A Physical Social Network℠

Ben Schwartz

It’s no secret that Environmental, Social, and Governance (ESG) investing has taken a hit. Investors pulled $19.6 billion out of ESG funds last year, and the sector is struggling to justify itself, especially in a hostile political climate. But while investors are skeptical that ESG companies can deliver a competitive ROI, there’s another way to align mission-driven capital with financial returns—and it’s already helping some founders attract investment.

I know because it worked for me.

I raised the first $100,000 for my startup because I committed to giving away a portion of my future wealth to causes my angel investor cares about. If I hadn’t made that commitment, I wouldn’t have gotten the investment.

As it turns out, there is already a mechanism by which founders have been making philanthropic commitments: the Founders Pledge. By taking the Pledge, a founder promises to donate part (at least 5%) of their future equity or personal wealth to charity. In 2016, Sam Altman, founder of OpenAI and then-president of Y Combinator, endorsed the Founders Pledge as an easy charitable outlet for YC-backed founders.

In its current state, the Pledge is not reaching its full potential: ten years after its founding, only 2,000 entrepreneurs have committed to it, a drop in the bucket relative to the pool of 4.5 million startups worldwide.

Part of the problem is that the Pledge doesn’t incentivize founders to participate. But picture this: during an investment pitch, a PropTech founder proposes a self-imposed, legally binding commitment to give away 5% of their future equity to a homeless shelter.

To an ROI-focused investor this formula is extremely appealing: place a bet on an innovative founder with a huge potential upside, and contribute to a worthy philanthropic cause. Paine Masticik, Managing Partner at 4th & 1 Ventures, gives an example: “I would be excited to invest in a founder who commits 5% of his personal equity to an organization combating the fentanyl crisis.”

To a mission-driven donor who might not typically invest in startups at all, this formula also has appeal: instead of making a one-time donation to a nonprofit, leave behind a legacy that continually has an impact on the nonprofit long past the investment date. Family offices, in particular, which often seek both financial growth and legacy-driven impact, will find this model enticing since it aligns wealth generation with meaningful societal contributions. 

Ariel Serber, a financial advisor to family offices and HNWIs, explains the magnetic appeal of such a pledge: “Investors, customers, and the public look at everything founders say, but especially what they do…committing precious equity to a cause is not to be taken lightly. It’s a signal of dedication, belief, and a responsibility to succeed, but also to something much bigger than themselves.”

John Maloney, cofounder of beverage startup DIRTY VIRGIN, thinks this model is a positive sum proposition for all parties: “We founded DIRTY VIRGIN because we believe in the community nightlife fosters and want to remove alcohol as the barrier-to-entry for enjoying these spaces. There is a natural purpose-driven angle to our mission. We would love to financially contribute to substance abuse causes, but the beverage industry’s notoriously narrow margins make a traditional ‘percentage of sales’ model all but impossible to sustain …

“The equity pool allocation model … would allow us to contribute to a cause in which we believe while preserving our business model. It would make us an attractive prospect for angel investors passionate about the same cause and would demonstrate to our consumers that we are serious about benefiting their community.”

Somya Gupta, founder and CTO of AI learning platform Context, also sees the potential: “The idea of founders pledging 5-10% of their equity pool to a cause they believe in … transforms fundraising into an opportunity to drive real change, ensuring that financial success also contributes to a broader social good. I would be glad to support such an initiative and see it become a norm in the startup ecosystem.”

VCs depend on only a 1% success rate of venture-backed startups for competitive ROI. With this model, philanthropists and impact investors can do the same, i.e. expect at least as much to go to charity as traditional philanthropy. But, as opposed to a one-time donation to a nonprofit or charity, a new system would be created that repeatedly benefits social impact organizations, ensuring their long term sustainability and success. Charlie Schroder, a brand, partnerships, and franchise builder, considers this concept a “potentially transformational idea” that will function as an “on-ramp for nonprofit organizations to participate in the upside of the startup ecosystem, which has been previously unavailable to them.”

In practice, players in the startup ecosystem could implement this new framework in a few ways: a pledge marketplace, new VC funds, or individual founders taking the initiative to attract independent angel investors who might be off the radar of the traditional startup ecosystem.

Stefan Pagacik, CEO of Ampresta, a financial firm pioneering climate and human performance data monetization, has previously built digital platforms that align regulation and compliance with ESG metrics through automation. Stefan believes that using founders’ charitable pledges to attract investment is “a bankable idea” that promotes “deeper alignment beyond ROI” between founders and investors in a company.

Interested parties could explore alternative ways to structure this idea beyond direct equity allocation. Founders could commit a percentage of proceeds from a future exit, an IPO, or another liquidity event. The commitment could also be conditional—activating only if the company reaches unicorn status—offering a low-risk option for early-stage founders. 

In an era characterized by general despair—with ESG facing an existential crisis—this is a moment for our society to redefine the relationship between business and social outcomes. “For generations, titans of industry have engaged in philanthropy after generating immense wealth,” says Jesse Weiss, Assistant Vice President of Green Economy at the New York City Economic Development Corporation. “With this new philanthropic tool, entrepreneurs can attract capital for their startup by committing to ‘pay it forward’ up-front. It holds immense potential to support the nonprofits that strengthen our communities and enrich our lives.”

This article is meant to spark discussion rather than provide a comprehensive framework. I invite others to explore and expand on these ideas to see what new insights emerge.