He Said, She Said: The Importance of Funding Agreements

It has been a busy few weeks - tax season means people are starting to look at their overall wealth plans and laying out their charitable giving plan.  On the upside of this busy-ness is the fact that it looks like philanthropic activities are going up.

During these past few weeks I have had conversations with two funders about difficult relationships they are having with their recipient organizations.  In one case, the funder was not clear about the expectations and had set a precedent of funding the organization even though they were not getting the information that was required.  In the other case, the funder has very clear expectations, but they too continued to fund the agency out of an emotional response to issue the organization is addressing.

Conundrum... do fund based on precedents?  How do you disengage yourself from this relationship?  Are you legally obligated to fund based on a pledge agreement?

I was having coffee with Mark Starratt, an advisor at Richardson GMP about this very topic yesterday.  Here's what we discussed:

Philanthropy is financial response to a social problem based upon an emotional experience. People give to people and they do so because they were asked.  So when a foundation, or anyone for that matter, is reviewing funding solicitations it is important to be able to put the emotions aside to look at the merits of the organization.  This does not mean that emotions shouldn't play into the decision, it just means, first you have to have a clear understanding of how your philanthropy is supposed to "work" (just like you make your money work for you when you are investing... you make your philanthropy work for society when you are community investing...).  Once you have a clear understanding of your social vision, and when dealing with a family giving plan, your family mission, and then you dig into the emotional components of why you are going to fund this organization.

What does a funding agreement look like?  They are all different and are tailored to the needs of the funder and the organization.  For agencies with little capacity, the funding agreement could be as simple as a disbursement calendar and a statement of how the gift is to be recognized.  For organizations that are more sophisticated or have the capacity to manage certain requirements, these agreements could list out challenge grant requirements or reporting on impact expectations. BTW -Mark and I are both seeing an upswing in these types of funding relationships.

Pledges are not legally binding, but there is a sense of a moral and ethical obligation to see them through.  That said, if an agreement is in place, and it has been negotiated between the two parties, and one side does not fulfil their obligations then the grounds for withdrawal of funds is justified.

In some cases, funding agreements can be legal documents.  In this case it depends on the sophistication of the donor.  You will usually see these legal funding documents drafted by government funders.

When should you have a funding agreement?  Whenever you have expectations around how your donation is to be used.  

As I have said in the past, it is up to the donor to lay out the funding expectations and it is up to the charity to make sure that the funder is not driving them to mission-drift or scope-creep.  These funding agreements are negotiated, not dictated.