SHOULD YOU GIVE THROUGH an LLC? JOHN: Good Morning Everyone

Friday, October 25, 2019, Aviara (T21_1) SHOULD YOU GIVE THROUGH AN LLC? JOHN: Good morning everyone. My name is John Tyler. I’m the general counsel secretary, chief ethics officer for the Ewing Kauffman Foundation and it’s my privilege to be able to moderate and facilitate this session on really philanthropy and use of the LLC model. The Jan Zuckerberg initiative made a big splash a couple of years ago when Mark and Priscilla announced that they were going to set up their philanthropy through an LLC. And there was all sorts of, mostly uproar and a little bit of excitement and quite a bit of misunderstanding in the uproar. But Jan Zuckerberg was not by any means, the first philanthropy to be approached with this structure. But it did ignite interest in the structure and that has continued to this day. And I think that there is some good strong curiosity among high net worth individuals about, is this a good structure for me to operate my philanthropy through. And it’s more of an enterprise structure rather than a foundation single structure. It’s looking more the LLC structure through philanthropy is usually encompasses a variety of things. And so we’ve got high net worth individuals wondering is it a good structure for them. We’ve got foundations and community foundations and DAFs and other funders curious about, well wait a second, can we collaborate, can we do work with these for profit philanthropies and so there are questions about that. And there are just questions then that the sector has more broadly: Is the LLC structure going to hurt the credibility, if you will, of the philanthropic sector because it can get away with all of these things? And we’re going to solve all of those questions here this morning. And we’ve got a couple of folks here who are at the forefront of using LLCs and working with the donors behind using the LLC structures. Jeff Hom at the Omidyar Network which really, Pierre and Pam Omidyar were really probably the first that I’m aware of to be intentional, strategic and thoughtful about using this type of approach, this type of structure and Jeff will give some of that background and history. Looking at more recent decision making, Kelli Rhee is the president and CEO of Arnold Ventures, John and Laura Arnold’s philanthropy out of Texas. And they have recently engaged the LLC structure to help pursue the Arnold’s philanthropy. So with that, let me actually turn it over to Jeff and Kelli to provide a little bit of background about Omidyar and then Arnold. JEFF: Great. Thank you, John. Good morning everyone. Hopefully everyone is awake for our 8:00 a.m. session here. Though as John mentioned, I’m the general counsel at Omidyar Network. It’s the venture that Pierre Omidyar created. He had founded eBay in the late 90s, as some of you may know. eBay went public in 1998 and Pierre found himself with sort of an immeasurable amount of wealth at the time. And he asked some of his advisors, you know, what should I do now, now that I’ve come into this wealth? And many of them told him the traditional route, oh, you should create a foundation because that’s what you should do. And then others said, whatever you do, don’t create a foundation. So kind of weighing pros and cons, you know, I think at the time, it was sort of a lot of decisions and things to think about and life changes. He

went ahead and he created a foundation. So from 1998 until about 2004, we had the Omidyar Family Foundation. And it was doing sort of traditional grant making. It was kind of more one of what the family thought of, hey, we want to support this cause or this grantee. As a few years went on though, he was wondering, you know, he saw a foundation and where there were limitations and where he really had his experience from was with founding of eBay and it’s this network online that grew very rapidly. It connected buyers and sellers across the US, across the world. He saw that he was actually having quite a lot of social impact through a business vehicle. And he also saw that when you look at business, just generally speaking, that the scale that businesses can reach and the speed, it just seemed it was much faster than you’ve seen nonprofits scaling. And part of that is just the way they are set up, the way they can attract capital, the way they can deploy capital. So in 2004, Pierre decided that as a technologist, as an innovator, as an entrepreneur, he really wanted to shake things up a bit so he went to some leading advisors to come up with a new vehicle and a new structure. And that’s when Omidyar Network was born. So we jokingly say that we went from the Omidyar Family Foundation of OFF to Omidyar Network, to ON. That’s our inside joke. But in 2004, we created this hybrid vehicle that is an LLC and it’s a foundation. And one of the primary drivers was that it allowed us to make investments into for profit companies that we thought were mission aligned, were having impact in the world. And over time, we kind of refined this model where we focus on early stage, almost like venture capital type companies in emerging and developing markets around the world who are focused on improving people’s lives through delivering products and services for the underserved. Why don’t I stop there and we’ll dig into more questions on the LLC model and how that was helpful for us. JOHN: That’s great. Thank you, Jeff. Kelli? KELLI: Great. My name is Kelli Rhee and I am president and CEO of Arnold Ventures. If you know us, you may know us as a Laura and John Arnold Foundation because we just converted to operating as Arnold Ventures, January of this year. So Jeff represents the early movers. I represent the people who are recently moving in this direction. So we are a philanthropic organization based in Houston, Texas with half of our team in Washington and New York, focused on maximizing opportunity and minimizing injustice for everyone. Our work is primarily focused in the areas of criminal justice reform, healthcare reform, issues of public finance and issues of public health. We have been around for almost ten years and we really started in the way that Jeff described; the Omidyars getting off the ground where we were a private foundation. We invested in primarily K-12 education at the beginning. About two years ago, I’ve been with the organization six and a half years and two years ago, I took over as president and went on a soul searching process with Laura and John and our leadership team. And we really asked ourselves, were we doing enough with the resources that we had and the uniqueness of our perspective. And it was really a soul searching thing and

