What Is a Nonprofit Founder’s Clause (and Can It Protect a Nonprofit Founder)?

Written By Amber Wynn
what is a nonprofit founder's clause

Lisa started a nonprofit organization dedicated to providing after-school programs for children from under-resourced communities. Passionate about her mission and proud of her creation, she wants to ensure she’ll always have a say in how the organization is run and that she’ll never get fired. After all, it’s her baby—she poured blood, sweat, and tears into it!

Someone told her she could do this by including a “Founder’s Clause” in the nonprofit’s by-laws. This would allow her to protect her vision, maintain control over key decisions, and secure her position within the organization she’s worked so hard to build.

How can I word a section in my non-profit bylaws that protects the Founder: creating a membership where the founder is the sole member and changes are not made with out his or her approval? I have spent years, money, sweat and tears forming this organization and while I understand I will not own it, I would like to do my best to protect my vision and mission.

That’s a question from a founder in real life. 

Sound familiar? This scenario is not uncommon among nonprofit founders. Many are driven by a deep personal connection to their cause and a desire to safeguard their “creation.” 

However, the concept of a Founder’s Clause, while potentially appropriate for for-profit businesses, doesn’t align with the legal and ethical framework of nonprofit organizations.

What is a Founder’s Clause in the Nonprofit Bylaws?

A Founder’s Clause, typically used in for-profit businesses, is a provision that outlines special rights, privileges, or protections for the founder of an organization. These clauses often stipulate that the founder will always retain their status as founder, have veto power over certain decisions, or maintain a specific level of control over the organization, regardless of their current position or involvement.

While such clauses can serve a purpose in privately owned businesses, they fundamentally conflict with the nature and legal structure of nonprofit organizations. In this blog post, I will explore why Founder's Clauses are incompatible with nonprofits, clarify common misconceptions, and provide guidance on how founders can effectively lead their organizations within the proper nonprofit framework.

The Nature of Nonprofit Organizations

To understand why a Founder’s Clause is incompatible with nonprofits, you must first understand the fundamental nature of these organizations.

A nonprofit is a public charity

A nonprofit organization, particularly one classified as a 501c3 entity by the IRS, is considered a public charity. This designation means it is established to benefit the public, not private individuals. Its purpose is to serve a cause or community, and it is granted tax-exempt status based on this public service mission. 

Nonprofit vs For-Profit

The structure and purpose of a nonprofit organization differ significantly from a for-profit business in several crucial ways.

1. Lack of ownership

Unlike a for-profit business, a nonprofit cannot be owned by any individual, group of people, or other entity. It is essentially owned by the public it serves. This lack of private ownership is a fundamental principle that ensures the organization remains focused on its charitable mission rather than personal interests. In fact, the IRS awards Tax-Exempt Status based on this lack of ownership.

2. Cannot be passed down

Because a nonprofit isn’t owned, it can’t be inherited or “passed down” to future generations. (Your spouse, your children, etc.) The concept of legacy in a nonprofit context refers to the ongoing impact of the organization’s work, not to personal or family inheritance. Leadership transitions in a nonprofit are based on merit and organizational needs, not hereditary rights. 

3. No personal benefit allowed

In a for-profit business, owners can directly benefit from the company’s success through profits, dividends, or increased equity. In contrast, nonprofit regulations strictly prohibit any individual from personally benefiting from the organization’s resources or activities beyond reasonable compensation for services rendered. This includes founders, board members, and staff. All financial gains must be reinvested into the organization’s mission and programs.

The IRS has clear regulations about this.

Inurement/private benefit: Charitable organizations

A section 501(c)(3) organization must not be organized or operated for the benefit of private interests, such as the creator or the creator's family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization.

difference between nonprofit and for profit

Understanding these key differences is crucial for founders. They form the foundation of nonprofit governance and operations, ensuring that organizations remain true to their charitable purposes and maintain public trust. These principles also explain why concepts like a Founder's Clause, which implies ownership and personal control, are fundamentally at odds with the nature of nonprofit organizations.

Why Founder’s Clauses Don’t Apply to Nonprofits

While the idea of a Founder’s Clause may seem appealing to those starting a nonprofit, it’s essential to understand why such provisions are incompatible with the nonprofit structure. I’ve mentioned this a few times, but let’s dig deeper. (It really is that important!)

Origin in for-profit partnerships

Founder's Clauses originated in the for-profit world, particularly in business partnerships and, more recently, start-ups. In these contexts, they protect the rights and interests of founding partners who have ownership stakes in the business. These clauses often outline special voting rights, profit distributions, or decision-making powers for founders.

However, this concept doesn’t translate to the nonprofit sector because the fundamental principles of ownership and personal benefit don’t apply.

Incompatibility with the nonprofit structure

Nonprofits are structured differently from for-profit entities:

  1. Public benefit. Nonprofits exist for public benefit, not personal gain. A Founder’s Clause that grants special privileges to an individual contradicts this core principle.

  2. No ownership. As I discussed earlier, nonprofits can’t be owned. A clause implying ownership rights for a founder goes against this basic tenet of nonprofit law.

