Tag Archives: insider

Do you “get it” when it comes to wealth? Probably not.

Major Gift Teams, Research in Fundraising, , , , , , , , , , ,

Let’s test your wealth instinct and find out if you “get it” or not.

Pretend that your boss comes to you and says: As you know, leadership is taking the company public next year. You can choose how you want to receive your $100,000 annual compensation from the three options below:

  1. $25,000 in cash and $75,000 worth of the company’s new stock
  2. $75,000 in cash and $25,000 worth of the company’s new stock
  3. $80,000 in cash and $0 worth of the company’s new stock

Which one do you choose?

This choice is difficult for you and me!

If the only wealth you have is cash in your bank accounts, maybe some retirement funds like a 401(k), and you are renting or own the home you live in (probably with a mortgage), your options are very limited. Could you survive on $25,000 cash for a year? You are considering the options based on your disposable income.

If you have a dual-income household, a second home, or some reasonably liquid investments that you could cash-in, all three choices might become plausible options. You have disposable income plus additional investment wealth.

I know you know that the $75,000 worth of stock could take off and double or triple in value-or even more. You want that stock!

Now, what if suddenly your parents passed away and you inherited the house they owned for 50 years, which sells for $800,000. Would that make it easier to accept $25,000 in cash with $75,000 in stock?

Of course it would!

And this is the shift in thinking that you need to make when you are researching and cultivating major gift prospects.

You do not want a cash gift.

Check out the asset allocation chart below. This chart is telling you many things, but among them is that in the first quarter of 2021, the high-net-worth individuals (HNWIs) surveyed were holding 24% of all of their wealth in cash and cash equivalents. A cash equivalent is something like a certificate of deposit (CD) or money market account–things that you can very easily turn into cash.

Source: Capgemini World Wealth Report, 2021

When you ask your donor prospect for a gift, do you want her to think:

“Gosh, they want me to give $50,000 out of my $250,000 cash. That feels a bit steep. The kids private school tuition went up a lot this year.”

Or would you rather ask for a gift of appreciated stock and have her think:

“If I give $50,000 of appreciated stock out of my $750,000 investment account, I can take a charitable gift tax deduction for the full amount and offset the capital gains taxes. I’ve always wanted to have this kind of impact on this cause.”

But you shouldn’t just believe me.

What do I know? Instead, you should believe Dr. Russell James who took the time to review a million nonprofit tax returns filed between 2010 and 2015. Numbers don’t lie. Dr. James discovered that nonprofits that received asset gifts raised more money. Check out the figure below for a snapshot of his findings.

Source: Cash is Not King in Fundraising: Results from 1 Million Nonprofit Tax Returns, Professor Russell James III, J.D., Ph.D., CFP®

Note: If you want to find whether your organization has a history of accepting asset gifts, you can check Schedule Min its public IRS Form 990.

Evaluating your donor prospects for wealth

If you want to grow your fundraising in major gifts, a key strategy is to ask for non-cash gifts. Understanding the asset allocation model from Capgemini featured above allows us to quantify this shift in thinking. We can now estimate the relative size of the cash vs. non-cash wealth held by our donor prospect.

Once you have estimated the value of the cash and non-cash wealth of your prospect, you can better understand how your prospect might view your ask amount relative to those values.

Below is an example of what this allocation looks like if we use the Capgemini asset allocation percentages on someone research has determined has an estimated net worth of $5 million.

Assets Value
Cash and Cash Equivalents $850,000
Non-Cash $4,150,000
Total $5,000,000

Imagine for a moment that you want to ask the prospect for $250,000. How does that stack up against each of the two categories, cash or non-cash?

Lean-in to the psychology of giving

Why would you want to fight against human nature and continue asking very wealthy donors for cash gifts when you could switch to asking for non-cash and raise more money overall? Lots of reasons. Maybe you feel much more comfortable asking for cash gifts.

I’m suggesting that it’s time to get comfortable with being uncomfortable.

To help you get more comfortable, check out this collection of work by Dr. James for more insights into the psychology of giving and techniques and tactics you can use in your work:

http://www.protopage.com/prospectresearch#Planned_Giving_(Dr._James)

Why Do Insiders Disclaim Beneficial Ownership?

Profiles, Prospect Research, , , , , , , , , , , ,

If you are a prospect research professional, odds are that you have searched for the beneficial ownership of securities table in a proxy filing with the SEC. But do you really know what beneficial ownership means Why do insiders sometimes disclaim the beneficial ownership they reported? Should you care? Maybe. If you have to explain it to others, such as development officers, then definitely!

