Why I gave away my company to charity

by sivers • 17 years ago

328 83 17 years ago

Psyonic2• 17 years ago

Can we assume it actually makes more than 5% interest every year? Otherwise he's slowly draining it of its value, and if he lives long enough may empty it. It probably does, but it's a thought.

ryanwaggoner5• 17 years ago

Yeah, asset managers generally advise withdrawing no more than 4% annually to preserve wealth. However, I'm guessing that this is classified similar to a foundation, which must pay out 5% of its assets each year.

EDIT: Just read the wikipedia article he links to, and as the value of the trust is recalculated each year, and his annuity is based on the recalculated value (as opposed to the original value) it's effectively impossible to deplete the value.

Also, you can setup a net-income CRUT that pays out the lesser of the annuity income percentage, or the trust's net income for the year, thus ensuring that your annuity doesn't reduce the value of the trust from year to year.

sivers5• 17 years ago

Exactly. I'm required to pay out 5% per year to myself, but then I don't have to spend the whole 5%. I can reinvest it or whatever.

ippisl• 17 years ago

but it's possible that the value at the end would be just a small fraction of the original sum.

sivers5• 17 years ago

Unwise to passively assume. It's my responsibility to make sure it grows by at least 5% or that defeats the whole purpose! :-)

http://sivers.org/book/SmartestInvestmentBook

http://sivers.org/book/InvestorsManifesto

http://sivers.org/book/FourPillarsOfInvesting

Psyonic2• 17 years ago

Good links, and I'm not at all surprised that you've put a lot of thought into it. Of all the writers that appear here on a regular basis, you have the highest signal/bullshit ratio I've seen. When you say you're giving back, I believe you.

ksvs• 17 years ago

That's what I was thinking. 5% is the upper limit of the fraction of his wealth that a rich person could safely spend each year anyway. So his income is no different than if he'd kept the money. The only thing he has lost is the ability to change his mind about where the principal goes when he dies.

sivers5• 17 years ago

Intentionally lost my ability to do something stupid with more than 5% the principal while I'm alive. :-)

drp2• 17 years ago

That kind of salary still lets him build substantial personal wealth, so if he manages it wisely there will likely still be quite a large sum to pass to his heirs.

gvb2• 17 years ago

He should live so long. :-D As pointed out elsewhere, this is an exponential decay so it will never go to zero.

Bashing numbers helps me visualize this...

Looking at (nearly) the worst case, if the trust earns zero interest, he will be draining it by 5% per year, so the principle will be

  0.95^y * 22e6

where y is the number of years. If he lives for 40 more years...

  0.95^40 * 22e6 = 2.8e6

(13% of the original sum is left).

A less drastic case would be earning 4% but paying out 5%, i.e. losing 1% per year.

  0.99^40 * 22e6 = 15e6

(67% of the original sum is left).

OK, the absolute worst case is he invests the whole amount in subprime mortgages and loses it all. We won't bash those numbers, obviously he is a lot smarter than that.

michael_dorfman• 17 years ago

Wow, talk about a classy move.

Major props to Derek.

"The best things in life aren't things"

nazgulnarsil• 17 years ago

status is a thing >_> isn't derek signaling high status by giving away something valuable? <_<

misuba• 17 years ago

sort of. but everything humans do can be argued as a status move, so it's unwise to get super hung up on it. (me, i just marvel at the 1337 tax-evasion skillz. :-)

aaronblohowiak• 17 years ago

Polysemy -- "thing" is an overloaded term.

araneae• 17 years ago

Yup, he is. Now all the ladies will be after him.

wehriam• 17 years ago

I don't think that is what they mean by "things." Derek is signaling generosity by being generous.

MikeCapone• 17 years ago

5% * 22 million = 1.1 million

Not bad.

quickpost3• 17 years ago

He's getting 5% of $22 million each year to cover living expenses ($1.1million)?

Doesn't exactly sound like "living simply" to me.

drp2• 17 years ago

Just having money doesn't mean he has to blow it.

quickpost3• 17 years ago

Fair point. However, if that's the case, why not leave more of it in the trust - he's automatically "blowing" 35% of that 5% (350k+) in taxes every year.