instead of thinking about how should we be organized and structured, we asked, what is the strategy that we should be implementing that maximizes our resources and our perspective as much as possible. We had always been about policy change because we believe that policy is a way to outsize our investments. So we think that policy can allow us to have scaled impact that sustains, that lasts. But the way that we went about funding policy change was as a private foundation and there is a lot you can do. A lot. And we funded research, we funded evaluations, we funded nonprofit organizations working with government to think about what good policy looks like. But ultimately, if our strategy is to drive policy change that lasts and scales, being organized as a foundation was limiting. So we could not make investments in the political arena or in the direct advocacy and lobbying work in the way we felt was necessary. Now, this wasn’t a no brainer decision for us, primarily because we’re nonpartisan. So we don’t have a political ideology of our cofounders that we’re trying to implement. And when you start to move into the C4 political world, there’s a lot of assumptions made about your motivation, your transparency, your outsized influence and power on the government and political process so we spent a lot of time really thinking about that. But ultimately, we determined that if we operated as an LLC, we could have a better shot at helping solve the problems that we care about through driving policy change. So the way that our organization is now set up is that all employees and associated expenses sit in Arnold Ventures LLC but we don’t actually give through that vehicle; we give through the Laura and John Arnold Foundation. We give through their donor advise fund and then we give through a C4 and LLC. So I’m happy to take any questions on that structure but I just want to be clear that we operate as an LLC but about 80% of our funding is still C3 nonprofit through our foundation and through our donor advise fund. JOHN: Let’s talk a little bit then about how both Arnold Ventures and Omidyar work in practice. And, Kelli, I might start with you. So we’ve got some structure issues and some why issues. Let’s get to the actual operations and then we’ll probably come back up and visit some of the issues around differences but in the actual operation. So Kelli, you described that you’ve got Arnold Ventures at top and then related to that, because it’s not owned, you don’t have a foundation owned by Arnold Ventures. And then the DAF and the C4. How do things work in practice? You said all the employees are up at Arnold Ventures. How do things work in practice? KELLI: Yeah. So the giving vehicles that I described, the foundation, the donor advise fund and the C4 LLC actually all existed before we became Arnold Ventures and we just operated in silos. So virtually every employee was a member of the foundation and we had what we, we had robust strategies and approaches to how we were going to drive change in the issue areas that we cared about. We then had a couple of people who operated entirely independently of us, honestly working on those same issues. And we couldn’t talk to each other. We didn’t know what was going on. There were a few times where we were making investments in the same places and didn’t know it.

