Using M&A Deal Escrows to Support Non-Profits
SRS Acquiom and Pledge 1% have teamed up to created EscrowUP by SRS Acquiom. As investors in SRS Acquiom and members of Pledge 1%, we are excited about the creative idea the two organizations have come up with to increase charitable giving as a result of merger transactions.
When one company buys another, a portion of the proceeds (usually between 10% and 20% of the deal) goes into an escrow account for a period of time (usually a year or two). This escrow is used to cover any undisclosed or agreed to liabilities that come up for this period of time after the transaction. One of the shareholders, called a shareholder rep, is responsible for managing all the activity on the sellers side. It’s a thankless task and a number of years ago my partner Jason Mendelson helped create SRS Acquiom to address this. Instead of a VC, board member, or founder being the shareholder rep (and doing what can turn into a lot of work for free), you can now outsource this to SRS Acquiom.
The money kept in escrow is typically held by a bank. Not surprisingly, the bank makes a spread on the money for doing nothing other than holding the money. Often, the accounts are interest free because it makes tax and accounting easier, and the interest on the escrow accounts isn’t material in the context of the individual deal. But, the numbers across multiple deals adds up. Therein lies and interesting opportunity.
Imagine the following situation: Assume GiantCorp agrees to buy AwesomeStartup for $1 billion. As part of the deal, GiantCorp insists that $100 million of the $1 billion (10%) be put in escrow for 18 months after closing to ensure everything AwesomeStartup represented about its business is true.
GiantCorp and AwesomeStartup could agree that the escrow will either go into an interest bearing or non-interest bearing account. Whatever they select, they get the same terms with EscrowUP as they would without it so there is zero impact to them. But if they agree to have it participate in EscrowUP, then money goes to charity.
That money comes from SRS Acquiom, not out of the deal parties’ pockets. SRS Acquiom gives a portion of their revenue (up to 24 basis points) from the deal to the awesome group of designated charities that support entrepreneurs.
The result is that up to $360,000 would to go to the designated nonprofits from this single example deal of GiantCorp buying AwesomeStartup. If lots of deals join in, it drives many millions to Pledge 1% and the other nonprofits.
For a different summary, Erin Griffith wrote a good article in Fortune titled How the Merger Boom Can Drive Donations to Charity.