For most of its fifty-year history, the Dyson Foundation didn’t use grant agreements. The Millbrook, New York-based family foundation was concerned the contract-like letters of agreement between grantmaker and grantee would make the foundation too formal and bureaucratic.

“We started using them some years go, though, with larger grants,” notes the foundation’s Executive Vice President Diana Gurieva. “It really helped clarify the relationship.”

“We now use grant agreements with all our grantees,” she says. “We had grantees wondering why we had not used them before.”

This month’s Family Giving News takes a look at creating an effective grant agreement: what should—and perhaps shouldn’t—be in them and what your options are when things don’t go as planned.

(Note: This issue will discuss conventional grant agreements with most public charities. There are very specific rules and regulations governing grant agreements with certain supporting organizations [a specific type of public charity] and non-charities, for example, a grant to a chamber of commerce for a charitable program. There are specific requirements about what must be in these grant agreements and what must happen when and if the terms of the agreement are violated. Please consult trusted legal counsel for more information about these grants.)

Elements of a Grant Agreement

The goal of a grant agreement is to make explicit the mutual expectations of grantor and grantee, thus preventing misunderstanding and protecting both parties should something unexpected happen.

“They don’t have to be complex,” says Kelly Shipp Simone, senior staff attorney for the Council on Foundations. “Simply documenting the name of the grantee, the amount of the grant, and the purpose of the grant begins to clarify things for everybody.”

Effective grant agreements include these basic elements:

  • Amount and purpose of the grant. Grant agreements note specifically how much the fund is committing to what purpose, such as general operating support or a specific program. Include the program’s name as described in the applicant’s proposal.
  • Grant period and payment schedule. For larger or more complex grants, the amount might be paid in installments. If this is the case, the grant agreement explains when and under what conditions future payments will be made.
  • Confirmation of charity’s tax-exempt status. This is crucial as many funds are often bound to support only tax-exempt public charities.
  • Notification of changes. All of the above is subject to change, and effective grant agreements expect the unexpected with a notification requirement. If the nonprofit’s programming changes, or if a grantee’s tax-exempt status changes or may change in the near future, the grant agreement requires the grantee to notify the grantor. For instance, a grantee might be in need of some sort of emergency funding and request permission to use funds originally designated for one program for another purpose. In any case, a grant agreement for even the simplest of grants should be one that anticipates changing circumstances. A notification requirement provides an occasion for discussion about how the grantee and grantor feel about the changes and how they’ll go forward.

Beyond these basic elements grant agreements can diverge widely depending on the nature and circumstances of the grant, and may cover issues like evaluation, intellectual property, and lobbying.

“You don’t want to overly complicate a general support grant to a public charity,” says Simone. “But there may be other issues that come up as grants become more specialized. If there are other expectations that go along with the grant, it’s good to lay that out so that everybody’s on the same page.”

As your family considers its own grant agreements, bear in mind the following issues:

  • Recordkeeping, reporting, and evaluation requirements. What records will the grantee need to keep and for how long? What kind of reporting does your family fund expect from grantees? Is there a specific form these reports need to take? Is there a certain kind of evaluation that ought to take place with certain grant types or amounts? What will be expected of the grantee for evaluation? Grantees are managing a number of funding relationships. If various reports or activities are expected over the course of the grant period, the grant agreement is the place to establish a schedule of deliverables so that the grantee can easily manage the relationship and so that the foundation board and staff can fairly and consistently monitor progress.
  • Intellectual property. Will the grant result in some sort of intellectual property, e.g., a book, film, or work of art? Who will eventually own it? It’s something to consider at the outset to protect both grantor and grantee.
  • Publicity. How public or private is this grant to be? Will there be a press release? Who will create it? Can the grantee use the foundation’s name or logo in fundraising materials? If so, how? Will you require final say over any materials that do use the foundation’s name and logo? For foundations looking to manage their public presence, and grantees looking to leverage philanthropic dollars, the grantee agreement becomes the place where clarity about privacy and publicity are established.
  • Lobbying restrictions. Many grant agreements include language prohibiting the grantee from using the donated funds to lobby, influence legislation or the outcome of a public election, or carry out a voter registration drive. Some families distance themselves from the political process because the rules governing such activity are somewhat complicated. Thus, some families are more comfortable with a blanket prohibition.

“This is unfortunate,” argues Abby Levine, Senior Counsel for Alliance for Justice, a national association of advocacy groups. “That language doesn’t need to be there. Grantees can legally do this kind of work, and this language can restrict their ability to accomplish their mission.”

While family foundations are themselves prohibited from lobbying, they can indeed fund grantees that do—provided the foundation follows certain rules. For example, a family foundation can fund a local group that lobbies city council on behalf of people who are homeless. The foundation cannot, however, give the group money specifically earmarked for that lobbying. In other words, family foundations can give grants to charities that lobby but cannot give grants to charities to lobby.

Grantees can lobby with foundation funds under certain circumstances, and the blanket prohibition of many grant agreements is needlessly restrictive.

When Things Don’t Go As Planned

Many grant agreements include an additional provision: what happens if and when the terms of the grant agreement are violated. There is only so much change an agreement can take before it’s breached.

What happens when the money donated for one purpose is used for another? What happens if reporting requirements are not fulfilled? Is the money to be returned? If so, how?

“It’s a good question because it’s largely an organizational choice,” says Simone. “It will depend on what happened with the grant. Was it used for a trip to the Bahamas or was the grant used for another program? And how does the foundation feel about that?”

Gurieva agrees.

“I think the circumstances dictate the particular action,” she says. “If an organization didn’t use the funds as intended, it would severely strain the relationship between the foundation and the grantee. That might include asking for the money back.”

She tells the story of one grantee that didn’t fulfill all the reporting requirements for a capital improvement grant. When the grantee approached the Dyson Foundation about another grant, Dyson noted that they wouldn’t consider a new grant until all the paperwork for the previous grant had been received. The grantee submitted the required reports about the new improvements, and Dyson is considering the new grant at its next board meeting.

“I can’t imagine circumstances in which we would ask for money back if an organization didn’t submit their required reports, but we might withhold future funding or the next installment of a larger grant,” she says.

Other breaches are more serious as when funds dedicated for one purpose are used for another against the donor’s wishes. Because there is some disparity about whether grant agreements are legally enforceable, it really is up to the organization as to how they’d like to move forward. Your family might consider whether or not there are any extenuating circumstances that might justify how the funds were used. Your family might decide that the switch made sense but convey to the grantee that you would have appreciated more advanced notice. Your family might decide simply to move on and not fund that grantee again. You might ask for the donated funds back in accordance with the grant agreement both grantor and grantee signed.

This is not always resolved amicably, and such is the stuff of high profile court cases.

“Your ability to enforce the grant agreement is going to vary,” Simone cautions. “The clearer you are in the grant agreement, the more likely you’ll be able to take action.”

“The Difference Between a Grant and a Gift”

The health of many relationships is determined by the quality of communication. Consider how accurately, consistently, and fairly your fund is communicating its expectations to its grantees. Reflect on how a well-written grant agreement might help improve that communication and your grant relationships as well.

Strive for a grant agreement that responds to the unique dual nature of family philanthropy—business-like enough to clarify and communicate expectations and responsibilities but not so transactional that the grant loses its true charitable character.

This is a special consideration for family foundations and funds, who, like the Dyson Foundation, prize their status as a caring family enterprise but understand, as Gurieva puts it, “the difference between a grant and a gift.”