Why Grant Agreements Matter More Than Many Foundations Realize

Many foundations operate without fully exploring whether their grant agreements serve them well. While grant agreements are not legally required when granting to U.S. public charities (things are more complicated when granting to foreign organizations or other private foundations), strong grant agreements protect funders from a small number of recurring risk scenarios.

Grant agreements should enable funders to reconsider the grant commitment when projects underperform, grantees experience leadership changes, or unforeseen issues arise. They should also govern the use of intellectual property created through the funded work. If your current grant agreements do not address these issues, they should be revisited. 

To guard against funding projects that are not succeeding, grant agreements should contain clear benchmarks, along with an explicit exit right if those benchmarks are not met. This does not mean funders should exit simply because a project is progressing more slowly than anticipated. Social change is not always linear, and effective grantees will learn from setbacks and adapt in ways that lead to eventual success. Still, when a funder has lost confidence in a grantee or the project’s direction, the agreement should allow the funder to withdraw.

Another common concern arises when key staff members leave an organization. Grants are often awarded based on confidence in specific individuals, not just the institution itself. Well-drafted grant agreements can provide an exit right if key personnel depart, which in effect gives the funder an opportunity to participate in discussions about replacement staff.

Over the past two years, many funders have sought to protect themselves against grantees that adopt anti-Israel or antisemitic positions after a grant has been committed. Funders have developed a range of contractual approaches to address this risk, typically including language that provides an opportunity for conversation with the grantee before funding is terminated. In practice, however, no legal language is effective once a grant has been fully paid. Although it is theoretically possible to require the return of funds under certain conditions, many grantees will not agree to such terms, and enforcement would require litigation. The most practical protection is to fund over time, rather than paying grants in full upfront or endowing them.

Many foundations give little thought to the use of intellectual property rights deriving from a funded project. Depending on the situation, a funder may seek the use of the property (or seek to enable other grantees to use the product) through a license. In other cases, a funder might want to negotiate ownership of the rights while giving a license to the grantee. Like much else in grant agreements, context is everything.

There are other grant provisions that should be in any grant letter, including the timing of payments and reports, the benchmarks that need to be achieved, an evaluation process, a requirement that grantees make their records available if the funder seeks an audit, and in some cases, sharing of contact information of participants in the project.

JFN Consulting helps funders tailor their grant agreements as part of a best practice review of foundations. If you seek to engage us in a best-practices review, please email Yossi Prager.