The proxy (Form Def 14a) is the document a public company files each year to explain and be transparent about the securities or stock it has on offer for purchase by the public. After all, the SEC came into existence in 1933 to restore investor confidence in our capital markets after the stock market crash of 1929. From that perspective, beneficial ownership makes a little more sense.

A beneficial owner is…

  1. A person who enjoys the BENEFITS of ownership even though the stock is not directly owned in his/her name.

    For example, I may change the title of my stock to a trust, or a foundation, or an LLC, but still, maintain the benefit of ownership as a trustee or beneficiary or both.
    .
  2. A person (individually or as part of group) who has the power to vote on shares, or who wields influence over a shareholder’s vote.

Fundraising research is less concerned with whether the prospect can influence the votes of shareholders, but we do care about enjoying the BENEFITS of ownership, because this can have an impact on our prospect’s wealth picture.

James Dimon Example

Let’s look at an example: James “Jamie” Dimon is CEO of JP Morgan Chase & Co. (JPM). According to the beneficial ownership table in the proxy filed on 4/6/2020, he owns 9,538,667 shares of company stock. Or does he?

Footnote #3: Includes 115,800 shares owned by entities as to which Mr. Dimon disclaims beneficial ownership, except to the extent of his pecuniary interest therein.

If Mr. Dimon BENEFITS from those 115,800 shares, but DISCLAIMS this beneficial ownership, who might have legal and direct ownership of them?

A Form 4, Statement of Changes in Beneficial Ownership, must be filed every time an insider has a change in the number of beneficially owned shares. It often gives us greater detail on who owns exactly what shares. Could it help us with Mr. Dimon’s disclaimed, mystery 115,800 shares? Indeed, it does!

Form 4| Filing date 10/14/2020(much later than the proxy filing

Note the footnote #1 next to ownership by “LLC”? This savvy guy doesn’t want us to know the name of the LLC, just that it is an LLC.

Footnote #1 reads: Reporting person [James Dimon] disclaims beneficial ownership of such shares except to the extent of any pecuniary interest.

Mystery solved?

An LLC of undetermined name legally owns title to 143,388 shares of JP Morgan Chase & Co. stock. And Mr. Dimon DISCLAIMS that ownership, even though he is legally required to report it because he benefits from the ownership.

Translation / Interpretation

In Mr. Dimon’s example above, we are discussing fewer than 200,000 shares out of more than 9 million shares. From that perspective I care a lot less about that mystery LLC. But I have researched more than one prospect where the mystery LLC owns the lion’s share of stock. Sometimes I even know the full name of that LLC.

And too often, even knowing the company name doesn’t help.

As I have described before, someone like Mr. Dimon could be a member of an LLC in Delaware and the public (and even the Delaware Division of Corporations) wouldn’t know it!

The DISCLAIMING of beneficial ownership in Mr. Dimon’s case feels interesting because he benefits from a laundry list of indirect ownership that he does not disclaim: 401(k), family trusts, spouse, etc. Since he does indicate a pecuniary (financial) interest in the LLC shares, we might speculate that he expects to profit from whatever the mystery LLC is going to do with his shares, but that he argues that he is not influencing the investment.

Is Speculation Warranted?

Speculating is fun! And sometimes it does help to put numbers into perspective, especially if you are fussing over exactly how much and what kind of gift proposal to put together for a prospect.

Following is my completely fictional speculation about Mr. Dimon’s mystery shares as written for the prospect profile. For this fictional example, assume that I discovered the name of the LLC was MiamiBeach LLC and that I knew his daughter started a real estate venture in Miami Beach.

We know that Mr. Dimon’s 32-year-old daughter recently began a real estate venture in Miami Beach, Florida. We do not know who owns Miami Beach LLC because it was incorporated anonymously in Delaware. Since Mr. Dimon disclaims ownership of the shares owned by Miami Beach LLC, we might speculate that it is his daughter’s company, and that Mr. Dimon invested those shares in his daughter’s company, expecting a financial return.

We can speculate, be we can’t actually KNOW this to be true. The information about the true disposition of those shares is NOT available to confirm our speculation.

Be Clear. Be Firm. Have Fun!