EDIT: Here's the real answer - http://news.ycombinator.com/item?id=976759

ryanwaggoner5• 17 years ago

He's required to receive at least 5% of the trust's value as his annuity each year.

http://en.wikipedia.org/wiki/Charitable_remainder_unitrust

quickpost3• 17 years ago

Ahhh, that makes a lot more sense. Thanks!

ajju• 17 years ago

Does the benefactor have to pay tax on that 5%? If not, this is an amazing deal for the benefactor!

seldo• 17 years ago

It's certainly very altruistic, but not entirely, since he has saved himself a whole lot in taxes and guaranteed himself an income for life.

ryanwaggoner5• 17 years ago

That was my first thought as well, but in reality, there's more available for whatever charity eventually gets the money. Granted, he could have donated it all outright, but there's something to be said for having some income so you can work on things you love, including giving back. I'm guessing that for someone like Derek, his time and expertise is more valuable than his money :)

yason• 17 years ago

It's not about altruism or lack of it. Nor ultimately even saving money in taxes. It's about having enough, so there's no point in owning more than you need.

He obviously has to live somewhere and eat, so it's only pragmatic to arrange that he will get what he needs but, I assume, not really much more.

jws• 17 years ago

$1.1 million/year sounds like a lot, but he is living in an apartment in New York city.

edit: Oh, -4 on the mods. I'll make a note to put flashing lights around it the next time I use irony to comment on a man who thinks a $1.1m/yr income is "living simply".

josefresco2• 17 years ago

Dude, the highest mean income in the most titsy of NY neighborhoods is only about $150K/year. $1.1 mil is a shit ton of money each year.

FreeRadical• 17 years ago

$1.1 million a year tax free is alot - he could live lavish in Monaco with that!

edw519• 17 years ago

Thank you, Derek. One of my all time favorite hn posts. So many good quotes, I won't cite any of them. Just read the whole thing.

We spend so much time pushing our customers to answer the question, "What's most important to you?" that we tend to forget to ask it to ourselves. OP's answer might not be my answer, but it's an awfully good one. Working hard is so much easier when you're working toward such an important outcome.

Respect.

Retric3• 17 years ago

Do the math. He created a trust that pays 5% of 22 million and avoids ~5 million in taxes. That's 1.1 million a year in income and a 5 million tax break at the cost his capital after he dies. It's less liquid right now, but 1.1 million a year is well past FU money and getting a loan with that sort of income stream is easy. If his annual payout was less than 5% then it would have been a sacrifice, but 5% + inflation means he might be extracting more money in real terms than he is generating. This means over a long enough time scale he basically skims most of his money back, and he leaves the tax break some of it's interest to charity. Granted if he generates significantly more than 5% + inflation he does lose some money but he does get 5% of an ever larger pool so it's not all that much of a loss.

PS: Which is not to say it’s a bad thing, rather it’s more of a tax loophole than you might think. Afterall his other option was to live off of ~4.5% of 17 million. (Assuming he did not want to run out of money if he lived to be 90.)

sivers5• 17 years ago

Eh. I get taxed fully for everything that gets paid to me. (That annual 5%.) That doesn't avoid taxes at all.

Only what will never touch my hands (direct from purchase-event to charity) avoids taxes.

So this was just a way of making sure as much of it as possible never touches my hands.

(As compared to passing-through me: taking it as income then giving it back out again.)

alanthonyc• 17 years ago

What's your point? You make it sound as if he's hypocritically passing off his action as an altruistic gesture.

Bottom line is: it was a smart tax move. He created a company worth a lot of money. He wanted to "donate to charity" as efficiently as possible.

What he did ended up benefiting his charity a lot more than if he had made a donation after selling the company first. The fact that he is sitting pretty doesn't change that fact.

Haladen• 17 years ago

My issue is in title, sure it will be read more stated that way, but the post still follows that line of pure benevolence.

"I live simply. I hate waste and excess. I have a good apartment, a good laptop, and a few other basics. But the less I own, the happier I am. The lack of possessions gives me the priceless freedom to live anywhere anytime.

Having too much money can be harmful. It throws off perspective. "

A better title would have been. "1.1 Million a year until I die THEN the remainder of my money goes to charity," would have been more clear to the situation. Instead the current title just brings a bunch of Kudos and warm fuzzies.

