Editors’ note: This article, first published in print during Jul/Aug 2005, has been republished for Nonprofit Quarterly with minor updates.

In the boom years of the 1990s, even the smallest group could be found putting money away into an endowment, a reserve fund, or just a savings account. This money was invested in mutual funds or certificates of deposit and, with a little tending, the principal grew dramatically. Endowment income became a reliable and increasing part of an organization’s annual needs, and for organizations with large endowments, the endowment gains were a major part of income. With the dramatic stock market downturns beginning in 2000 and the market’s continuing instability, putting money aside has not been as popular or even as possible as it was in the last century.

But just like a family or an individual who saves for retirement or hard times, any organization that possibly can, should put some money aside. Organizations that should be permanent fixtures in the nonprofit landscape need to start endowments. There are ways to invest safely and to ensure both long-term growth and some income. In this introductory article, I will explore what an endowment is and isn’t and what an organization needs to have in place to start one. Most of what needs to be in place to start an endow­ment also needs to be considered in starting a reserve fund, or even in keeping large amounts of money in a savings account, but an endowment is the most permanent of all the “nest egg” options.


Coming between “endotoxin” and “end papers” in Funk and Wagnall’s College Dictionary, “endowment” is defined as follows: “1. Money or property given for the permanent use of an institution, person, etc., 2. Any natural gifts, as talent or beauty, 3. The act of endowing.”

The first definition is obviously the one most germane here. An endowment is a permanent savings account for an institution. Money is put aside as principal and a small percent of that principal (traditionally 5 percent) is used for the annual needs of the institution. In years when the principal increases more than 5 percent, the value of the overall endowment increases accordingly, which then increases the amount the organization can use, while still staying at the 5 percent figure. In years when the principal does not increase by 5 percent, the organization can still take out 5 percent of the asset without truly eroding the original principal. On the other hand, in huge market downturns even the original principal may lose value; taking out any of it for operating expenses is not as useful, as that further lowers the endowment’s value.

Generally, using a mix of investments, an endowment can weather market instability and still be productive. However, like any source of money, an endowment can lose value, which is why organizations should have diversified income streams so that investment income is not critical to survival.


Though the advantages of endowments may seem obvious, let’s review them anyway.

  1. Just like a savings account, an endowment provides a measure of financial security and takes some of the anxiety out of annual fundraising.
  2. An endowment allows, indeed forces, an organization to think in terms of long-range planning because an endow­ment implies a commitment to exist in perpetuity.
  3. Endowments provide a vehicle for people to make larger gifts to an organization than might be appropriate for an annual gift, and they allow people to make one-time-only gifts with the assurance that the gift won’t just be spent.
  4. An endowment gives people a way to express their commitment to an organization through their wills; few people will leave money to an organization that does not have some kind of permanent fund.
  5. Endowments attract donors who perceive the endowment to be a sign of good planning and long-range thinking in a group they may not otherwise have thought to support.
  6. Principal from endowments can be used for capital expenses (such as a building purchase) and as collateral for loans, if ever needed. In extreme circumstances, the endowment can be used to keep the organization alive until it can generate other income. (While “invading principal” is something organizations try very hard not to do, there are circumstances in which it might be the best or only recourse, and it is nice to know you have that possibility.)


Believe it or not, endowments have some drawbacks too.

  1. If they are big enough, they allow organizations that should have gone out of business, or at least changed the way they work, to exist permanently and to stay the same.
  2. The income from a large endowment can allow organizations to become unresponsive to their constituency.
  3. There is a philosophical point as well: money in an endowment has been diverted from the tax stream but is not being used directly for tax-exempt activities. Organizations that are troubled by decreasing support from government funding and increasing privatization will need to grapple with this dilemma. An organization that believes it is doing work that the government should be using tax money for (such as social services, support of the arts, sup­port of school programs, and so on) is essentially “privatizing” itself by raising private “nest egg” funds. (A historic footnote on this point: In 1791, as part of the French Revolution, all endowments belonging to church or private institutions were seized and sold off, reflecting the Jacobin revolutionaries’ belief that the state should provide what its citizens need for quality of life and that private intermediaries, particularly “the long arm of the dead donor,” did not promote a healthy society. The law that was passed, which essentially curtailed the creation of foundations, was in effect in France until 1987.)
  4. As we have seen in the first years of this century, endowments can provide a false sense of security. Interest rates vary, stock markets crash and, of course, money can always be invested badly.
  5. The existence of an endowment may discourage some donors from giving who prefer to support organizations that they perceive to need the money more. Further, some donors may choose to give to an endowment rather than to annual operating costs.
  6. When donors give money to organizations to endow certain programs, the work of the organization can become donor-driven rather than mission-driven. (This pitfall is a danger with foundations and government funding as well, or with any large source of money earmarked for a specific program area.) The added problem of specific programs being endowed is that the donor is usually deceased by the time it is clear that the program needs to be changed or abandoned, but the terms for changing how the funds are spent may not be in place. If the endowment is large enough, lengthy and expensive court cases may result.
  7. Managing an endowment is an additional piece of work for board and staff. This management time can become the tail that wags the dog, particularly if there are problems with the investments or disagreement about using the income.


