Foundations, please get over the urban myth of “tipping”

[Two donkeys, peeking their head over a fence. Image by mvdsande on pixabay.]

Hi everyone, before we get started, it’s been five years since Unicorns Unite: How Nonprofits and Foundations Can Build EPIC Partnerships, a book I wrote with co-authors Jessamyn Shams-Lau and Jane Leu, was released. Here’s a free webinar taking place on February 14th at 10am PT to discuss what we’ve learned since then. Auto-captions will be enabled. Also, please use promo code UNI50 here to get 50% off your copy of the book.  

Today, we talk about an issue that many of us probably had no idea existed, but one that is very annoying to those affected, and it perpetuates inequity. The concept of “tipping.” This is basically the idea that if a foundation gives a nonprofit “too much” funding, it would “tip” that nonprofit into becoming a foundation itself, which would then open a hole in the fabric of spacetime and an ancient evil would breach our dimension to rain chaos and destruction and there would be fire and brimstone and terrible wifi.

It seems to have a weird pull on many funders, who sometimes use it as an excuse to limit how much money they give to nonprofits. When I was an ED, I had multiple foundation program officers telling me they could only give my org up to a certain amount, because they didn’t want to accidentally “tip” my org. I thought this problem had gone away, but here’s a recent email I got from a nonprofit leader:

“There is a very large private foundation in our area that has used tipping as a reason why they want to focus only on granting to large organizations because they want to give out only large grants and don’t want to ‘tip’ the smaller non-profits in our area to private foundations. They made clear that they would be focusing only on large organizations that have ‘capacity,’ and they were shifting away from smaller orgs because of this tipping concern. Beyond the very intense frustration that the least-resourced organizations are not going to be eligible for their funds, it has also just added a lot of confusion for folks. I have been in several conversations lately where people have mentioned tipping concerns now where I had not been hearing this as a concern prior.”

Foundations who still believe “tipping” is an issue, we need to have a serious talk. Not much is written about it, but one of the few articles on it is this short piece by a lawyer calling it a non-issue:

This is a piece of urban legend with a little basis in reality, but it is not true […] To qualify as a public charity as a matter of right, an organization which is not a church, school, or hospital (or related entity) must receive at least one third of its support from qualified public sources. It is possible to qualify with as little as 10% public support. […] The IRS has lessened the requirements for foundation scrutiny of this issue, and it is almost never a realistic a problem today.”

There you go, foundation colleagues, that was from an actual lawyer, and not just from me, a guy whose score on the Law School Admission Test was so low that he ended up in nonprofit management, to the shame of his entire village. Tipping is not a real problem. It cannot hurt you. Your fear of it, however, is hurting the nonprofits you claim to care about. Here are several things for you to consider:

The risk of “tipping” is so low that it’s nonexistent: Sure, there may be some obscure law related to tipping. No one cares. There are all sorts of ridiculous laws that no one bothers to enforce, such as this one in Arizona making it illegal to have your donkey sleep in a bathtub. “Tipping” is one of these laws. Talk to your colleagues and see if any of them have heard of a single instance where a nonprofit lost its status because some foundation gave it 50% or 75% or 100% of its annual budget. I’m sure if you comb your network hard enough, you’ll find something. But the chances of tipping are as low as a nonprofit board chair being struck by lightning (not that it stops some staff from daydreaming). Ask yourself if that tiny potential chance is worth the certain challenges you’re causing to nonprofits who need funding to do important work.

An infusion of funding is often necessary for the success of many ideas: In the for-profit sector, there are start-ups, and the successful ones get significant funding from venture capitalists. An idea will go from zero money to getting millions in investments. And they’re often doing truly inane things, like the Juicero, a wifi-connected juicing machine that got 120M in start-up funding. How will we in nonprofits be able to solve entrenched societal problems if funders not only won’t invest at similar scales, but use nonsensical excuses like “tipping” to give out tiny crumbs? If you want critical nonprofit organizations, leaders, and movements to succeed, especially when they first start, you will need to support them with large amounts of money.

Equity requires significant and catalytic investments: Numerous organizations get 50% or more from a single foundation when they start up, and no one gets on their cases. Often they are white-led. Equity requires the moving of resources to the communities that are most affected by systemic injustice, and to the organizations led by these communities. If you refuse to fund more than 10% of a nonprofit’s annual budget, for example, then most funding will continue to flow into larger, and thus more likely white-led, nonprofits. A white-led nonprofit with 5M in budget, for instance, can get up to 500K, while a Black-led org with a 250K can only get up to 25K, according to your arbitrary rule. That is the complete opposite of equity. If you really care about equity, then fund Black-led, Indigenous-led, LGBTQ-led, disabled-led orgs 50% or 100% or 500% of their current annual budgets or whatever they need to effectively do their work.

If a law or a rule is inequitable, work to change it: It’s always frustrating how many people with power and resources fail to see that they have the choice to follow an inequitable rule, or they can work to change it. Especially when the rule is so obscure that most people have never heard of it, and the people who have heard about it don’t give a flying tub of moldy hummus about it. Go ahead and give your nonprofits 50% or more of their annual budget. If any of them gets a letter from the IRS saying they got “tipped” (which, again, is about as likely as my being declared Sexiest Man Alive), then use your resources to educate policymakers and help change this ridiculous law.

Nonprofits do not need funders’ “benevolent paternalism”: A longer post may be needed on this topic, but a lot of practices funders put into place are there because many funders genuinely believe they know what’s best for nonprofits and are “protecting” them. Funders need to remind themselves that their primary job is to ensure nonprofits doing good work have the funding they need to continue doing it. It is nonprofits’ responsibility to ensure they are compliant with IRS regulations, have financial sustainability, etc. Your “looking out” for nonprofits have caused way more harm that it’s helped by depriving nonprofits of funding, a key resource they need to be effective. Give nonprofits the funding; let them take on the nearly nonexistent risk of being “tipped.”

I hope that helps. Tipping is not a concern. The likelihood of it happening is very low, but the harm you cause to nonprofits by fixating on it is very high. Please do not use it as an excuse to perpetuate terrible and inequitable funding practices.

And for everyone in Arizona reading this, go ahead and let your donkeys sleep in bathtubs if they want to. It’s very cozy for them.