But, beyond the way it was communicated, Derek I give you Kudos. You are definitely disciplined to not cash out with the money upfront and go on a spending spree. That is more than what a lot of people would have done. You had a lot of decisions to make, figuring out what you really wanted, what was best for your 85 employees, what to do with the money? I hope they all turned out well for you. I hope you keep starting and building things and not lose the bug.

flooha• 17 years ago

Why not use the money for music education now and be actively involved (or not) instead of in x number of years (40?) from now?

eli• 17 years ago

Because then you couldn't live off the interest in the mean time.

auston2• 17 years ago

I once heard the word "Charitable Remainder Trust" - it was by a guy who wanted to make sure his money could never be taken from him...

http://www.investorwords.com/830/charitable_remainder_trust....

So no cap gains + a tax deduction for making money? Doesn't seem so charitable to me...

(someone, please correct me if I am wrong)

ryanwaggoner5• 17 years ago

There's absolutely nothing charitable about paying taxes.

auston2• 17 years ago

Sorry - my point was that the title connotes he's already completed some charitable action, when, in actuality, he's just taken steps to preserve his wealth until he passes - at which point a charitable action will be taken (on his behalf).

edit: no one here likes the truth, I guess.

phony_identity• 17 years ago

Derek, you did great work in creating that wealth and everyone here is happy to see you enjoying some of it. But please consider re-writing this to something more truthful - fewer words emphasizing your altruism and spartan lifestyle (?) and more words talking about the tax advantages and forced spending discipline that this smart plan gives you.

The title, for example, shouldn't be "Why I gave away my company to charity". You didn't do that. (Which is good! That would be crazy.) How about, "Why I willed my estate to charity."

maddalab• 17 years ago

Altruism aside, it is a very smart move. I grew up in India and am sparse in my living standards and am at times amazed at the kind of affluence that exists in America even amongst those who consider themselves less privileged.

As long as the trust grows at greater than 5% of its values you receive the mandated annual disbursement which is this case is a fair chunk of change and add monies to be disbursed at the end. However factoring in the rate of inflation and "money's real value over time", the trust probably needs to be invested wisely to grow at 5% + rate of inflation to retain its original value over the years.

Occurs to me that setting up the trust is only half the battle, having it deliver on its original promise is the greater half.

ido• 17 years ago

When you reach that magnitude (many 10s of millions of dollars) getting 5% + inflation (inflation is on average pretty low in industrialized countries) amortized over many years is not hard.

ivankirigin• 17 years ago

I was thinking of a similar configuration for an investment vehicle. Make a charity whose goal is investing in good startups. Feed the returns back into investing. The goal is clout and influence rather than cashed out returns. I think this would better align incentives of investors and companies. It could also be used for "human capital" investments which are uncommon today except for student loans.

It wouldn't need to be relinquished upon death - but the trustees would be transferred over time.

wallflower2• 17 years ago

"At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, 'Yes, but I have something he will never have enough.'"

Original source of 'enough' quote in Sivers' essay

http://www.tompeters.com/dispatches/010754.php

ryanwaggoner5• 17 years ago

That quote kind of loses its punch without the ellipsis:

'Yes, but I have something he will never have...enough.'

wallflower2• 17 years ago

Argh. Reminds me for some reason of the stand-up comedy formula. You are correct. I forgot the punchline. The ellipsis.

Example from Robin Williams

"Parenting is hard" (Premise)

"Once you become a parent, you have responsibilities" (Statement/setup building on premise)

"For example, you can't go out drinking, come home drunk, go up to Junior's room at 3am and say 'For a change, Daddy's going to throw up on you now just like you do" (Turn around, the twist)

n8agrin• 17 years ago

Wow, this really rang true with me:

"It's not that I'm altruistic. I'm sacrificing nothing. I've just learned what makes me happy. And doing it this way made me the happiest."

I often think about how this mentality equates to business. For example, we generally think about business profit growth as healthy, but what if a business is sustainable, does not grow in profits but can somehow grow "happiness" with customers, investors, employees, etc. In a sense the business is not necessarily being altruistic, it's just recognizing what makes people more dedicated to the business. When thinking about Zappos I generally wonder if this wasn't their strategy for many years.

lefstathiou• 17 years ago

I hope I'm not being an ass but this article annoyed me a bit. This guy came across very arrogant, self righteous and judgmental.