When thinking of starting an endowment, organizations often focus on the money: how much to raise, how to raise it, whom to ask for it. It is obvious that only organizations with strong annual campaigns are really in a position to start endowments. But there are two critical questions that must be answered before even one dollar is invested in your endowment.

First, does everyone in the organization agree that your group should exist permanently? Most nonprofits involved in social change are formed with the idea that if their work is successful, they will put themselves out of business. The founders generally do not think of the group becoming permanent and everyone may be surprised at how long it is taking to solve whatever problem the organization was created to address. Arts groups, independent schools, historic preservation societies, parks and wild land conservation groups, and some social services are clearly permanent, with their work always needed or wanted. On the other hand, environmental, feminist, liberation, and advocacy groups, if they are successful, will cease to exist.

Sometimes the most interesting part of the endowment process is discussing this question at the beginning: Should we always be here? “Permanence” in terms of endowment has shades of meaning. It can take its traditional meaning of “always and forever” or it can take the meaning of “fifty years from now.” But endowments do imply existing well past the lifetime of anyone in the group, and they require the group to imagine the day when people who are not yet born are sitting on the board and working as staff. Will your group be needed then? What is the evidence of that need?

Second, what will endowment income be used for? Just as couples may have differing ideas about how and when to use savings, so may board and staff differ about using endowment income. Some will see the income stream as a relief from constant fundraising and will not expect the group’s annual budget to grow very much. Others will see the endowment income as paying for particular programs or doing things the group has not been able to do before.

What you use the income for is related to how big you want your endowment to be. An organization with a $250,000 budget simply looking for a little financial relief will be happy to start with a $100,000 endowment that yields $5,000 a year. This money can be used to increase staff health care benefits, or buy better equipment, or fix up the office. It is not enough money to change the direction of the group in any way, but it is enough to make life easier. A group looking for enough endowment income to open a satellite office or explore new program directions will need an endowment of $1,000,000 or more, from which they can safely draw $50,000 a year.

Once these two questions are resolved (which, in more than one organization I have worked with, took a year of discussion), you are ready to begin the necessary initial logistical steps. These involve authorizing the endowment, determining what gifts will be accepted, and deciding on investment policies.


First, the board agrees to create an endowment fund. This fund will be reflected in all financial reports as a separate line item. The group agrees to hold this money in perpetuity. It is at this point that the group should consider and decide on a series of policies about the endowment money.

A Use Policy

Policies detailing how the interest income from the endowment will be used can be couched as broad statements, but should not be so broad that they are subject to a variety of opposing interpretations. For example, one organization’s policies stated, “Endowment income is to be used for operating costs.” Later, they opened another office and added new programs. Some board members thought the endowment income should be spread to include all operating costs for all programs; others felt the income was limited to operation of programs in place at the time the policy was created and that new programs were therefore on their own to raise all their money.

Use policies should also specify how the use of the endowment income could be changed. Most organizations use the income to fund their ongoing program and general operating expenses. Others, however, may use endowment income just for one aspect of their program, or, if they own their own building, just for expenses related to the maintenance and improvement of their property.

