Charitable Giving for Entrepreneurs: Donating Equity and Startup Shares

Why entrepreneurs consider donating equity or startup shares

Donating equity—common stock, preferred stock, or membership interests in LLCs—lets founders and investors support nonprofits without cash outlay. When the donated securities are long‑term and publicly tradable, donors generally receive a charitable income tax deduction for the fair market value and escape capital gains tax they would owe on a sale. For entrepreneurs, that combination can magnify philanthropic impact while improving tax efficiency.

In my practice advising business owners, I often see equity gifts used alongside donor‑advised funds (DAFs) or charitable trusts to convert illiquid or highly appreciated positions into meaningful grants while preserving tax advantages.

(See IRS guidance on charitable contributions and valuation: Publication 526 and Publication 561.)

• IRS Publication 526: Charitable Contributions (https://www.irs.gov/publications/p526)
• IRS Publication 561: Determining the Value of Donated Property (https://www.irs.gov/publications/p561)

Step‑by‑step: How the process usually works

1. Identify the asset and confirm transferability

• Verify that the shares are transferable and free of restrictions (vesting, lockups, or transfer agreements). Restricted or short‑term holdings may limit the deduction to your basis rather than fair market value.

1. Confirm the charity can accept the gift

• Not every charity will accept privately held or restricted stock, LLC memberships, or options. Talk to the nonprofit’s development or finance officer about acceptance policies and whether they have a brokerage setup to receive securities.

1. Value the shares

• Publicly traded shares are valued at the average market price on the date of the gift. Privately held or closely held company interests usually need a qualified appraisal if the deduction claimed exceeds $5,000 (IRS Form 8283 rules) and may require special valuation methods. (See Publication 561.)

1. Transfer the shares

• For publicly traded stock: transfer via electronic broker delivery to the charity’s account. For private company stock: transfer requires legal documentation (stock power, assignment of membership interest) and the charity’s acceptance.

1. Record the donation and file tax forms

• Obtain a contemporaneous written acknowledgement from the charity for gifts $250 or more. For noncash gifts over $500, file IRS Form 8283 with your return; for gifts over $5,000 you’ll generally need a qualified appraisal and attach Form 8283 Section B. Keep all correspondence, appraisals, and transfer records.

Reference: IRS Form 8283 and instructions (https://www.irs.gov/forms-pubs/about-form-8283).

Tax rules and limits to remember (practical summary)

• Capital gains avoidance: If you donate long‑term appreciated securities (held more than one year) to a public charity, you typically can deduct the fair market value and avoid paying capital gains tax you would have owed on a sale.

• Deduction limits: Gifts of appreciated, long‑term capital gain property to public charities are generally limited to 30% of your adjusted gross income (AGI). If you exceed that limit, you can carry the unused deduction forward up to five additional years. Gifts to certain private foundations or other organizations can have lower limits (commonly 20% of AGI). (See Publication 526.)

• Short‑term or restricted property: If the donated shares were held one year or less or are subject to material restrictions, the deduction is generally limited to your cost basis (what you paid), not fair market value.

• Documentation thresholds: Any noncash contribution over $500 requires Form 8283; contributions over $5,000 normally require a qualified appraisal and additional Form 8283 information.

(Authoritative sources: IRS Publication 526 and Form 8283 instructions.)

Common complications with startup or closely held shares

• Liquidity and charity cash flow: Many charities prefer cash, so they may liquidate donated shares quickly. If the company is private or illiquid, the charity must be willing and able to hold or sell the interest, which can make acceptance unlikely.

• Transfer restrictions and shareholder agreements: Startup shares often carry transfer restrictions or rights of first refusal. These legal limits can prevent a direct transfer to a nonprofit or require board approval.

• S‑corporation, partnership, and LLC interests: Ownership forms matter. An S‑corporation can have only certain types of shareholders; gifting an S‑corp share to some charities can be administratively complex. LLC membership interests and partnership interests raise additional valuation and operating agreement issues. Always review entity documents and consult counsel.

