September 14, 2006 Brilliant?
Posted by Victor Fleischer

Google announced its for-profit charity today,, which will be run by Executive Director Larry Brilliant.  In Brand New Deal, I argued that when Google structured its IPO as an open auction rather using a traditional book-building method, it was using deal structure to achieve a branding effect.  More recently, I've looked at the branding impact of Mastercard's use of a charitable foundation in its IPO. 

The structure of obviously has some branding implications for the firm as a whole.  It's an innovative and creative structure, consistent with the overall Google brand.  It frees up the "charity" to engage in more deals, perhaps with Kleiner Perkins' "green" venture fund, and to lobby Congress.  It blurs the line between profit and charity, consistent with the Don't Be Evil motto. 

I'll post separately on the tax implications, which are trickier (and better for Google) than you might think. Google has a high effective tax rate.  The operating losses of will soak up income from Google, thereby achieving much the same tax effect as a charitable donation, and without the restrictions that accompany charitable donations.  I'm assuming remains as part of Google's consolidated return.  I need more detail on the structure, so more to come.

The real benefit of the structure is accountability.  Suppose the Google founders gave a hundred million dollars to a traditional, separate tax-exempt charity.    Once that money leaves the hands of Google or its founders, agency costs increase, and over time it becomes steadily more difficult to monitor whether the managers of the charity are managing the charity for their own benefit or for the public interest (however defined by the founders).  With the structure, the Google founders and managers can monitor what's going on and exert more control over decision-making.

Of course, with this structure, the founders aren't using their own money, but rather money that belongs to Google shareholders.  (They did warn shareholders that they'd be doing this kind of thing when they went public.)   So while will be accountable to Google, there's a question of whether Google itself is properly accountable to its shareholders.  Is good for shareholder value?  Like all corporate charitable donations, it's only good if it can be properly justified in terms of a positive branding impact.  Whatever consumption value the founders may get from the organization isn't enough to justify the move.  Time will tell, and we'll need to see more detail about what the organization does (particularly regarding green tech and VC firms like Kleiner Perkins).  At first glance, I once again think Google's use of deal structure to achieve a positive branding effect is brilliant.  Or should I say, Dr. Brilliant

For more, see also Eric Posner's post at the U Chicago blog, which discusses his paper on for-profit charities with Anup Malani. 

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