When Being A 501c3 Non-Profit Makes More Financial Sense For Your Startup
One of the myths I’ve been trying to squash with is the idea that there’s one preferred path for startups: be a for-profit corporation to sell things and leave the door open to raise venture funding. All that glitters ain’t gold, and I wish that someone had told me some things I went down that path for my last startup.
The first misconception that requires clearing up is the idea that 501c3’s can’t make money. Completely false. If your revenue streams are tied to the mission that gave you tax-exempt status in the first place, you totally can, as long as that money goes toward expenses. Guess what, salaries are expenses.
But let’s dial back: I’m going to assume that 1) your startup does serve a public interest, say education or healthcare; and 2) you already know that you can take a nice salary from a non-profit. Because I knew these things, and still I chose the wrong path.
The reason I chose to go with the traditional fundraising route was because I wanted my startup to blow up to fantasy levels, just like every other entrepreneur. I wanted that big piece of equity pie, even if we never exited. And I ignored all the warning signs that this just wasn’t the path for me.
For one, we didn’t have a steady revenue stream and wouldn’t until we had 50k users. We created a digital health platform for patients mostly because of personal passion and pain point, and knew about a few other companies that had made it with various business models and thought we’d figure it out later. But the scale never came, so we essentially failed. The disappointment of not being able to return money to our investors was severe.
The flipside? If we had been a non-profit, I think the situation would be very different. We could’ve applied for Google Grants which offers hefty financial assistance with ad spending and hosting, and none of that was dependent on scale. They offer $10k in monthly ads, and up to $40k. That’s like an annual $120k — $480k seed round without the pressure. We could’ve applied for other foundation grants.
We could’ve taken donations from philanthropists. We could be paying ourselves a decent salary and continue gunning for global impact, even after our 2-year startup runway was long gone. The non-profit model would essentially reward us for every user we helped, rather than penalized us for not hitting critical mass.
Yes a 501c3 certainly comes with more bureaucracy than an LLC. But if you’re a startup trying to raise, eventually you’ll become a c-corp anyway, and the bureaucracy is just as bad if not worse.
If you’re in the public service space, are satisfied with a decent market-rate salary, aren’t fond of pressure to hit annual 10% growth at all costs, and aren’t gunning for an exit, a 501c3 non-profit is a very real option to get there.
