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I find the broad proposal of quantifying impact in an equity-like form and providing that “impact equity” to contributing stakeholders proportionally to their contribution to the organization’s impact in an attempt to improve the efficiency of the matching market between organizations and donors compelling. I also think it may have several second-order effects, of which some may be positive and some may be negative, which merit consideration.

More efficient matching markets between organizations and donors

It seems plausible that quantizable impact equity would substantially simplify the donor coordination problem and reduce the communication complexity involved in charity spending decisions. As I understand your proposal, that simplification will result from the distillation of the charity’s program options into a single (or perhaps several, since there may be threshold effects in implementing particular programs) impact equity offers, which can then be evaluated by donors on a comparative basis to other impact equity offers they have from other charities. Charities then need not spend time proposing particular programs to individual donors, and donors needn’t understand the details of the particular programs the charity might pursue.

Less clear to me is how comparable impact equity of different charities would be—would there be a specific metric (e.g. estimated QALYs saved) or would donors construct individual conversion rates (at least implicitly) based on their evaluations of how effective charities are likely to be over their lifetimes? The former further simplifies the evaluation complexity for donors but might be hard to evaluate for many kinds of programs and could lead to problematic incentives (if donor decisions are being made somewhat automatically, charities which overestimate their QALYs saved will have an advantage), while the latter might be harder for a donor to understand or estimate than the impact of a specific program (although this may vary widely based on the charity). This is different than venture capital investing, where the input investment into and eventual expected returns of all potential companies are in the same currency.

Alterations of donor incentives

The reification of contributions into measurable impact equity could lead to a more competitive game between donors since this impact equity confers a measurable kind of status which can easily be publicly displayed. This might have strong positive effects—since the status gained in return is more valuable, donors might donate more—concretely, imagine if everyone’s “impact score” were displayed beside their forum profile or Twitter account. Measurable impact equity might also lead to perverse incentives to overestimate impact, depending on how impact equity from different organisations is compared (see above paragraph).

If the impact return curve of charities is some kind of power law, impact equity might cause donors to contribute smaller amounts to many newer organisations in the expectation that most will fail to have much impact but one or two will succeed and “return the fund”. I don’t know enough about the current funding landscape to judge whether newer organisations are currently over-funded or under-funded.

Alterations of employee incentives

Impact equity could be given to donors only, or given to donors and organisation employees. The latter is the closest to the for-profit equity model, where the founders start with all of the equity and then parcel it out to employees and investors in recompense for work or capital. Giving impact equity to employees might have positive effects—as for donors, it is tangible status and might encourage more employees to join the organisation or encourage existing employees to work harder to increase the future impact of the organisation (and thus the value of their impact equity). However, it might also lead to discontent if employees don’t consider the impact equity allocations to be fair (whether between different employees, between employees and founders, or between employees and investors). One other advantage of not quantizing the individual contributions of employees is that they can sum up to more than 100% - all twenty employees of an organisation may each believe that they are responsible for at least 10% of its success, which is mathematically inconsistent but may be a useful fiction (and in some sense it could be true—there may be threshold effects such that if any individual employee left the impact of the organisation would actually be 10% worse) - if impact equity is explicitly parceled out, everyone’s fractions will sum to 1.

Added here: https://​​causeprioritization.org/​​Moral_economics

A charity can try to mitigate this risk by understanding how much they would need to reduce their valuation to get additional donors interested.

A Vickrey auction should be a nice way of addressing this problem. The charity ends up with a complete, honest listing of all bidder’s valuations. Google’s IPO was structured along these lines.

How is valuation determined?

I think it’s also nice to think about this from an “inside view”. Typically, an asset is priced such that the price equals the net present value of the expected stream of rents the asset generates. The ability to calculate a valuation from (slightly) more tangible inputs means that the charity doesn’t have to pick a totally arbitrary number when they’re starting their price-finding/​fundraising process. This definition also helps guide the “Equity in what?” discussion.

No one has an external incentive to behave honestly. The system is intended as an aid for generally-aligned donors and employees to actually understand how much they are contributing.

I know you have this and other caveats throughout, but I definitely worry that it’ll be hard to ignore the numbers when they create perverse incentives (Goodhart’s law, Campbell’s law, etc.). Market mechanisms have lots of problems and I wouldn’t want to import those into the charitable sector unnecessarily (which is not to say that markets don’t have good features or that the charitable sector doesn’t have structural issues). I’ll have to think about this more carefully, but it seems like it would be nice to design a mechanism which is tailored for the unique features of the charitable sector (e.g. incentives ought to be more aligned and less zero sum, any potential market is probably fairly illiquid).

Another thing to think about: Equity typically confers voting rights. Is that appropriate here? Why or why not? The why not argument that comes to mind immediately is: In typical for-profit companies, voting rights are useful as a way of disciplining managers that have their own private incentives. Hopefully, the incentives of donors and charity management are already fairly aligned.

I only skimmed this and am not familiar much with investing, but the issues seem to me whether people are investing to make money, or investing to make ‘social impact’ (for the greater good) on goals they support. and also whether the investment actually will ‘pay off’ in terms of either making money, having social impact, or both. I think forecasting ‘impact’ is the hardest one. Some venture capital firms succeed , others fail.

My view is if impact predictions are correct then any ‘dilution’ effects on shareholder value will be temporary. In a sense current shareholders are loaning some of their shares to others to invest in the project in the hope its a good investment. (I think in a way what is called MMT—popular in some economics circles—is a version of this idea).