The following statements were just obnoxious: - "Yes, but I have something he'll never have: enough." - "I live simply. I hate waste and excess. I have a good apartment, a good laptop, and a few other basics. But the less I own, the happier I am. The lack of possessions gives me the priceless freedom to live anywhere anytime." - "it throws off perspective. It makes people do stupid things like buy “extra” cars or houses they don't use - or upgrade to first class for “only” $10,000 so they can be a little more comfortable for a few hours."

A) I've never met nor heard of any billionaire who got where they were because they were chasing dollars. All of them started out by LOVING what they did and doing it extremely well. The market rewarded them for the value they created for society. The greater the value, the greater the reward.

B) Why is he implying that because of their success, the rich are incapable of appreciating the simple things in life? Why does doing that require owning just one nice apartment in NYC a nice laptop, a brand new prius

C) What business it is of his how other people live their life and how they choose to spend their money. Everybody needs to be like him in order to be as valiant and noble?

I dunno... maybe i'm being a bit extreme but I just cant stand it when other people go around self righteously preaching about how other ppl should live their lives.

dkarl• 17 years ago

It struck me the same way. He projects a salesman's confidence and glibness, so my knee-jerk reaction is to roll my eyes and wonder what the hell he's selling. Well, it's obvious what. The entire post is plain and simple bragging. He says himself that he didn't do it out of altruism. He did it to maximize his happiness, which includes -- he says this explicitly -- enjoying the fact that he made such a bright decision. And though he doesn't say it, it's obvious that another one of the benefits he gets is the joy of telling everyone about his enlightened, tasteful choice.

Nothing he says is new. Choosing a life of utter freedom, security, and modest luxury over the relentless drive for more wealth and power is probably as old as stable urban societies and has probably been admired for the same reasons just as long. So we're not here to learn; we're just here to gawk at one of our celebrities. If HN had channels, this would be E!

Admire the man for what he's done, but for God's sake, have the sense to roll your eyes and stop admiring for a second when he tastelessly brags about it. Resume admiring when this little faux pas passes out of consciousness.

sivers5• 17 years ago

I agree!

I did all this over a year ago, and didn't plan on telling anyone. I knew it would sound like smug bragging.

But in a few entrepreneur-focused interviews since then, (VentureVoice, etc) - the interviewers seemed particularly interested in the details on how and why I set up the trust.

Yesterday I did another one of those interviews, and he pushed for details again - so today I thought I should just write it down once and for all, so I don't have to keep re-telling it.

Sorry if it sounds like bragging. Perhaps it is, a bit, but I hope that someone somewhere in the future selling their company might be aware that this is an option and read someone else's experience with how to structure it.

npk• 17 years ago

Being proud, egotistical, or a braggart are all human characteristics. I mention this for two reasons. First, without the benefit of direct contact, you really have no idea what kind of person sivers is, or what his intention was when posting. Second, even if he is an egotistical bastard, so what?

Few people are in a position to donate $20 M to charity. Fewer still who are willing to give up what they worked so hard to make. This puts sivers in the top (some small number) percent of human population in important objectively measurable criteria.

Personally, I enjoy learning more about people I admire, flaws and all.

gcheong• 17 years ago

I read it a bit like that but most of what I got out of it was an interesting way to structure a deal that I might consider should I find myself in a similar circumstance. I would like a private jet though.

jimbokun• 17 years ago

"Why does doing that require owning just one nice apartment in NYC a nice laptop, a brand new prius"

Partly because owning a lot of crap tends to distract you and create a kind of gravitational pull that keeps you near the crap you own.

I thought he made it pretty clear that not owning much stuff made sense even for purely selfish reasons.

vaksel• 17 years ago

wouldn't it make more sense to invest that money into a few hundred startups instead?

At $50K a pop, that's 340 startups that he could invest in.

Then 5 years later, when that 17 mil becomes 200 mil, he could setup that music trust.

I mean sure, he can still invest with whatever is left over from that 1 mil yearly cash out, but it's not going to be a game changer compared to backing 340 new startups.

seasoup• 17 years ago

Reread the statement about "enough".

