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Frequently Asked Questions
Who came up with the idea for EFH?
John Dean, former Chairman & CEO of Silicon Valley Bank; Bill Richardson, a Hawai`i venture capitalist; Greg Kim, partner at Vantage Counsel LLC; and John Davidson, entrepreneur and technologist, are the founders of EF Hawai`i. EF Hawai`i is based on a model developed in 1997 by Gib Myers of Mayfield Fund and other leading venture capitalists in Silicon Valley. John Dean was a founding director of the Silicon Valley EF and was its CEO in 2001-02.
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How is the EF model working?
The Silicon Valley EF has stock or options from more than 100 companies, has helped 10,000 employees from EF companies volunteer in 85 nonprofits, and has donated over $2.4 million to charitable causes. The EF concept has been exported to Atlanta, Austin, Boston, Dallas, Portland, Sacramento, and Tel Aviv.
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What is EFH’s structure?
EF Hawai`i is a Hawai`i nonprofit corporation with tax-exempt status under section 501(c)(3) of the Internal Revenue Code.
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How is EFH funded?
EF Hawai`i seeks funding for its operations from Hawai`i businesses, foundations, and individuals. Over time, as liquidity events occur, EF Hawai`i expects to become self-funded.
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What is the relationship among the EF affiliates?
Each affiliate is an independent nonprofit organization, but all subscribe to a statement of Shared Mission, Strategies, Principles, and Practices. The EF trademark is licensed at no charge from the Silicon Valley EF. The affiliates confer regularly by telephone and meet annually in person to share updates, best practices, materials, and networks.
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What types of companies should consider EFH membership?
Any early stage company, no matter how small, that has the potential to achieve a liquidity event is a candidate for EF Hawai`i membership. Membership is not limited to technology companies.
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How does EFH help companies with community involvement?
EF Hawai`i serves as an “outsourcing provider” to help companies organize community involvement activities and programs. EF Hawai`i recognizes that early stage companies are focused on building their businesses, so a community involvement program will begin only when the company is ready. The program will be tailored to fit the company’s interests and resources and will usually start with a single event like a beach cleanup or a food drive. EF Hawai`i will confer with management, survey employees, develop an array of options for community involvement, identify nonprofits to work with, and publicize activities. EF Hawai`i hopes and expects that as the company grows, its involvement in the community will also grow.
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How much of the company’s time will this take?
The company’s management will decide how much time to devote to working with EF Hawai`i on a community involvement program. A simple activity like a giving tree at Christmas will take very little management or employee time. Other events like volunteering to serve a meal at a shelter can be held on weekends with family members included – minimizing the use of company time but allowing employees to be with their families and to do good at the same time.
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How much stock is a company asked to donate to EFH?
Companies are asked to donate options or warrants on stock worth $50,000 or 2% of the company’s valuation, whichever is less.
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Why would a company’s board and investors approve the option donation?
The board and investors will likely recognize that the benefits of community involvement – team building, improved morale, increased pride in the company, a recruiting and retention edge, a better image in the community – are more than worth the minimal dilution caused by the donation of stock options or warrants.
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How does the tax deduction work?
The company does not take a tax deduction at the time of its donation of stock options or warrants (a deduction is often of no use then, since the company may not have any income tax liability). Instead, the company gets a deduction at the time of the liquidity event, when the stock has appreciated in value and the company probably has tax liability. An IRS letter ruling supports this tax deduction.
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What kind of options does EFH ask for?
The options would come from the company’s existing option program. They would be non-qualified, fully vested, net exercisable options. The company may also donate common stock, in which case the tax deduction is for the fair value of the stock at the time of the donation. Founders stock, warrants, or cash may also be donated.
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What happens to the donated stock options?
EF Hawai`i holds the options or warrants until a liquidity event occurs, at which time EF Hawai`i exercises the options or warrants and places 50% of the proceeds in a charitable fund from which the company directs donations. EF Hawai`i retains the remaining proceeds to support its operations.
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How does the company’s charitable fund work?
The company can either organize its own charitable foundation or establish a donor-advised fund at the Hawai`i Community Foundation. The latter option is attractive because HCF handles fund investment, administration, bookkeeping, and tax returns, and the company retains the right to recommend donations to charities of its choice.
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What if the company is acquired?
If a company is acquired by a non-Hawai`i company, it is EF Hawai`i policy that the option or warrant proceeds are to be distributed to qualified Hawai`i charities chosen by the company’s founders or by a committee of the company’s Hawai`i employees.
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What if the company never has a liquidity event or it goes out of business?
The stock options or warrants become worthless and are never exercised.
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What is the expense to the company at the time of the donation?
A charitable expense is recognized when the option or warrant is granted. The accounting value of the option or warrant is a fraction of the fair value and is based on the Black-Scholes option pricing model.
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How does a company get started with EFH?
Please contact Leigh-Ann Miyasato, leighann@efhawaii.org, to get started. The company’s board will be asked to vote on a resolution approving the stock option or warrant donation, and an option or warrant agreement will be signed. The company should assign a contact person with whom EF Hawai`i will work to develop a community involvement program.
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Will EFH make its own grants to nonprofits?
Not at this time. EF Hawai`i will use its resources to help companies develop their community involvement and philanthropic programs. Later, when liquidity events occur, it may be possible for EF Hawai`i to consider making its own grants.
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How can I support EFH?
EF Hawai`i is open to advice and introductions from the venture, business, and nonprofit communities in Hawai`i and beyond, and financial support is always welcome. Please contact Leigh-Ann Miyasato, leighann@efhawaii.org, for more information.
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