Launching a climate nonprofit
If you have an idea for combating climate change, but can’t foresee a profitable business, you might want to consider starting a non-profit instead. With a non-profit, you may have a better chance of building trust with communities you hope to work with and you won’t risk losing sight of your initial mission as your efforts grow and scale. But where do you start?
Anastasia Gamick is the co-founder and chief operating officer of the non-profit Convergent Research. We chatted with her to discuss the key differences between nonprofits and for-profits, and map out key steps you need to take to build a successful non-profit organization.
Non-profits vs for-profits
If you can figure out how to generate impact while making money, go ahead and start a for-profit business. It’ll be easier and faster to raise capital, there are more opportunities for doing so, and you’ll likely be able to pay your staff higher rates. Funding opportunities for nonprofits are more scarce, sometimes come with rigorous reporting restrictions and don’t have the same kinds of market pressures driving investment that for-profits do.
But if you’re building a public good (e.g., nonexcludable and nonrival), working in a space with no obvious market, where the timeline to returns is too slow, you can’t raise venture or other for profit capital, the risk is too high, or it is otherwise hard to capture value from your work, then starting a for-profit business might not make sense.
If you want to think outside the box, an alternate route involves starting a non-profit that then owns part or all of a for-profit, which means you can raise more capital from for-profit sources. Giving the non-profit a voice and voting rights within an organization also helps cement the business’s impact focus.
Key first steps when starting a non-profit
1. Make sure you’re solving an unmet need
Before you form a non-profit, make sure you’re not duplicating another organization’s work. Check if other non-profits are already operating in your space, and if they are, look for ways you are either differentiated or ways you can boost their impact. If you blindly start a non-profit without performing a competitor analysis first, you’ll be doing duplicative work - not to mention pursuing the same funders as existing organizations, and you may all be less impactful as a result.
2. Understand the different types of nonprofits
Most non-profits fall under the umbrella of 501(c), and there are then many different types within this category, with the most likely for climate purposes being a 501(c)(3) or 501(c)(4). Becoming a 501(c) means you won’t pay income tax and can receive funding from donors who will subsequently be eligible for a tax break. This is an important factor that many funders consider when grant making.
One key thing to note between a 501(c)(3) or 501(c)(4) is that a (c)(4) has the freedom to engage in political activities such as lobbying.
3. Plant the seeds with potential funders
Raising money for your nonprofit is often partially relationship based, and building those donor relationships takes time, so start talking to philanthropists, foundations, and other funders as soon as you can. Think of this as the customer discovery process for your organization - you need to find out whether funders are interested in your non-profit in the same way a business needs to know there’s a market for its product. I’d suggest being genuinely curious about what problems your potential funders are interested in solving and how they like to work.
This can be daunting at first, but you can partner with someone who has already raised a lot of capital in your space, and has established relationships with the right people.
4. Decide whether you need a fiscal sponsor
The bureaucratic pieces that you need to move into place when founding a non-profit include legally incorporating your organization, securing tax-exempt status from the IRS, and setting up the processes and procedures to maintain tax-exempt status. Taking all of this on by yourself can be a slow and difficult process, so you can work with a fiscal sponsor organization.
A fiscal sponsor is a particular type of non-profit that supports mission aligned efforts and organizations act as a non-profit. The fiscal sponsor holds the 501(c)(3) status, reports to donors + to the IRS and handles many of the legal and accounting processes. . Fiscal sponsors charge varying amounts - though in a lot of cases, they won’t cost anything until you start receiving money - and offer different services, so put the time in to find a partner that’s right for you.
If you’re a normal, cookie cutter non-profit, which simply receives funds from donors and hires contractors and staff, it’ll be very straightforward to contract a fiscal sponsor to incorporate the organization for you. If your structure is a bit more complex - maybe you’re building a nonprofit/for-profit hybrid like we described above - you’ll likely need to manage formation in-house with specialized legal counsel, and a fiscal sponsor would likely not be a fit.
5. Set up board
A non-profit corporation’s board needs to have at least 3 members. Because a non-profit isn’t owned by anyone, this board is ultimately responsible for oversight of the non-profit.
They have 3 primary legal duties (the same as for any corporation):
- Duty of Care
- Duty of Loyalty
- Duty of Obedience
Different non-profits have different theories on setting up boards, including:
Friends - Many small nonprofits pick 3 friends or family members to sit on the board. This is certainly easy for getting started and getting approvals, but undercuts the ability of the board to provide real oversight or contribute to the success of the non-profit.
Funders - Larger non-profit boards frequently consist of major funders or their representatives. For these prestigious positions, the ability to oversee the project and participate in the mission is a major reason for donating.
Key Advisor - In my opinion, the best boards are made up of subject matter experts that can best oversee the nonprofit. Different founding teams will need to be balanced by different boards but expertise could include technical expertise, community knowledge, legal or accounting, organization building, etc.
6. Filing your 1023
If you’ve decided not to use a fiscal sponsor, you’ll want to pursue getting 501(c) status. To do that, the first thing you should do is incorporate your non-stock corporation as a non-profit. Then, you’ll complete the IRS’s 1023 application.
Generally, a 1023 is where you describe your mission, the types of activities you’ll partake in, your budgets and your potential funders. It’s important to cover anything you might do in this application - that way you’re covered if the IRS ever asks you about your activities. They will be proactively approving them.
Once you submit your 1023 application, the IRS will review it and get back to you with a “determination letter” (or more questions.) This process can take many months. You can apply for expedited review if you’ve procured funding that’s contingent on your getting non-profit status.
In any case, if your 1023 is approved, your non-profit status will be retroactive to the date of filing. This means that you can confer tax deductions from your donors right away. But remember - the determination letter may not come through, so be sure to be honest and upfront with your donors.
Many donors, depending on the organization, won’t grant to someone without a determination letter. Others will include “expenditure responsibility” in their grant language - that is, increased reporting requirements to ensure to protect their charitable status.
7. Get your books in order
You need at least two groups to support you with finances - a bookkeeping + accounting team to manage everything in real time, and a tax and audit team to make sure everything that’s sent to the IRS is in ship-shape. While some fiscal sponsors will take care of accounting for you, others won’t, so you may need to outsource. Look for an accountant and payroll provider who specialize in dealing with non-profit finances.
The IRS also has a requirement that you pay your staff a reasonable salary for a non-profit - the more competitive the rates, the more you should consider hiring a compensation consultant to help you justify them. It’s best to be prepared as early as possible for the prospect of an audit - moving fast and breaking things doesn’t work in the non-profit world. Generally, the IRS is most happy when you justify your decisions before making them rather than after.
8. Set up the right policies
As a non-profit, you’ll need to have certain policies in place early. Work with your fiscal sponsor, counsel or non-profit group on the wording. But at the minimum you should have: conflict of interest policy, travel and expense policy, IP Policy (if you generate IP).
9. Start building a community
While Silicon Valley might have a huge network of founders who encourage and help each other, this is less true for non-profits. Make the effort to reach out to others who’ve embarked down the same path - their advice and support will be incredibly valuable.
Anastasia Gammick is the Cofounder and Chief Operating Officer at Convergent Research. There, she is pioneering a new model for large-scale science projects called Focused Research Organizations (FROs), which address neglected bottlenecks in biomedicine, biosecurity, climate technology, and other areas.
Previously, Anastasia was the first operations hire at Neuralink, was Chief of Staff at the robotics company Creator, oversaw the Give Directly relationship at the fintech company Segovia, and led the scale-up of COVID-19 test kit production at Curative, Inc in the first weeks of the pandemic.