A reader reached out to me to share an experience they had with fiscal sponsorships. They had some great ideas which I share in this post.

Personal Reflections on Being a Fiscal Sponsor

As told by a nonprofit CEO somewhere in the United States.

My organization has done many fiscal sponsorships. Although we structured them in basically the same way, two of them did not go well. This has led to some personal reflection on my part.

None of the organizations we hosted had separate legal status. We did not have an end date in mind. We did not see the relationship as temporary, that is, just a holding place until the sponsored entity could get their own nonprofit tax status, for example.

For most of our partnerships, an individual had a great idea, received a startup grant, and needed a place to land. Some had more structure – some had their own financial administration. But most were using our HR, our bookkeeper, our insurance, our administration.

Inherent Tension in a Fiscal Sponsorship

There is an inherent tension in a fiscal sponsorship: The leaders of the entity being hosted think of themselves as separate, with their own culture, goals, and strategies. But the host organization holds the liability, the fiduciary responsibility, and, ultimately, the governance oversight. So, the leaders of the host organization do not see the sponsored entity as separate. They see it more like a project of the host organization. Because the host organization must have oversight, the relationship can come off as being Big Brother or hierarchical.

Let me unpack this. What does “having your own culture” mean? Does that mean you are using different HR policies? Does that mean that your hiring practices are different? Does that mean your compensation system is different? Because if something goes wrong, those are liabilities of the host organization. If you have an employment liability claim, that is on the host organization. If you run out of money, that shows up on the host’s balance sheet. So, the host organization must have some control over the administration and operations of the sponsored entity.

A Fiscal Sponsorship Is a Partnership

So how do you navigate this? My reflection is that at the end of the day, a fiscal sponsorship has to be thought of as a partnership. Success depends on having a healthy working relationship, trust, and respect. The power dynamic cannot be avoided. The host has to ask questions. As a host, I need to feel confident that they are doing decent financial management and that they are following good practices. I do not want to get into the weeds of their operations. And I do not want the sponsored organization to get defensive and start hiding things. Trust is very important.

I have been in situations where it has worked great. In others, the sponsored entity did not follow our administrative guidelines. They did not provide us with the information we needed to feel comfortable about taking liability for their operations. Scheduled meetings were canceled. We did not have the trust to navigate the tension.

Do Not Be a Fiscal Sponsor for Revenue or PR

Before doing any evaluation, I know there are times when I would not be a fiscal sponsor. I would never agree if my goal were to bring revenue into my organization. Yes, I want to cover my costs. But we end up spending time and energy that are not covered by fees. Plus, most nonprofit startups, like for-profit startups, fail. They are not a reliable revenue generating source.

I also would not agree to be a sponsor in order to send out an announcement and get PR for my organization. To me, being a fiscal sponsor is not about my organization. It is about the mission.

I would also say no if I was getting pressure from external sources, such as a funder. At the end of the day, my organization is on the line. I have to feel good about it.

Clear Steps for Deciding Whether to Be a Fiscal Sponsor

When asked to sponsor another organization, my first step is to look at the program, its mission, and impact. I want to sponsor entities that have complementary purposes. So, missions have to align.

Step two, I go to my staff who will ultimately be responsible for managing the new line of work. We do an internal assessment of readiness and capacity. You do not want to detract from your own work so I would advise against a really small organization being a fiscal sponsor. If you are a really large organization, it might also be hard. Your oversight might seem heavy handed. There is a sweet spot. You need to be large enough to absorb the work and take the risk, but not so large that the program or initiative gets lost.

Step three is a conversation with the Founder or Founders. Are our expectations aligned on what they need to do and what we need to do? It is good to formalize this but at the very least you need to have a conversation. Since they are not a legal entity, you cannot legally bind them. But putting things down on paper brings clarity.

Step four is assessing their capacity to do what you expect of them, realizing that things will change. What you expect at the beginning may be different after a month and different after the first year. Maybe they suddenly get a big grant, you need to revisit the original questions – does my organization have the capacity to manage the growth? Does the sponsored organization? And then there is the opposite side – what if money is running out or close to running out? What happens if they have to let people go? Organizations are dynamic, especially in the early years. You need to constantly assess the needs of both organizations.

Do Your Due-Diligence

Once I decide that my team has the capacity, we do due diligence on the other entity. This is Step five. We have a document that outlines what we consider to be a healthy, functioning, and well-governed organization. We do not make assumptions. We ask a lot of questions.

I start with financial management. This is most important because the relationship is a financial one. We ask if the supported entity is doing its own financials and whether they have a board that is reviewing them. We consider whether they can monitor their own budgets and finances on a daily basis. We still use our financial staff to look at monthly statements, but we would rather not be involved on a daily basis.

We look at the organizational structure as well. What staff do they have and what do they do? How are they managed?

Then we look at governance. Do they have a board? How is it structured? Is it a steering committee? What are board members expected to do? Do they know what they are expected to do? Are they looking at financials or are they just helping with the programmatic side of the work?

Next, we look at policies and practices. The host organization needs to know whether the supported entity has adopted policies and procedures around governance, finance, HR, and operations and whether those policies mirror what the host organization has adopted. Because the sponsored organization is not a separate legal entity, the policies cannot conflict. And the host needs to ensure they are being followed as well.

Another area we explore is leadership. What is the experience of its Executive Director or Founder? Often these people have great programmatic experience – that is why they want to build something new. But do they also have the experience needed to run an organization? We ask ourselves if we feel confident that the Founder has skills in areas including people management, financial management, legal and risk management, and compliance. We ask ourselves how we think they will handle a crisis when it arises.

Finally, we talk about fundraising. Will they do their own fundraising or expect us to help? If we have aligned missions, I am happy to connect them with a program officer at a foundation. But I would do that for any organization I thought highly of.

Once I complete my due diligence, examining mission alignment, internal capacity, relationship with Founders, and the entity’s own capacities, my final step is to bring a recommendation to my board.

A final point is about exit strategies. How do you decide to part ways? I start by asking questions. What is the purpose of separating? Sometimes the project is time bound and ready to wind down. Sometimes the project has grown and is ready to launch on its own. Sometimes the project is simply failing and cannot get more funding. Regardless, once you agree to part ways, have an end date and milestones to ensure a smooth transition.

Lessons Learned

• Be aware of the power dynamics.
• Do not be a fiscal sponsor in order to bring money or attention to your organization.
• Create a Due-Diligence checklist and follow it. Look at mission, financial management, organizational structure, governance, leadership, and fundraising.
• Once you decide to part ways, develop a clear exit strategy.