Saturday, December 5, 2015

Another angle to the Zuckerberg LLC

Facebook mogul Mark Zuckerberg has announced that he is donating his vast fortune to and through an LLC instead of a non-profit like a 501-c-3. He says that this is to allow him to invest these funds rather than simply to give them away. However, he may well have another reason.

A few years ago, I spoke at length with who started a school. At the time, no-one else wanted to be involved although "Joe"  received many good wishes. The only way to get a loan to obtain a building was to become a for-profit business, an LLC, and so Joe did, investing all the time and money you do when starting a business. Joe used all his savings and sold his house for more funds. He only took a salary in Year 7 and that was less than he paid the teachers. Over 10 years, Joe built the school up to become the best in the city and one of the best in the state winning national and international awards.

Joe had always wanted the school to be "independent", and of the key characteristics is to be non-profit. So, he persuaded a group of parents to create such a foundation and he then donated the school in return for them paying the balance of the original construction loan, him staying as principal for 5 years and receiving a market salary.

Joe had had no involvement in board selection as his attorney had told him to keep a very great distance to satisfy the IRS. The first year as a non-profit was shaky as none of the parents had school-board experience, and few any board experience at all.  However, during that year the board chair was transferred to a different city and so in the second year a new board chair came in. He believed in a presidential almost dictatorial style of governance, and he believed that the principal's role is merely to follow instructions from the board.

Various crises ensued and by the end of the year, the chair had persuaded the rest of the board that the principal was insubordinate and Joe was terminated. He did not receive the four months of salary promised in the termination and the board stopped paying the construction loan which of course was still in Joe's name. When Joe's attorney contacted the board, he was told that any and all legal costs would be deducted from any monies owed and that just researching this matter and writing the response had "cost" Joe $25,000.

In the next year, 5 of the 6 teachers who had been at the school for 8 or more years left. Half the families who had been there for 5 or more years left. The national and international accreditations were lost. The state and national successes were gone. The board chair was ousted, the board members were largely replaced. The school went from having no debt to being $500,000 in the red in two years.

The school still exists, but the new board had to hire an inexperienced principal who appears to follow board instructions. The new teachers are weaker, lower qualified and less experienced than those they replaced. Families are similar to each other and diversity has suffered. Fees were cut to bring in more enrolment. Today, the school offers the same program as most other schools in the area and relies on its central and main-road location to bring in students. It still has no national or international recognitions, and is still in debt. Joe is still not getting his money.

Joe believes that for educational, personal and financial matters he was wrong to have donated his school to the non-profit. If the original board chair had stayed, there were signs of a willingness to listen, to be trained, to construct an effective board. However, you cannot guarantee the motives or interests or even ethics of a non-profit board and the US is littered with the corpses of once successful non-profits who met their demise at the hands of bad boards and/or bad board decisions.

That may be the real reason behind Zuckerberg's decision. With an LLC, he can still oversee what is done and how. With a non-profit, he loses that power and perhaps he believes that the risk is just too great.

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