  3. Equal governance. Nonprofit governance is based on the principle of collective decision-making by the board. A Founder’s Clause that gives one person disproportionate power disrupts this balance.

  4. IRS Regulations. When granting tax-exempt status, the IRS scrutinizes an organization's articles of incorporation and operations to ensure commitment to public service. Provisions in these founding documents or subsequent practices that appear to benefit individuals rather than the public could jeopardize the nonprofit's tax-exempt status.

Conflict with the role of the nonprofit board of directors

Perhaps the most significant issue with Founder's Clauses in nonprofits is how they conflict with the board’s role:

  1. Board authority. The board of directors has the legal responsibility to govern the organization. A Founder’s Clause that overrides board decisions undermines this authority.

  2. Fiduciary duty. Board members have a fiduciary duty to act in the best interests of the organization. A clause that prioritizes a founder’s wishes over the organization’s needs could put board members in conflict with their legal obligations.

  3. Checks and balances. Nonprofit governance relies on checks and balances to ensure accountability. A Founder’s Clause that gives one person the right to veto any decisions made or unilateral decision-making ability disrupts this system.

  4. Succession planning. Effective nonprofits plan for leadership transitions. A Founder’s Clause that entrenches one person in a position of power can hinder necessary changes and growth.

A Founder’s Clause aims to protect the interests of founders—it fundamentally contradicts the principles of nonprofit governance. Instead of relying on it, founders should focus on building strong organizations with clear missions, effective boards, and sustainable practices. This approach ensures that your vision can endure and evolve, even as leadership changes over time.

Common Misconceptions Nonprofit Founders Have

Despite the clear legal and ethical framework governing nonprofits, several misconceptions persist, especially among new or aspiring founders. Let's take a look at some of the most common myths.

❌ I own my nonprofit

One of the most prevalent misconceptions is the belief that founders can “own” a nonprofit organization. This idea often stems from confusing the IRS-mandated nonprofit structure with that of a for-profit business. Founders may feel that because they began the organization and invested their time, money, and energy into its creation, they should have ownership rights.

Reality: A nonprofit cannot be owned by any individual or group. It is a public entity created to serve a charitable purpose. The founder’s role is that of a steward, not an owner.

❌ I have special rights or privileges

Some founders assume they should have special rights, such as veto power over board decisions or a guaranteed position within the organization. They might believe their status as founder grants them authority that supersedes the board or other governance structures.

Reality: While founders often play crucial roles in their organizations, they do not inherently have special rights or privileges beyond those explicitly defined in the organization's bylaws, which must comply with nonprofit law. The board of directors holds the ultimate authority in a nonprofit. Only the board has the power to hire and fire the Executive Director. If you are a Founder serving as the Executive Director (usually the case if the ED is being paid), then the Board has the authority to terminate your employment. 

❌ I can pass on my nonprofit as an inheritance

Founders sometimes believe they can pass down leadership of the nonprofit to family members or chosen successors, treating it like a family business or personal legacy.

Reality: Nonprofit leadership positions, specifically that of the Executive Director or board members, cannot be inherited or unilaterally appointed by the founder. These positions must be filled based on merit and the organization’s needs, typically through a selection process overseen by the board of directors. Again, only the board has the power to hire and fire the Executive Director.

These misconceptions often arise from a lack of understanding about the nonprofit structure and governance. They can lead to conflicts of interest and tension within the organization and potentially jeopardize its tax-exempt status if acted upon. It’s crucial for founders to educate themselves about the unique nature of nonprofits and adjust their expectations accordingly.

misconceptions about nonprofits

While you may not “own” your nonprofit in a traditional sense, you can still leave a lasting impact through your vision, leadership, and dedication to the cause. The true measure of your success as a founder lies not in maintaining control but in building an organization that can thrive and continue its mission even after you’re gone.

A Word on Founders Syndrome

While discussing the role of founders in nonprofits, I can’t ignore a related concept known as “Founder’s Syndrome.” This term describes a situation where a founder maintains disproportionate power and influence over the organization, often to its detriment.

Founder’s Syndrome can manifest in various ways, such as:

  • Resistance to change or new ideas

  • Difficulty delegating authority

  • Overinvolvement in day-to-day operations

  • Reluctance to plan for succession

This is often the main reason founders seek protection in a Founder’s Clause.

Founder’s Syndrome hinders an organization’s growth and sustainability. It’s crucial for founders to be aware of this potential pitfall and take proactive steps to maintain a healthy balance of influence and collaboration within their nonprofits.

For a more in-depth exploration of this topic, including signs to watch for and strategies to overcome it, read my article “Nonprofit Founder’s Syndrome: What It Is and Ways to Conquer It.” This resource provides valuable insights for both founders and board members navigating the dynamics of nonprofit leadership.

Founder Protection: What You Can Do

A Founder’s Clause isn’t appropriate for nonprofits. Still, you can take proactive steps to secure your role and ensure your vision endures. Here are two key strategies.

Establish a thorough Board Recruitment Process

A strong, seasoned board is crucial for organizational stability and longevity. Implement a robust recruitment process to build the right team.

