Some thoughts on starting a nonprofit

With @steemalliance apparently becoming a thing, I thought it would be a good idea to get some of my thoughts on the process of starting a nonprofit organization into a post so that it would be referred to by others. With regard to Steem Alliance, a lot of this post will rest on the assumption that @ned is specifically looking for an organization to which he and/or Steemit Inc. can make tax-deductible donations, and thus a US-organized charitable nonprofit. Some, but not all, of this becomes much easier if that isn't a requirement. There are also different, faster rules for organizations dealing in smaller amounts of money, so if you're reading this thinking about starting a non-profit for your hockey league or something, or any organization with less than six figures in annual donations, don't get scared off.

My experience: I spent 2015/16 as Treasurer of the board of a startup local arts 501(c)(3) nonprofit. (And parts of 2014 helping to build the organization that spawned it.) A lot of the expertise I gained through that is thankfully non-relevant here. (Don't get me started on platting.) But a fair amount of it is, and I feel like having it available to people doing this for the first time is a good idea. Don't get hung up on the Treasurer part; I did the accounting but also about seven other jobs. We were a five-person board.

Second caveat is that I don't really know anything about existing blockchain foundations, and most of my knowledge of open-source software foundations dates from when I was a teenager and they were relatively new. So there's a lot of existing domain-specific knowledge on how to do this that I don't have. If I was really diving into this that would be where I would start.

Stage 1

So, right now Steem Alliance is in the very first stage, which kind of generically goes like this:

1. Figure out what you want to do. This isn't missioning or visioning, or anything like that, but on a very, very broad scale. We wanted to advance the arts in our hometown and make a place for professional artists. Maybe Steem Alliance wants to promote something something on Steem via some method, I really don't know what this looks like even enough to spitball it. "Advance the Steem Blockchain" isn't specific enough but you want the next level down. The goal here isn't to get too specific, but to get the core membership to say "yes, this is affirmatively something I want to do."
2. Using #1, figure out your fundraising needs and opportunities. Again, this is very general, you're just kind of looking for a picture of what your fundraising is going to look like. Do you need tax-deductible donations? Do you have potential major donors and what are their priorities?
3. Try to jam #1 into a corporate structure that supports #2. If you're doing a tax-deductible non-profit, this won't work, because nonprofits aren't really built for human priorities. That's OK.
4. Now you know some of the constraints on your goals that the nonprofit structure you've chosen imposes, and you can apply them to the visioning process and refine your vision into something that serves a charitable purpose as defined by the IRS. This may suck; you got emotionally attached to some of the stuff you came up with in the first round, and now you're going to have to drop it. This will happen multiple times before you're done.
5. Work through #1 and #3 (and review against whether they change anything in #2) until you get a combination of goals and charitable purpose that you think will work. It won't, but again, that's OK for now.

When all of that is done, you can start thinking about boards and bylaws and so forth, incorporating for the first time, and building a mission statement.

Time Scale

So far I've seen a lot of very aggressive schedules for things put forth, and people being really all about getting this done quickly. It's important to recognize that it won't get done quickly. From our first Stage 1 meeting to receiving our 501(c)(3) determination letter took us 10 months, and every bit of feedback we got from our nonprofit mentors was that this was completely unheard of in the fast direction. If I recall correctly the average was 18 months.

We very literally knew what we wanted on Day 1, and it still took us a couple of months to build a mission statement that we could be happy with, much less anything beyond that. Everything you do here is incredibly complex, and matters a great deal to the final shape of the organization, and so you have to be very careful with it.

I know blockchain time runs faster, but this is not something that you should expect to be done and in operation quickly. We started our organization in November 2015; our public launch was the next July. Everything leading up to that was meetings, and organizational work, and visioning work, and making industry connections, and collecting paperwork for the IRS. Three of us were working more-than-full-time hours through all of this, and two others through some of it. Steem has more people but more people doesn't necessarily make things faster.

The IRS

One of the things that makes this slow is that the IRS will take 4-6 months to do a first review of your application, which takes quite some time to create in the first place. (That being in a non-shutdown year. Who knows what the backlog is now.) They're also pretty fickle; they'll choose which rules to be particularly concerned about at any given time, which means that you can't necessarily judge what you can do by what you see other nonprofits doing. They might have applied when the department cared less about that thing.

Also, the thing where the IRS says "we never call you?" This is the one situation where they call you. Plus, applications are public and have your contact info on them, so scammers are calling you at the same time and you have to sort out the real IRS employee from them. This was fun let me tell you. Fortunately once our rep understood what we were going through he was very helpful.

They will probably tell you you can't do at least one of the things you decided you wanted to way up at the top, and you'll have to go through that process again, decide whether to drop it, re-vision it, or reconsider your structure.

Blockchain Culture

You can't be anonymous as a nonprofit board member. There's been talk about disclosing only to the organization, but that doesn't work; board members' names are required to be listed on the annual form 990, which is public. (If you really enjoy overcomplicated organizational reports, you can go look at some.)

Part of this is because being a nonprofit board member makes you co-responsible for the actions of the corporation. There are enough situations where liabilities can pass through to the board that all responsible nonprofits carry board insurance for their members to prevent against it. And of course in order to buy you insurance they have to know who you are.

If you're thinking about being a board member, that can be pretty important. The board insurance will generally cover acts made in good faith, but it is entirely possible for mistakes made as a nonprofit board member to impact your personal assets in litigation, especially if they are not made in good faith or can be construed in that way.

Related to that, you absolutely have to take conflicts of interest seriously. I'm glad to see @crimsonclad already on that one, because Steemians can be very, very casual about conflicts of interest, as we've particularly seen this week, and doing that as a nonprofit board member is an incredibly bad idea. (And as above can open you to personal liability.)

If this is beginning to sound like really not a good way to acquire power, great. That's part of why I think this is a good idea. Being a nonprofit board member is a terrible way to take control of anything and use it for your own benefit; it's designed that way.

One other way it's designed is to avoid stake-based voting, something else that has come up recently. We have a stake-based voting mechanism; it's the equity corporation. Nonprofits don't have stake-based voting because they don't have stake. Much like the blockchain, the organization owns itself.

Unlike an equity corporation, board seat elections are not held by stakeholders; they're held by the board itself. The first board is literally whoever says they're the first board on the incorporation documents. They then vote in new members via the bylaws that they've written.

It's possible that bylaws could be written to allow stake-based voting in some fashion, but my guess is that the IRS would find this extremely hinky and probably a reason to deny, and the SEC might not be very happy with it either. A specialist attorney is going to be necessary for any stake-based voting mechanism to be implemented, if it's even possible. The usual method is one board member, one vote.

The most important thing for a new nonprofit board member is to be committed.

...and hopefully by the time they let you out of the institution you'll want to do something else. If this is beginning to sound really unattractive, that's good, I'm doing my job here.

Anybody doing this has to really, really value accomplishing the core mission of the organization, be willing to spend immense amounts of time and energy on something that will get them no personal benefit and very little appreciation, and be great at working in a non-hierarchical governance structure with other people who maybe aren't. If this sounds like you, maybe you're right for the job.

On the benefits side, it does have an immense and steep learning curve. Well, I'm not sure everybody sees that as a benefit. But I'm addicted to it, and I'm pretty sure I learned more faster in that year than in any other of my adult life. That's why I'm still glad I did it.