Should My Nonprofit Start an Endowment? 4 Considerations

Your nonprofit needs secure funding to power your programs, and it might be time to consider your financial future beyond the traditional annual giving cycle. An endowment is an excellent option for nonprofits of all sizes to establish long-term financial stability.

An endowment is a pool of assets established by charitable contributions and invested by nonprofits to provide long-term, sustainable financial support for its mission or specific programs, often as defined by the donor(s).

For example, a donor might establish a scholarship endowment at a university. Rather than spending the principal, the university would distribute a portion of the endowment’s accumulated investment earnings each year to pay for students’ education.

However, while endowments can offer perpetual funding, they also come with certain limitations and requirements, meaning nonprofits should carefully consider whether their organization is prepared to properly steward and operate one. This article will review the top four considerations your organization should assess before deciding whether to start an endowment.

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1. Major Gifts and Other Funding Sources

Many endowments are created through major gift funding. As such, it’s a good idea to assess your nonprofit’s major gift pipeline before launching an endowment.

Review your organization’s major gift program by:

• Analyzing your fundraising process. Your nonprofit should have a dedicated framework for identifying and cultivating relationships with major donors. Orr Group’s guide to major gift fundraising recommends assessing your current process by pulling donation reports to identify giving patterns, segmenting donors into giving levels, and scaling your portfolio of major giving prospects while being realistic about your fundraising capacity.
• Evaluating donor affinity for specific initiatives. Determine how your potential endowment fund aligns with donors’ priorities. Some donors may primarily be interested in giving to specific projects, whereas others might like the idea of establishing a legacy for themselves by contributing to an endowment.
• Thinking about messaging strategy. Focus on clearly articulating how the endowment will increase the impact of your organization’s work. Consider how your message will change when asking for an endowment gift rather than a regular major gift, such as emphasizing the long-term impact.

You might also consider that launching an endowment is not a one-time fundraising effort. Even after the fund is established, major donors can continue contributing to the principal over time, helping the endowment grow and expand its long-term impact.

This makes a strong major gifts pipeline even more important—not just for starting the endowment, but for sustaining and growing it for years to come.

2. Financial Flexibility

It’s important to understand the trade-offs that come with creating an endowment.

An endowment generates annual support by distributing a portion of the accumulated investment earnings each year, as defined by the nonprofit’s board-approved spending policy.

The level of flexibility your organization retains depends largely on the type of endowment you establish. For example, a board-designated endowment (also known as a quasi-endowment) typically allows your board to retain discretion over how and when funds are used, in accordance with your organization’s internal policies and governance.

In contrast, donor-restricted endowments (often referred to as true endowments) must be used in accordance with donor-defined restrictions. This means that funds contributed to the endowment are generally limited to specific purposes outlined at the time of the gift.

As a result, any major gifts used to establish or grow a donor-restricted endowment may not be available for broader or immediate operational needs if not approved by the donor.

That’s why early donor conversations are so important. Clear, thoughtful discussions upfront can help ensure alignment between your nonprofit’s priorities and the donor’s intent, so that funds are structured in a way that supports your mission both now and in the future.

Considerations about your organization’s financial flexibility might include:

• Endowment type. Different types of endowments offer different levels of flexibility. Where true endowments preserve the principal indefinitely, term endowments grant access to the principal after a specific date or event has passed, such as the 20th anniversary of the endowment’s founding. Your nonprofit’s board can also internally create a quasi-endowment, which has no donor restrictions and can be spent with your board’s approval if an urgent need arises.
• Donor vs. nonprofit priorities. Because donor restrictions dictate endowment spending, it is important to consider whether these spending restrictions align with the needs and values of your organization.
• Current financial position. An endowment can help your nonprofit’s future, but also consider your present financial circumstances. If your organization is struggling with its cash flow, it might make sense to pursue fundraising strategies that provide immediate funding.

Weighing your organization’s financial situation against the flexibility of different types of endowments will help you select the best option for your nonprofit’s needs and goals.

3. Financial Management Abilities

Your nonprofit’s fundraising capabilities can help secure the principal, but it takes strong financial management skills to properly invest and track that initial contribution and accumulated earnings.

If your organization plans to start an endowment, it’s a good idea to have the following:

• Understand UPMIFA. The Uniform Prudent Management of Institutional Funds Act governs the management of endowment funds, ensuring that nonprofits appropriately handle their finances and remain accountable and transparent in their reporting. If your nonprofit is considering a true or term endowment, it will be essential to familiarize yourself with UPMIFA.
• Time and knowledge to manage an endowment. Before you create an endowment, ensure your team has the capacity to supervise the investment account. This includes financial acumen and prior experience with endowment accounting, as well as time to manage the account and track spending. At some point, you may also consider bringing in outside financial support and guidance to help you.
• Endowment management tools. Consider using specific software to help you manage your endowment. Evertrue’s endowment accounting guide suggests using a designated tool to manage all endowments in the same place, improve transparency, and protect sensitive data.

Setting up your organization to manage an endowment allows you to get the most out of your principal, helps support donor trust, and lays the foundation for any additional endowments you may create in the future.

4. Donor Relationships

To gain support for your endowment, you must strengthen your relationships with donors. This is crucial for securing major gifts for principal investments and for bringing your supporters on board for the endowment in the first place. Keep donors in the loop regarding any developments and clearly communicate how their contributions are driving long-term impact.

To manage and strengthen the donor relationships vital to your endowment, ensure you:

• Maintain donor privacy. Protecting the privacy of major donors is essential for building trust. Use an endowment management tool with security features, such as encrypted sessions, multi-factor authentication, and unique user permissions, to ensure sensitive donor information remains secure.
• Provide updates and reports. Share annual or quarterly reports on the endowment's status to your donors, focusing on clear, story-driven updates to highlight the impact of their gifts. Use specialized endowment reporting tools to create templates and generate professional reports you can share with donors.
• Prioritize personalized stewardship. The completion of an endowment gift does not conclude your relationship with donors. Instead, continue your donor stewardship efforts. By maintaining your relationships with donors through personalized communication and timely impact reports, your organization can foster the authentic, long-term commitment that’s essential for retaining supporters and driving future engagement.

Before establishing an endowment to secure financial stability, your nonprofit must carefully evaluate its major gift capacity, required financial flexibility, necessary management expertise, and long-term donor stewardship approach. By addressing these critical considerations, your organization can set itself up to launch a successful, sustainable endowment.