An Invasion Policy

Are there any circumstances under which the group would use (invade) the endowment principal? There are no right or wrong answers to this, except to say that in most cases endowment principal is not used except under the most dire circumstance, or in the years when the principal does not grow by 5 percent. The group will need to decide on the categories of “dire.” Most board policies establish that the endowment can only be used if the organization itself is in danger of closing and that the amount taken from the principal must be paid back within a given time period. Some boards rule that the principal cannot be touched even if drastic cuts are required, whereas others decide that the principal can be used to balance the budget. These contingencies should all be spelled out in the authorization. There have been several circumstances in which a board of directors and staff worked very hard to build an endowment, then years later, after all those people were gone, another board with too much latitude to invade voted to use the endowment principal to balance the budget, gradually burning through the whole corpus.

Related to this question is the question of who will have the authority to decide whether to use endowment principal. Most boards rule that the whole board would have to approve of such a use. Others stipulate that up to a percentage of the principal can be used on the vote of the executive committee; beyond that percentage the decision must go to the whole board. At the full board meeting, some boards require unanimous agreement, while others deem that a simple majority or two-thirds’ vote is sufficient. Some of these procedures will be determined by how the group makes decisions on other matters.


The second broad category of decisions involves what types of gifts you will accept, who has the authority to accept them, who will draw up contracts with donors about them, and under what circumstances the organization will accept or decline a gift. (Most organizations should have some gift acceptance policy in place even if you don’t have or never intend to have an endowment. As you can see from the examples below, any kind of fundraising effort could run into the questions listed.)

For example, will you accept the gift of a house? “Well, why not?” you ask brashly. One group discovered that a house was given to them because the owner could not sell it, even at a huge loss. Another group accepted a house with a lien on it. Another accepted a duplex with tenants. They were going to convert the duplex into an office and sought to evict the tenants, creating an enormous public relations nightmare, including this headline: “Single mothers evicted for ‘social justice.’”

Will you take jewelry or art or antiques? You have to think about what you will do with this stuff. How will you sell it? Do you have access to appraisers and buyers of fine art? These items may be worth a lot of money, but you may not be able to sell them. You can spend hours of staff and volunteer time trying to getting a fair price for these items, and at the end of the day they have cost you more than they were worth.

Will you accept stock from companies that make weapons or degrade the environment or use sweatshop labor? (Because stock should be sold immediately, most organizations can accept stock from companies they disagree with without supporting them.) For a thorough discussion of gift acceptance policies, see “Fundraising Medicine: Creating Gift Acceptance Policies,” by Rick Cohen. Grassroots Fundraising Journal, Vol. 21: 1, 2002.

Will you accept endowment gifts that are restricted in use? For example, if someone wants to endow your children’s program forever, will you accept that restriction? If they want to create a new program and endow it, will you consider that?

To keep things simple, at the beginning most grassroots organizations should accept only cash, appreciated securities (stocks and bonds), and life insurance with few or no use restrictions. Other kinds of assets can be negotiated on a case-by-case basis.

Your published gift acceptance policy can be very simple: “The Board of Directors of People for All Things Good reserves for itself the right to turn down any gift that we believe will not be in the best interest of our mission or that we feel we cannot handle appropriately.” What you publish is not as important as that you have this conversation with your board and staff and that everyone understands what you are getting into. The tendency of most organizations is to accept all gifts (“Don’t look a gift horse in the mouth”), but without spending an inordinate amount of time on it, you need to be clear that some gifts can be burdensome beyond their value.

If you have questions about the types of gifts you should accept and what is involved, hire a consultant to help you. This may save you money and time later.


Your organization also needs an investment policy. Will you invest entirely for income or will you have a mix of investments that allow for growth of the principal and income? Will you require socially responsible investing, and if so, what screens will be put in place? For example, some groups have screens that exclude specific kinds of products or businesses, such as “no tobacco, box stores, or logging.” Others require evidence of no union busting, racially diverse staff and board, or domestic partner coverage. If you do social screening, you need to set priorities. If you try to screen for everything bad, you will have few places to invest.

The board will need to create an investment committee. This can include people who are not on the board. Friendly bankers, your biggest donors, or program officers at foundations can recommend people for this committee and sometimes can serve themselves. For many grassroots board members, their biggest investment is a new car; investing endowment funds requires learning a number of new concepts. Even if the board delegates responsibility for investment decisions to others, it must still educate itself in order to monitor the management of the endowment. It is not always easy to tell what is a good or bad investment, nor is it always easy to tell if someone is using your lack of investment knowledge to their (and not your organization’s) financial advantage. While you may want to hire an investment professional, don’t ever trust your investment decisions to just one person or a group of people who are all friends with each other.