• Substantial risk of forfeiture or other contingencies: If shares are subject to vesting or repurchase rights, the IRS may treat the gift as a gift of restricted property and limit the deduction.

For practical strategies on closely held business gifts, see our article: Charitable Strategies for Giving From Closely Held Businesses.

Strategies to make an illiquid or risky donation work

• Use a donor‑advised fund (DAF): Donors contribute shares to a DAF, receive an immediate tax deduction for the fair market value (subject to rules), and the DAF sponsors can sell donated securities over time to fund grants. This is a common route for privately held or concentrated positions.

• Charitable remainder trust (CRT): A CRT can accept equity, sell it tax‑free inside the trust, and provide income to the donor or beneficiaries before passing the remainder to charity. CRTs require careful setup and long‑term planning. (See our guide on Charitable Remainder Trusts Explained.)

• Gift timing and tax planning: Consider year‑end timing, your current year AGI, and carryforward capacity. Spreading gifts across multiple years or pairing equity gifts with cash can help maximize the deduction within AGI limits.

• Partial gifts or retained interests: Donating a portion of your holdings or structuring a split interest gift (e.g., retained income interest) can allow continued ownership or income while advancing charitable goals—subject to complex rules and valuation.

Valuation and appraisal: what you will need

• Publicly traded stock: Fair market value is generally the stock market closing price (or average) on the date of gift.

• Privately held interests: A qualified, independent appraisal is typically required for deductions over $5,000. The appraisal should follow IRS standards and address discounts for lack of marketability or minority interest where appropriate. See our detailed guidance: Valuing Noncash Charitable Gifts: Reporting and Appraisal Basics.

• Documentation retention: Keep the appraisal, transfer paperwork, contemporaneous written acknowledgements from the charity, brokerage confirmations, and any communications about restrictions.

Example scenarios

• Publicly traded startup founder: You hold publicly traded shares acquired over a year ago. You transfer shares directly to a charity’s brokerage account. You receive a deduction for the fair market value and avoid capital gains tax.

• Pre‑IPO founder with locked shares: Your shares are subject to a lockup and transfer restrictions. The charity cannot accept direct transfer. You may sell after lockup and donate cash, or use a CRT/DAF to manage timing and tax impact.

Professional checklist for donors (practical next steps)

1. Talk with your tax advisor and corporate counsel before initiating any transfer.
2. Confirm the charity’s policy for accepting securities and request wiring or brokerage instructions in writing.
3. Obtain valuation guidance early — determine whether a qualified appraisal will be needed.
4. Coordinate transfer method with your broker and the charity’s broker to ensure timely delivery.
5. Keep Form 8283 and appraisal paperwork ready for the tax return when required.

Common mistakes to avoid

• Assuming all charities accept private or restricted stock.
• Failing to get a qualified appraisal when necessary.
• Overlooking transfer restrictions in shareholder or operating agreements.
• Not coordinating timing with tax‑planning goals or AGI limits.

Final notes and professional disclaimer

Donating equity and startup shares can be a powerful philanthropic and tax‑planning tool for entrepreneurs, but it touches corporate law, tax code, and nonprofit policies. In my experience, the best outcomes follow when donors coordinate early with legal and tax advisors and with the receiving charity.

This article is educational and not individualized tax or legal advice. For your specific situation, consult a certified tax professional, valuation expert, and corporate attorney.

Key authoritative resources

• IRS Publication 526, Charitable Contributions: https://www.irs.gov/publications/p526
• IRS Publication 561, Determining the Value of Donated Property: https://www.irs.gov/publications/p561
• IRS Form 8283, Noncash Charitable Contributions (instructions): https://www.irs.gov/forms-pubs/about-form-8283

Further reading on tax‑efficient giving: Tax‑Efficient Charitable Giving Strategies and Charitable Remainder Trusts Explained.