JOHN: So those folks, they were working like through family office or – KELLI: Through a family office, that’s right and there were just a few of them. And we realized that not only was our structure limiting our ability to think strategically about how to drive policy change holistically, but the left couldn’t talk to the right. And there’s still limits and a lawyer should describe it, not me. Even when you operate as an LLC, there are certain things you can fund. There can’t be certain direct hand offs. There’s still limitations. So if you want more on that, please talk to a lawyer. But we saw that we couldn’t be holistic in our strategies and we couldn’t coordinate and be, really go out into the world as Arnold and so our partners were getting confused. So we now operate as one team where all of our strategies and decisions are decided at Arnold Ventures. And then our team, our lawyer, our head of grants management, myself and the programmatic team decides after we’ve made a decision to move forward, which is the right vehicle from which to fund it. So we try to not make that a front end decision but instead, think about that as a back end decision. All of the strategies and what we decide to do moving forward is really determined as Arnold Ventures. JOHN: And actually backing up for a minute, where did the Arnold Ventures wealth come from? KELLI: John Arnold was originally a trader at Enron, had nothing to do with the demise of Enron but he took the wealth that he had generated there and started a hedge fund. And you should know, Laura and Joh are in their mid-forties. They work full time at the foundation, and we can circle back to that, but I do think the way that we operate would be very difficult if we had living founders who did not spend as much time with us as they do. JOHN: Okay, thank you. JEFF: Let me follow up on that. I think one of the benefits of the LLC structure and why we also went with an LLC, as Kelli mentioned, is the idea of flexible capital, so Omidyar Network has been really big on the idea of sometimes a grant might be the right tool to use to solve a problem or an issue. It could be a loan. It could be an equity investment. It could be a guarantee. It could be policy advocacy. There is a range of different tools. And where I think Pierre saw that a traditional foundation and grant making was much more limited. And so where the LLC enables us is, we can really use different tools and, in fact, we are the same way. We have all of the employees sit within our LLC. So therefore, the same employees can utilize different tools, and it’s not that we have a grant team, and a for-profit investment team, and an advocacy team and they can’t talk to each other. We are all integrated within one firm. JOHN: And Jeff, does that mean, like Kelli described, you’ve got the team together with Omidyar Network, the entity, and the decisions get made. You’ve got strategic missions. You’ve got programs you pursue. The decisions get made about we’re going to do X, and the best means of pursuing X is going this particular route, a grant or an investment or a loan or something else. JEFF: That’s correct.

JOHN: So in a lot of ways, I think for what I’ve heard both of you describe, is that the form follows the function. It was strategic. It was intentional. It was thoughtful about maximizing the flexibility to best pursue mission and accomplish the mission objectives that you all have. JEFF: I think that’s right. KELLI: I agree. But you should know that there’s a lot of ways to do this. And the approach that we’ve taken is aggressive financially because every employee and employee related class we pay for through tax dollars. And that was a decision that our cofounders were comfortable with because it gave us so much more flexibility to operate in the way that we felt strategically used our perspective and resources best. But there are plenty of other models whether it’s a shared service model. There are lots of other approaches that you could take if this feels too aggressive. JOHN: So Kelli, you’ve just hit on something. And one of the criticisms that came out with Jan Zuckerberg Initiative was that they’re just setting this up as a tax dodge, they’re going to get all of this tax credit and these deductions and tax exemptions by going through an LLC. Being the lawyer that you. KELLI: As I understand it, the reason that the Zuckerbergs set up their LLC was in part because their wealth was in Facebook’s stock. And so I think that that’s a different reason and rationale than, for example, our rationale that did not affect our decision. For Arnold, this is actually a less tax advantageous approach to giving. But my cofounders are wanting to give away the majority of their wealth in their lifetime, and so that was actually not a factor that we really discussed. JOHN: Jeff, you want to chime in? JEFF: Yeah, and just to be clear, so when the Omidyars give to the LLC or contribute or put capital into the LLC, there is no tax benefits. There is not tax deduction. They can provide qualified appreciated stock like shares in eBay or PayPal, and there’s no tax benefit for doing so. So our LLC, like many LLCs, is set up such that it’s a pass through vehicle for a federal income tax perspective. There is no tax benefits. We are intentionally forgoing those tax benefits to enable some of the other advantages that we’re talking about here, and we’ll continue to talk about. JOHN: As both of you have talked about, it’s perhaps tax disadvantaged. If this is purely a tax planning mechanism, you wouldn’t have the administrative costs in a taxable vehicle. You would have them in the tax exempt vehicle and where those expenses count towards the qualifying distribution but there is a cost to doing that as well if you are trying to do those, as both of you all have found out or your founders have found out. There is an operational efficiency with having the employees in the taxable entity. You may not get tax benefits, but you get operational efficiency as you’ve both talked about. Jeff, let’s start with you. What are some of the differences in practice and actually operating through the LLC model versus the foundation model? JEFF: Sure. So one of them talking about the employees in an LLC vehicle is in terms of compensation. So as a private, taxable entity, like other limited liability company or corporation, there are no IRS restrictions on compensation for individuals. You are free to set up your