If you are going to pick apart stock holdings and speculate, just be sure to use very clear language. Words such as the following are useful:

  • We do NOT know if this is true, but we are GUESSING based on…
  • We can NOT know who owns this company, but we SPECULATE…
  • Mr. Dimon disclaims his ownership of these shares and although we can NOT know the details of exactly who owns the shares, we SPECULATE…
  • Because this is SPECULATION, you might want to consider these shares as NOT available for gifting.

The pressure on your development officers to raise the most money possible to further your mission is real and it is powerful. If you are comfortable speculating, it can help your development officer to put the stockholdings into perspective relative to the full philanthropic and wealth picture of the prospect.

But there is a limit to what we can know. And when the prospect has deliberately placed information beyond public viewing, it is worth stating. After all, our prospects are just as entitled to their privacy as we are. To attempt to pull back the veil of privacy could be construed as disrespectful with the potential to damage the relationship.

I enjoy the tangled web of financial filings and the constant rebalancing of how exact to attempt to be when presenting the information. I hope this example made beneficial ownership just a little bit clearer.

Additional Resources

  • Want to dive in deep to insider SEC filings? Become a member and enroll in the Insider Stock and Compensation Course. >>Learn More
  • Wish you had an SEC filings reference book handy? Purchase the Insider Stock and Compensation Workbook and focus on filings and information that matters for fundraising. >>Learn More
  • Can You Really Hide LLC Ownership? You Betcha!| Jennifer Filla | 2020

Meg Whitman agrees to work for $1 – or does she?

Discussion, Major Gift Teams, , , , , , ,

by Kate Rapoport.

Compensation structures for highly paid executives in public companies are often a tangle of legalese, difficult to parse. The Security and Exchange Commission (SEC) requires that all public companies detail the compensation of their highest paid executives, but that doesn’t mean that what the companies report is straightforward. In recent years, many companies have gone from giving executives large sums of money each year, regardless of company performance, to trying to create a compensation structure that depends significantly upon the actual performance of the executive and the success of the company.

One example of this is the compensation package that Meg Whitman received when she joined Hewlett Packard in September 2011 as Chief Executive Officer. The former CEO of EBAY, Meg Whitman ran an unsuccessful campaign for California Governor in 2010. She was brought on as CEO at HP after a year on their board.

Ms. Whitman will receive $1 a year in salary. According to the Wall Street Journal, the $1-a-year CEO isn’t uncommon at tech companies. Eric Schmidt, Larry Page and Sergey Brin at Google and Apple CEO Steve Jobs have also worked for $1 a year.

However, one dollar is just the beginning of her potential compensation. She will also receive an annual bonus of at least $2.4 million with the possibility of increasing that bonus up to $6 million depending on the cash flow performance of the company.

The biggest percent of her compensation package involves stock options. Stock options have been around quite a while as an executive incentive tool. Options require the executive to purchase the stock with her own money at a predetermined “exercise price”. The options are only valuable if the market value of the stock she purchases is greater than her exercise price. If the market value of the stock has gone down from the exercise price, she earns nothing or could lose money by choosing to exercise the option.

Ms. Whitman received an option to purchase 1.9 million shares of HP. The exercise price will be equal to the market value of the shares on the date she received the options. The options will vest over an eight-year period; however, they will only be considered fully vested if HP’s share price rises by 40 percent or more. In September when she took the job, that number of shares was worth $45.2 million.

100,000 of those shares will vest on each of the first three anniversaries of her hire date if she stays with the company. 800,000 shares will vest after the first year, IF HP’s share price has risen 20 percent and stayed that high for at least 20 days. The final 800,000 shares will vest on the second anniversary of her hire, IF HP’s share price has risen 40 percent for more than 20 days. If she succeeds in raising HP’s share price 40 percent in the next eight years, she would make profit of $17 million.

This type of compensation package reflects companies’ desire in recent times to compensate executives based on what they can do for the company, not just because she is friends with the directors on her board. Ideally, this should save the company money in the short term and encourage high performance from the executive in question.

Hewlett Packard also included an incentive for Ms. Whitman to stay with the company for the long haul, making her severance benefit payment 1.5 times the sum of her annual base salary, or $1.50 plus the average of her bonuses paid in the last three years. If she left before the first year was out, she would receive less than $2 in compensation. That would certainly make me want to stay!

Here’s hoping the company has learned a lesson from its handling of Ms. Whitman’s sacked predecessor, Leo Apotheker, whose severance was $9.6 million and $3.5 million in stock even those his performance was dismal.