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May funder demand seat on the board?

Your Legal Questions Answered

May funder demand seat on the board?

Is it legal for an organization to demand a seat on the board of a nonprofit society as a condition of ongoing financial support?

Anyone can ask for representation on the board, but you don’t have to give it.  It is essentially an offer for a quid pro quo contract that you can accept or reject.  It is done all the time by venture capitalists who are funding start-up businesses.  It is much less prevalent in the nonprofit world, although many large charities take the initiative to offer a seat on their board to their major donors.

It is not illegal to provide a seat, but if your organization is a charity and the organization “demanding” the seat is a taxpayer (like a business corporation or an individual), the payment may not fully qualify as a deductible charitable contribution because it is conditioned on receiving something of value in return.  That may or may not dampen the donor’s interest in the seat.

You may decide that the donor will bring skills, contacts, and even wisdom in addition to the money and that is worthwhile to give the seat on the board to get these benefits.  Or you may decide to characterize it as a payoff that would undermine your integrity.  It is really up to you how you want to respond.

Tuesday, March 24, 2015
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Comments

I think one of the most important things to consider with respect to major donors requesting to be on the board of directors is that once a donation is given, the donor cannot continue to dictate what the money is used for. Often times, donors like to have a seat on the board so they can continue to direct their significant gifts. I see this in smaller non-profits where an individual started the organization and has seemingly stepped away after some time and then uses that as a means of getting back into control of the organization.

Early in our organization's history we sought a line of credit for cash flow. The potential creditor (a bank) also demanded a seat on the Board as part of the condition of the loan. Was this kosher?

I think there is a difference between having a donor on the board and having a vendor on the board who could very easily be adverse to the organization.  A donor could stop giving prospectively.  A banker could pull the plug on the line of credit and effectively kill the organization.  The bank representative clearly has a conflict of interest if the organization has any financial issues.  The banker could learn financial information in confidence that would cause the bank to pull the plug early.  Alternatively, the bank representative could learn of the organization's steps to cure its financial problems that would allow it to continue the line of credit beyond what it might otherwise do. I tend to think the potential downside of this arrangement outweighs the upside, however, particularly when you can keep the bank in the loop about what you are doing without its knowing everything about the organization that would otherwise be confidential.  --Don Kramer

The likelihood of this situation can be diminished if your organization has a robust set of documents for new and existing board members. Including a firm list of characteristics of board members you choose to bring on and a spelled-out orientation process is essential anyway, but in this case it could help clarify responsibilities and make the donor see that the qualifications may mean he or she is not yet ready to join. (Of course, if the person is great, and is willing to join committees and roll up their sleeves in other detailed areas, go for it!)

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