compensation structures. We were looking at markets like in Silicon Valley, startups, stock options. Foundations don’t have anything along those lines and really can’t offer similar types of vehicles. Or in the investment world, when we’re looking at doing this impact investing, we’re trying to attract talent from venture capital firms, or equity firms and again, they’re used to something like a carried interest or something along those lines. And so again, from a foundation perspective, that’s not something you can offer. So an LLC really does provide quite a lot more flexibility in how you can structure your compensation, who you can bring in, and that can be very helpful. Again, it depends on your strategy. It depends on whether you will build your own teams internally or leverage external expertise. But for us, it was important to have that flexibility to build our own internal team. JOHN: And you’d mentioned earlier too, Jeff, that one of the reasons that Pierre wanted the flexibility was to be able to work with for profits and through for profits, not just the LLC, but through investment and a variety of investment vehicles. How is that different through the LLC? JEFF: Sure. So when Pierre started, I mean, we’ve sort of evolved a little bit over time but when we started, it was really the LLC was for investments and it was sort of commercial for profit investments and then the foundation was really just for grant making. And over time, we’ve blended a bit. We have what we call investments kind of across a continuum and we see that foundation can actually make investments. It can make program related investments, what we call mission related investments. But there’s still limitations to that. There’s costs associated with making a program related investments for those who may know. For instance, getting a legal opinion which is often helpful if you’re in a gray areas or sort of pushing the boundaries of the kinds of investments you want to make. That can cost 10 or $20,000 per opinion, per investment. So if you’re making a relatively smaller sized investment along the lines of an angel investment, let’s say it’s a $200,000 investment, you’re not going to incur a legal fee of $20,000. I mean, that’s incredibly high, costly for that kind of investment. Similarly, for the mission related investments or the investments that a foundation can do out of its general asset pool, again, you can do that to a point, to an extent, but the general prudence rules that govern foundations and the investment in foundation assets could also limit your ability to make certain kinds and types and amounts of investments. And so the LLC structure really enables Omidyar Network to make investments. We’re not limited to the PRI rules or this excess business holdings rules that govern foundations. If we find an investment that we like, we can just make that investment. And we’ve come across making investments in India and Africa and other places where you raise, hey we might want to do this as a program related investment and, you know, you just have a lot of challenges trying to get the other side to understand what is a program related investment, how it could restrict them or not restrict them and there’s quite a lot of back and forth. So we’ve found that those investments are great when you’re dealing with a for profit company that is either affiliated with or spun out from or generated from a U.S. nonprofit that’s familiar with charitability, that’s familiar with PRI rules. It’s less, it’s not as great of a vehicle if you’re looking to make early stage investments around the world where the founders aren’t familiar with these kinds of rules.

JOHN: So a lot of times more efficient and more effective for that type of investment activity to come out of the LLC. And Kelli, you talked a little earlier about the policy work that the Arnolds do. How is that different using the LLC model? KELLI: So I would echo Jeff’s comment on compensation. If, for us, the types of individuals that we’re recruiting, it is helpful to have more flexibility. We don’t do the investment side of things through our LLC. I wouldn’t rule it out but it is not a part of our strategy today or in the near future. But as you mentioned, we operate as an LLC because we are about driving policy change and there were many moments where our team would be in conversation and literally have to shut down the discussion because it went into a gray area or could go into a territory that is, you can’t operate in as a C3. So it gave us flexibility on the policy making side. The other advantage, another advantage of operating as an LLC, particularly with living founders, is that Laura and John do plenty of things outside of the Laura and John Arnold Foundation that relate tangentially to our work. And we would have team members who could not help and advise them on things because they were paid by the foundation and it wasn’t foundation work. And so now, not only can we be helpful to them, but we are finding that we are using their platform and voice in ways that are related to our work but not necessarily a direct part of how we operated as the foundation. JOHN: Okay. Let’s shift then to some of the similarities and you’ve both hit on some of the similarities. And Kelli, I might start with you. What are some of the similarities in practice? For instance, does the structure impact spending or how does it impact spending? KELLI: So we moved into this direction because we wanted to give more. And in this first year of operating as Arnold Ventures, we will not only give substantially more as a C4 or more as a C4 but we are giving more in our C3 work. And so it has had a multiplier effect for our giving because we are able to do things more holistically. As far as the day to day for our program, for our entire team, it’s honestly not that different. 80% of what we do is still C3 work. That’s the majority of people’s time. But what it has done is it’s taken away this bright line and allowed us to be more flexible with our partners and grantees so that we can fund their work from start to finish in a way that we couldn’t before. But we still apply the same level of due diligence. We still have grant agreements and contracts and we still largely operate in the same way that we did December 31st of last year. JOHN: Jeff, how does it affect you all’s spending? JEFF: We’ve been in this form now for more than a dozen years. Over that time period, just to give you a sense, about half of our dollars out go through the C3, through the foundation, and about half of our dollars go through our LLC vehicle. We are probably about $1.1 billion of money that’s gone through both, together through the foundation and the LLC. So a good amount of capital again, over about a dozen years now. And again, that’s still continuing. Again, as we mentioned before, we look at what is the right vehicle for the problem at hand, and if it’s a public good, if it’s something that’s building ecosystem, field building, ecosystem building, things like that where like a for profit investment doesn’t make sense, then we’ll make a grant. JOHN: Is either the LLC or the private foundation, are either of them endowed?