JanezStupar• 17 years ago

Plus if we assume that he does recieve 1.1 mil $ per year (at least for first couple of years).

And if he is that ascetic as he claims.

Then we can safely assume that from 660k that remain (after taxes) - he can probably live pretty lavishly on 160k per year (for an ascet !) - especially since this amount doesn't need to be spent on making money (transport,...).

So now we can see that he can clearly invest into 10 startups per year - and even afford to be actually involved in them. Which would probably far increase possibility of success over just blindly dumping money in 340 startups with total disregard for anything. And in 10 years he would be involved in 100 of possibly pretty good startups of which I believe at least one could repeat his success (due to selection and nurturing).

To me its clear how this "non-greedy" strategy is clearly better over long term.

I'm really amazed how some people who claim (or act) greedy are really not THAT greedy - solely because they act on short-term ("BIG" bonus this year! or - steal from thy shareholders, etc, etc) over long-term. I don't call them greedy - I just call them stupid :)

Because a true greedy person should be focused on an mid or long-term goal (how to maximize my profit in 20 or 40 years).

mattmaroon3• 17 years ago

I have to admit, I hate anyone who says something like:

"That means $5 million more going to music education instead of another tank in Iraq or a banker's bailout bonus."

Because that is where all tax money goes. I'd say >90% of tax dollars go to something way more important than music education, though I guess if I had cashed out of a music startup I might be selfish enough to convince myself that is untrue.

Tichy• 17 years ago

Music education was important to him. For other people maybe other things are more important. They can donate to other cause, or pay voluntary taxes.

mattmaroon3• 17 years ago

What paid for the roads he took on his way to music classes? What funded the internet he made money off of? What paid for the tanks that kept his country in such a state that people could spend time studying music rather than fighting civil wars and subsistence farming? I'm sure I'm no more a fan of the Iraq War than he is, but I'm glad we have tanks and nukes, if for no other reason than their very existence reduces the likelihood we will need them.

If everyone gave their money to helping other people with their hobbies, rather than paying taxes, would you want to live here?

andrewcooke• 17 years ago

just wanted to make a point that others seem to have missed. to the extent that this is avoiding taxes so that more money can be given to a particular charity, isn't it "robbing peter to pay paul"?

this might not make much sense to the american mindset, which seems to be virulently anti-government, but taxes don't just vanish - they pay for vital services. more than that, reducing how much tax someone with many millions pays implies that others, with less money, either pay more or receive lower quality services.

i realise this is a minor detailed compared to giving to charity or keeping it all, and i don't mean to detract from that. i just find the "it's cool to avoid taxes" (and instead give more to charity) assumption a bit odd.

smanek• 17 years ago

The US government spends most of its money (roughly in order) on:

-Wall Street Bailout

-Military Spending (which, in large part, means pre-emptively attacking sovereign nations we don't like)

-Inefficient entitlement programs

-Interest on our existing debt

If memory serves, only about ~5% of our money goes to what I would consider really worthwhile programs like NASA and education. You can up that to about 20% if you include things like roads, infrastructure maintenance, 'vital services', and so on.

I imagine that Derek prefers to have more control over where his hard earned money goes.

Mz• 17 years ago

Recently at work, I wondered if some acronym we were using was incorrect. I wrote my boss an email saying, basically, I think we have this wrong and got the reply "I googled it and it comes up so it's right." Um, yeah, I googled both terms before sending the email and both versions bring up this form. So I got curious and spent about 40 minutes searching for information to verify which acronym is actually correct. Ultimately, I found we were using the correct acronym. Curiously, most of the sites that were using the correct acronym were for-profit business sites and most of those using the incorrect acronym were government sites.

My point: Maybe if the American government were more competent, Americans wouldn't be so anti-tax.

djm• 17 years ago

hey derek - you mentioned that you wrote this article after being prompted to do so and I thought I'd take the opportunity to try and prompt you to write another one!

You briefly commented on living the (relatively) simple life - having fairly few possessions etc. I try and live somewhat like this myself and have found it very liberating.

If you're interested I'd much like to read an essay with your expanded thoughts on this lifestyle decision.

cheers, david

mbrubeck• 17 years ago

Here's one of his past essays that's relevant: http://sivers.org/freedom

Why I gave away my company to charity

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