Program-Related Investments (PRIs) for Startups

Program-related investments (PRIs) are a powerful, often overlooked source of funding for startups and social enterprises in the United States. Unlike traditional venture capital funding or angel investments, PRIs are designed to advance a charitable purpose while allowing a private foundation to potentially earn a modest return.

This guide explains what PRIs are, the IRS requirements, how they compare to venture capital, and strategies for attracting this type of capital investment.

What Is a Program-Related Investment (PRI)?

A program-related investment is an investment made by a tax-exempt private foundation to support its charitable purpose while offering the possibility of financial return. These investments are typically made at below-market interest rates or through high-risk ventures that further social good.

Unlike traditional investments that focus solely on production of income or property appreciation, PRIs prioritize mission over profit. Common PRI structures include:

• Low-interest or interest-free loans to social enterprises
• Equity investments in for-profit entities with strong social impact
• Guarantees or other financial arrangements to support charitable programs

Why PRIs Are Gaining Popularity

The use of program-related investments has grown significantly, with large foundations using vast amounts of funds for PRIs (e.g. the Gates Foundation has allocated over $1.5B to PRIs). Despite this growth, only a few hundred private foundations regularly make PRIs—making them a competitive but valuable source of funding.

For startups and mission-driven businesses, understanding PRIs is essential because they:

• Provide long-term, patient capital at favorable terms
• Help build credibility and attract additional investors
• Support economic growth while staying true to a charitable purpose

IRS Requirements for Program-Related Investments

To qualify as a PRI under IRS rules, the investment must meet three key requirements:

1. Primary Purpose

The primary purpose of the investment must be to accomplish one or more of the foundation’s exempt purposes, which are defined in the Internal Revenue Code. These include:

• Charitable
• Religious
• Educational
• Scientific
• Literary
• Testing for public safety
• Fostering national or international amateur sports competition
• Preventing cruelty to children or animals
  
  

Within “charitable,” specific purposes include:

• Relief of the poor, distressed, or underprivileged
• Advancement of education or science
• Erecting or maintaining public buildings or works
• Combating community deterioration or juvenile delinquency
• Eliminating prejudice and discrimination
• Defending human and civil rights secured by law

If your business plan supports any of these goals, your enterprise may be eligible for PRI funding.

2. Production of Income Cannot Be a Significant Purpose

While PRIs can generate income, making a profit cannot be the main goal. The IRS asks: Would a typical investor seeking only financial gain make this investment on similar terms? Because PRIs usually involve below-market interest rates and higher risk, the answer is typically no—making them compliant.

Common PRI examples include:

• Low-interest loans to small businesses owned by economically disadvantaged groups
• Investments in businesses revitalizing deteriorated urban areas to create jobs
• High-risk investments in nonprofit housing projects
• Loans to nonprofit organizations combating community deterioration
  
  

3. No Political or Legislative Influence

A PRI cannot be used to influence legislation or participate in political campaigns. Any involvement in lobbying or elections disqualifies the investment.

How PRIs Compare to Venture Capital and Angel Investments

Unlike venture capital funding, which demands significant financial returns and often control over governance, PRIs prioritize charitable outcomes and allow businesses to maintain their mission focus. While angel investors and venture firms may seek rapid growth and exits, PRIs often offer:

• Lower interest rates
• Long-term repayment terms
• Flexible structures, including equity or hybrid models
  
  

For startups, PRIs can complement other forms of capital while reducing reliance on purely profit-driven investors.

Benefits of Program-Related Investments

For Private Foundations

• PRIs count toward the 5% payout requirement, which mandates that foundations distribute a portion of their assets annually for charitable purposes.
• Income from PRIs is exempt from unrelated business income tax (UBIT) because it furthers the foundation’s mission.
• Funds can be recycled for future charitable projects, amplifying impact.
  
  

For Startups and Social Enterprises

• Access to critical capital investment for mission-driven growth.
• Increased credibility, attracting other investors and grantmakers.
• Opportunity to build a credit profile through repayment.
  
  

How to Attract Program-Related Investments

Securing a PRI is competitive. Here are key strategies:

1. Target the Right Private Foundations

Thousands of private foundations exist, but only a few hundred engage in PRI regularly. Focus on those with established PRI programs aligned with your mission.

2. Craft a Strong Business Plan

A successful PRI applicant must show:

• A clear path to sustainability and revenue
• Alignment between financial goals and charitable purpose
• Realistic projections for long-term growth
  
  

3. Build Strong Corporate Governance

Foundations value accountability. Ensure you have:

• An active board of directors
• Compliance with startup law and corporate governance best practices
• Terms of the investment clearly documented
  
  

4. Engage Legal Services

Program-related investments involve complex legal and tax considerations. Working with legal professionals ensures:

• Compliance with IRS regulations
• Proper structuring of loan or equity agreements
• Protection for both the foundation and your business

Frequently Asked Questions About PRIs

What is the difference between a PRI and a grant?
A PRI is an investment with the expectation of repayment or return, while a grant does not require repayment.

Can a for-profit business receive a PRI?
Yes. As long as the business serves a charitable purpose and meets IRS requirements, it can qualify.

Do PRIs replace venture capital?
No. PRIs are mission-focused and often complement other funding sources, such as venture capital or angel investments.

What types of investments qualify as PRIs?
Examples include low-interest loans to underserved businesses, equity investments in social enterprises, and guarantees for projects advancing charitable goals.

Final Thoughts

Program-related investments offer a unique way to finance social impact while preserving your mission. If your startup or social enterprise is ready to explore PRI opportunities, working with experienced legal counsel is essential.

Contact SPZ Legal today to learn how PRIs may fit into your funding strategy and support your long-term growth.

DISCLAIMER: The information in this article is provided for informational purposes only and should not be construed or relied upon as legal advice. This article may constitute attorney advertising under applicable state laws.