JEFF: Yeah, so our, generally speaking, it’s funded on a kind of evergreen basis. Our foundation does now have in the neighborhood of $400-500 million, somewhere in that ballpark. But overall, the model is one where most of the assets still reside with Pierre’s trust, in the family trust and so at the LLC and the foundation level, those are actually just assets that are provided over time. JOHN: And how does that work for Arnold? KELLI: So we have about 2.2 billion in our foundation today. We have the Arnold’s donor advise fund and then we do C4 activity through an LLC and a C4 and that is on an as needed basis. But so while we do have a substantial endowment, we have much more aggressive plans for giving because most of their assets still sit within the family structure. JEFF: And I’ll say, one thing that was good when Pierre first created the foundation in the late 90s is that he didn’t put all of the money into the foundation. So sometimes I speak to colleagues and some of our peers who are at much larger foundations who are actually a little bit jealous that we have this flexibility, that we hadn’t put all of the money into the foundation because once the money goes into the foundation, you can’t get the money back out of the foundation. And so you’re stuck in that structure. So for those who have done that, I apologize. But for those who still have assets outside of the foundation, by putting into an LLC, you can always in the future decide to put that into the foundation. It really gives you that flexibility where you can continue that in the foundation or not, but it’s not sort of stuck in one vehicle. JOHN: Well, and for those who have put the money in family foundations, wanting to do this, it’s not woe is me. It’s incentive to create new wealth. So, we’ve talked some about the front side of the strategies here. What about the back side of it, looking at evaluation and metrics and, Kelli, let me start with you. Are there different approaches because you are in an LLC? KELLI: I always hate the, how do you evaluate your success question because I would like to have a very neat answer. I mean, you all struggle, I assume, with this on some level too that our work is more complicated and dynamic to have a number or even a couple of numbers that say, yes, we’re on the path to success or no do something very different. What I think moving to the LLC has allowed us to do and we are still very much in the process of figuring out how do we know if we’re onto something or not is, we’re able to think about driving change in a broader way. When we were more limited as a foundation, there was a big handoff. So policy changes is what we think is our strategy to making a difference. We had to set things down and hope that policy makers, whether they be government officials, other groups that work with government, that they would pick it up and move it and that’s a big handoff. And now we are able to fund activities that move change along the process differently and that is helpful in us seeing whether or not our investments matter. JOHN: So there’s, in some ways, more of a, you’re able to see more of a causal connection in the policy space whereas with the foundation work, you can do the research, you can do the education, you can do the advocacy, you can support, but you shouldn’t have as a metric, this bill passed. That type of thing. Jeff, what about the evaluation and metrics side? Does that change for you all?

JEFF: Again, I think it’s similar. It’s along the same lines that Kelli mentioned, you know, where our teams, they really want to have impact and want to see whether it’s laws changed and broader reach and impact through that and so this enables us to do that. I think more broadly, aside from the kind of lobbying advocacy side of things, a lot of the impact and metrics are the same. A grant is a grant. It doesn’t matter which vehicle, necessarily, it comes from. I think on the investment side, we do have a little bit more, like other for profit investments, you can measure at least financial returns. And we often do measure, you know, the number of schools and the number of students that are served, and kind of the broader reach of technology in these companies. Again, we’re trying to come up with these metrics. But they are, as Kelli mentioned, they tend to be more ad hoc. We have a loose framework that we use, but again, it’s quite difficult to measure. JOHN: So the LLC is not a silver bullet. You’ve solved the, you’ve cracked the atom on metrics because you’ve done the LLC. Same problems, same issues, same concerns, right? JEFF: Yes. JOHN: One of the things I’ve mentioned in the introduction is some mystery around the LLC structure and the ability to collaborate and to collaborate with other funders, private government, philanthropic. You both hit on this a little bit but can you go ahead and talk about collaborations. You’ve both referenced doing it but easier, harder, the same? Kelli, you want to take that. KELLI: As a policy oriented organization, it is much easier for us to have comprehensive partnerships today than a year ago. The challenge in partnering has come with some of our traditional C3 grantees. So they were nervous when we said, okay, we’re going to now to be Arnold Ventures. They said, well, we don’t want funding from an LLC, that will compromise us, we want funding only from a nonprofit. And it took a lot of discussion with a handful of our grantees to get them comfortable with the fact that we were still an organization focused on data and evidence to guide our decision making. We were nonpartisan. The majority of our funding is, and their funding in all of these situations, when individuals kind of bristled, their funding still came through a C3 whether it was our foundation or our donor advise fund. But I think that there was a lot of discussion and conversation and education with our grantees, some of our grantees, to get them comfortable so that we could continue to partner moving forward. JEFF: Yeah, I think for us, you know, it was, especially in the early days, it’s, you know, what are you. You know, for the grantees, again, as Kelli mentioned, they may look at us, what is this new model and are you just a for profit investor? And then similarly, when you’re in the for profit space and the impact investing space, you know, are you just a foundation and like, what is this hybrid thing that you are. And over time, again, about a dozen years of doing this now, I think we have quite a strong brand reputation. We’re known as, you know, impact investing, it’s a hybrid. It’s a bit of both. But it does take time to kind of, you know, to develop that because again, as an LLC it’s very flexible. You can be whatever you want to be and so you kind of have to build that reputation, what you’re known for, what you care about, and that will take some time, potentially, to develop as opposed to, if you’re just a foundation, people kind of just, okay, yeah, you’re a foundation, I know what that is. So it takes a little bit more time.