Have clear expectations. Develop a comprehensive Board Recruitment Package that outlines board member responsibilities, meeting attendance requirements, financial expectations, and time commitments. Use this package as an “invitation to apply” for board positions. This approach allows potential members to self-select based on their ability to meet expectations, ensuring a better fit from the start.

  • Include details on board dues and event participation

  • Clearly state the expected time commitment

  • Outline key responsibilities and expectations

Need help creating a Board Recruitment Package? In my course, 90 Days to a Profitable Nonprofit, I offer a comprehensive toolkit with templates as a bonus.

Conduct thorough interviews with board candidates, involving at least one current board member and the Executive Director. Use a standardized set of Board Candidate Questions to assess character, experience, capacity to contribute, and personal motivations.

  • Evaluate alignment with organizational values

  • Assess relevant skills and expertise

  • Gauge financial ability to support the organization

  • Explore the candidate’s network and connections

Perform effectively as Executive Director

The best job security for a founder is to excel in your role. 

Prioritize continuous learning and skill development. Stay current with nonprofit best practices by attending workshops, conferences, and training sessions. Seek mentorship from experienced nonprofit leaders and consultants and join professional associations in the sector. This ongoing education will help you adapt to the changing landscape of nonprofit management.

  • Attend trainings on nonprofit management and fundraising

  • Participate in workshops on board relations and program development

  • Engage in continuous learning about financial management and grant writing

On top of my DIY course, I offer nonprofit consulting services, including personalized coaching and board training.

Understand your responsibilities

Clearly define your role as Executive Director and understand the distinction between board and staff responsibilities. Develop and maintain a strategic plan, sustainable funding sources, and impactful programs aligned with your mission.

  • Create measurable goals and regularly assess performance

  • Maintain transparent financial practices

  • Foster effective communication with the board and staff

  • Be open to feedback and willing to adapt your leadership style (Take the quiz: What Type of Nonprofit Leader Are You?)

By focusing on these areas, you can create a stable, supportive environment that values your contributions without relying on artificial protections. Your best protection is your performance and the strength of the relationships you build within your nonprofit community.

✅ Lead With Purpose, Not Clauses

While the desire to protect your vision and position as a nonprofit founder is understandable, a Founder’s Clause is not the answer. Such provisions conflict with the fundamental nature of nonprofits as public charities and can potentially jeopardize your organization’s tax-exempt status and overall effectiveness.

Instead of seeking special protections, focus on:

🚀Building a strong, well-vetted board of directors

🚀Excelling in your leadership role through continuous learning and skill development

🚀Fostering transparent communication and collaboration within the organization

🚀Creating sustainable systems that can outlast any individual’s tenure

The true measure of your success as a founder isn’t in maintaining control but in nurturing an organization that can thrive and further its mission for generations. By embracing the unique structure and principles of nonprofits, you can create lasting impact without compromising the integrity of your organization. And that is a legacy worth having.

Ready to build that legacy? Here are some resources that will point you in the right direction:

📹Nonprofit Governance—The Role of the Nonprofit Board of Directors

📹A Nontraditional Approach to . . . Sustainability - The Succession Plan

FAQ

1. Can a founder be voted off the board?

Yes, a founder can be voted off the board of directors. If the Founder is a board member and not the Executive Director, they can be removed. If the Founder is the Executive Director, they are not a Board Member; they are a staff member. The process for removing board members, including founders, should be outlined in the organization's bylaws. Typically, this requires a majority vote of the board. If the bylaws don't explicitly address this situation, they may need to be amended to include clear procedures for board member removal. 

Reasons for removal might include ethical violations, failure to fulfill duties, or actions that conflict with the organization's best interests. It's important to note that provisions for the amendment of bylaws and removal of board members help ensure the organization can adapt and maintain good governance.

2. Can a nonprofit founder be fired?

Yes, a nonprofit founder can be fired from their operational role (e.g., Executive Director) by the board of directors. The board has the authority to hire and fire the Executive Director, regardless of whether that person is the founder. If the founder is underperforming or acting against the organization’s interests, the board has a fiduciary duty to take appropriate action. The Founder will forever be the Founder, but they can be fired from their paid staff position.

3. Can the bylaws protect a nonprofit founder?

While bylaws can define roles and responsibilities, they cannot grant special protections or powers to a founder that contradict nonprofit law or best practices. Bylaws should focus on organizational governance rather than individual protections. Any clause that gives a founder unilateral power or permanent position would likely be considered improper and potentially jeopardize the organization’s tax-exempt status.

4. How do you protect the founder of a nonprofit?

The best way to “protect” a founder is to ensure they are an effective leader. Some ways to do this:

  • Invest in ongoing professional development and nonprofit management training

  • Build a strong, supportive board through careful recruitment and clear expectations

  • Establish clear roles and responsibilities for the board and executive leadership

  • Implement regular performance evaluations and goal-setting processes

  • Foster open communication between the founder, board, and staff

  • Create a culture of transparency and accountability within the organization

Amber Wynn

Nonprofit expert with over 27 years experience in program development, funding, and compliance

https://www.amberwynn.net
Previous

What Donors Want to Know Before They Give
Next

The Importance of Audited Financial Statements for Nonprofit Organizations