JOHN: And sometimes being a foundation makes it trickier, not just legally and not just procedurally but relationship wise to collaborate with for profit. And if you’ve got a for profit vehicle to do that, it makes it easier. It makes it a little more efficient. So one of the, and Jeff, let me start with you on this question. One of the topics near and dear to the heart of the Philanthropy Roundtable is donor intent. You both talked about the donors and you’ve got living donors and it’s their intent to work through the LLC. But looking forward and projecting forward over time, how does donor intent factor into this structure and potentially even going beyond their lives? JEFF: Yeah, I think because we have an LLC and we are sort of evergreen funded so donor intent is almost renewed on an annual basis, so to speak. So we don’t really have that issue where we have to figure this out right, going forward ten, 15, 50, 100 years. We also, similar to Kelli mentioned for Arnold Ventures, you know, the Omidyars have also signed a giving pledge. They are pledging to actually give away most of their wealth during their lifetime so we aren’t trying to create some kind of a perpetual vehicle in the sense that a traditional foundation might. JOHN: Yeah, which is harder to do the perpetual vehicle through an LLC, just as a legal structuring matter. JEFF: Correct. JOHN: Do you have some thoughts on donor intent? KELLI: I think you would experience additional challenges without living donors or engaged donors, not only to set this up but then to continue to operate. We obviously have back up plans if some catastrophe happened but I think, you know, in the years to come, we will need to think about, what does this look like if Laura and John are not involved day to day but they have the same desire not to set up something that lasts beyond them but instead, to really use these assets in their lifetime. JOHN: Kelli, let me turn this question to you. One of the criticisms that I’ve seen of the LLC model is that it allows giving and philanthropic engagement to be done in secret without the magic word of transparency and all it entails. I know you all have given a lot of thought to that. How do you all approach that? KELLI: The criticism that an LLC model or any sort of kind of hybrid vehicle allows donors to have darkness or perhaps outside influence, I think those arguments have merit. And we take them very seriously and recognize that there isn’t a lot required of us. Truly, there’s really not a lot required of any of us on the foundation side in terms of accountability and there is transparency in terms of, we gave this much money to this group but not necessarily transparency and accountability to what are you trying to accomplish, did you achieve those results, what actually specifically happened with that money. So I think some of the issues apply whether or not you operate in an LLC or not. But we have chosen to set our own guidelines for transparency because one of our fundamental principles is to use data and evidence to determine what we fund and how we move forward. We report all of our giving through our donor advise fund through our foundation and our C4 giving on our website. So we obviously comply with tax

requirements in some of those circumstances. But as you look at our website in 2020, you will see all of our C4 funding in 2019. JOHN: Jeff, what do you all think about that? JEFF: Yeah, I think similarly, we report on the advance and investments we make on our website as well. I will say on the for profit side, whether for confidentiality reasons and when we make investments, we’re bound by certain confidentiality obligations. We don’t report what our IRR and exits and returns are. Again, that’s very common in the for profit investment space not to do that. But generally speaking the fact that we’ve made investments and all that is quite public. So we’re not trying to hide anything using an LLC vehicle. I mean, again, some people could do that but that’s not our intent. JOHN: Well, and it sounds like in both instances, as the organizations and the donors have been strategic in setting up the structure, they’ve been strategic and thoughtful and intentional about the openness and the access and the sharing of information in furtherance of mission, in furtherance of the credibility but in furtherance of mission then, as well. Let’s see if folks have questions. Does that sound all right? JEFF: Sure. QUESTION: I don’t know if I missed it or not, but can you as an LLC, give grants or whatever way fund non-501(c)(3)s? JOHN: So the question is, using the LLC structure, can you give grants to non 501(c)(3) public charities? JEFF: So, yes, the answer is yes you can. The one thing you do have to just watch out for is, if there are any gift tax issues that arise if you do that. So it’s much easier to give to a 501(c)(3). There’s no gift tax that arises due to that and so it depends on how you structure the funding to that non c3 entity. But generally speaking, yes. QUESTION: Do you handle your donors personal political giving as well or is that something separate? KELLI: We do, and that was part of our, that went into our rationale in part, to become Arnold Ventures. No matter how much we try to convince ourselves that Laura and John are independent people and what we do as an organization is not, the two are not this one in the same. The outside world does not see the distinction that we see internally and so they are still two independent people and there are times, particularly on political giving where they will make a decision that is not, it’s never in conflict with what we’re doing but it’s not necessarily supportive of our activities. But we have brought that all under the umbrella because the outside world sees us, we’re representative of them. So yes, we oversee their political. JEFF: And we don’t but we collaborate very closely with the family office and others who do that so again, it’s important too, as Kelli mentioned, to really kind of see the bigger picture.

QUESTION: I want to know the answer to this but it may be obvious but I’m going to ask you anyway. What was the motivation for setting up the DAF for Arnold Ventures? JOHN: So the question is, what is the motivation for setting up the DAF? KELLI: Laura and John have had a DAF for a long time and you would have to talk to them and their attorney to get the specifics on why. And if any of you are interested, John has a lot of opinions about donor advise funds and just wrote a piece in the Chronicle of Philanthropy about how those should be aggressively used as funding vehicles. But I think it’s more of a tax issue, Christy, but I couldn’t answer the specifics because the donor advise fund has existed for a long time. QUESTION: Does that allow them to move outside the foundation’s priorities? KELLI: Yes. QUESTION: That’s what I thought it was. Okay. KELLI: So we have always given, through the Laura and John Arnold Foundation, we have given things that align to our mission in the areas in which we work. We use their donor advise fund for anything personal. So we live in Houston and they will support causes in Houston that are outside of our scope. That is done through the donor advise fund. In addition, we do support mission aligned activities through the donor advise fund as well because now, as Arnold Ventures, we can use all of the vehicles to make grants and investments to organizations. QUESTION: So you had mentioned the salaries and I’m just curious, are the LLCs structured in such a way or do you work with the family office or something so that the salaries are a deductible business expense or is that salary load all basically after tax dollars of the founders? JEFF: Yeah, so to the extent that it’s time and money spent working on the investments out of the LLC then they can be business expenses. To the extent that it’s time spent on working on foundation matters, that is not typically taken as a business expense, generally speaking. But I’m not the tax person here but – KELLI: Ours is everything is after tax dollars. QUESTION: Do you have formal management agreements between the LLC and the foundation to loan employees? Is there documentation? Is it formalized or is it just an informal approach? KELLI: Formal. JEFF: Yeah, we have a formal agreement that again, just documents that all of the services are provided free of charge, among other things. That’s the, you have to avoid the self-dealing issue that you can’t charge for those services. KELLI: If you are going to do this, have a good lawyer. There’s a lot behind the scenes. JOHN: Yes. At the end of the day, that’s exactly right.

QUESTION: What you were saying early on, that you were very careful not to have people in the foundation discussing with people who are trying to influence policy. But are you saying that my making it an LLC, you can do this at the top what you couldn’t do before and that’s perfectly okay and is like your parent company, is that the LLC and then everything else flows down from that? KELLI: Yes. So the parent company is the LLC. All employees sit in the LLC so they can have the conversation about C3 charitable giving, C4 issue advocacy or the weather, investments. I mean, we operate as a company so they can work on anything in theory. But as I mentioned before, where the limitation comes for us now is that we can’t fund things in the foundation or the donor advise fund that has a direct handoff to advocacy and C4 work that we’re doing. So it still has to be in the public good, the grants that we’re making, but our employees can talk about anything. JEFF: Yeah, and I’ll just add onto that. So the employees can, for instance, lobby. And you’re not subject to the foundation lobbying rules. You are still subject to federal just general Lobbying Disclosure Act rules that apply to all companies and corporations and people and that’s state based as well. So it’s not that you have free reign to do whatever you want. You may still have to register as a lobbyist, for instance, and the like. KELLI: And for us, we don’t directly lobby. We’ve made a distinction that as a nonpartisan organization, we don’t do that but we do fund lobbying activities. QUESTION: But, technically, at the LLC level, you would be making presumably recommendations to the trustees or the directors of the foundation and those individuals would be making decisions with respect to the C3 donations. Is that an accurate way of describing it? JEFF: From a legal perspective, I think that’s right. Yeah, you don’t control the foundation assets but you do serve in an advisory capacity. QUESTION: And you may have crossover in terms of trustees or directors and also employees of the LLC. KELLI: So ours are all the same. So we don’t have different board members at this point for different entities. It’s all one group. JOHN: But the documentation, the formal decision making is structured in the entity with its decision making responsibilities and authorities. So in paying attention to those formalities is really important because otherwise, there could be all sorts of confusion but getting it right and as Kelli said, working with legal counsel to make sure it’s set up right and then followed is important. Other questions? So Jeff, a minute ago, you used the term self-dealing. How does that potentially come into play here, particularly in the investment side of what you all do? JEFF: Yeah, so I think the big thing to know is we have, the LLC is essentially treated as a disqualified person with respect to the foundation so we just need to make sure that there are no self-dealing transactions between the LLC and the foundation. So everything that you look at, generally speaking, from a foundation perspective with respect to your donors and the like are

true with respect to the LLC. So we don’t, for instance, coinvest where the LLC and the foundation are both investing in the same entity. That may be permitted. There are certain IRS rules and regs around that but generally speaking, we don’t do that. And there are other things where we wouldn’t give a grant to an investment that we’ve made out of the LLC, for instance. That would be what we call indirect self-dealing. So again, you have to be cognizant of these rules and really understand kind of how to play within that field. JOHN: Well, and presumable, as part of that too, if the LLC is investing in an early stage company and owns more than 35% of it, that company is a disqualified person. JEFF: It’s also a disqualified person. JOHN: And so if it’s an early stage office supply company, you’re not getting your office supplies through the company that you own. JEFF: That’s right. JOHN: Yeah, okay. Mindful of questions. QUESTION: I’m curious, if you think about investment allocation, how much of it is really kind of for good and how much of it is for profit? That may be a little too generalization because they can go hand in hand. You know, how much is further your mission and how much really helps sustain your mission, maybe is a different way to look at it. JEFF: Yeah, I think for us, the LLC is the mission based entity. So there’s the family office who manages all the rest of the Omidyar family wealth so of the billion dollar figure that I threw out earlier, so about give or take five or $600 million of for profit investments out of our LLC, those are all mission based investments. And really focused on the strategy, the mission, what we’re trying to accomplish. And that’s nice. The LLC does allow the flexibility. We’re just about that. We’re not a family office that has to kind of do both things and so having an LLC just focused on that can be quite helpful. JOHN: So any last thoughts, guidance, suggestions, warnings, encouragement, Kelli? KELLI: So through this two year soul searching process, I have personally come to appreciate there is no right way to do philanthropy and no one answer. So should you invest through an LLC, I don’t know. Only you’d know. There are lots of ways to make a difference. And it was powerful for us to think less about how we were structured and more about are we doing enough with what we have and the perspective that we bring. Having some clarity on that, we talk to probably 15 or 20 different organizations including Omidyar because there are a lot of ways to structure things to enable your approach and your strategy. And I would say that if we, at Arnold, based on what we learned, could be helpful to you, we would love to do that because we benefited from the perspective of others. JEFF: And similarly, I think we’re seeing a lot of interest in doing things differently, especially with younger generations of wealth coming out of Silicon Valley and elsewhere and so looking at new kinds of structures again, just enables different types of ways of thinking, ways of funding. I think it can be quite interesting. On Omidyar Network’s website, we have, just I

wanted to reference two things there, we have a document called Building a Philanthropic Investment Firm. That’s just short PowerPoint as well as Building an Impact Investing Team so to the extent anyone is interested, if you just Google it, it will come up in a search. JOHN: So I think you can see that neither Omidyar nor Arnold nor probably the other ones that are out there as well, Jan Zuckerberg, Emerson Collective, they’re not doing it to be different. They’re different to do their mission and the form should follow the function and the mission priorities and the decisions around the approach to efficiency and effectiveness in programming. But it’s doable and it’s workable and could be the right approach, maybe now, maybe at some point in the future and appreciate the trail blazers who are helping all of us learn. And hopefully, this conversation has demystified some of the LLCs. They actually are human, so to speak. But please join me in thanking Kelli and Jeff. Thank you both. [End of recording]