Derek Sivers: Why I Gave CDBaby to Charity

HUNT VALLEY, Md. ( TheStreet) -- To celebrate the release of my book The Ultimate Financial Plan, co-written with Jim Stovall, I invited four entrepreneurs, bloggers and authors who've been an inspiration me to share some of their feelings on personal finance. I can't tell you how honored I am that any of them, much less all four, accepted my invitation.

We kick off today with a post that will blow your mind from entrepreneur and best-selling author Derek Sivers, also a musician with enough technical ingenuity, passion and vision to have truly changed the way music is delivered today. You've probably benefited from his work without even knowing it.
Derek Sivers created CD Baby, then gave it away in exchange for the minimum legal annual return from a charitable trust.

Frustrated there were no online outlets for independent musicians (meaning most of the musicians out there who haven't received a big record contract), Derek created one -- first simply to sell MP3s of his own music. After a few other bands asked if he could replicate the trick on their websites, he realized he could create a company to do it; a few years later, Apple's ( AAPL) famed Steve Jobs, was knocking on Derek's door asking him to make his extensive online library of independent music available on iTunes.

At the peak of his success, Derek felt the call to leave his baby -- CD Baby -- in the qualified hands of others. He sold the company for $22 million. (Not bad for a "struggling musician.") But get this -- he had already placed CD Baby in a trust that would irrevocably give the proceeds to charity. Here's a piece of his story he was kind enough to share:

Derek Sivers writes: Two friends were at a party held at the mansion of a billionaire. One said, "Wow! Look at this place! This guy has everything!" The other said, "Yes, but I have something he'll never have: enough."

When I decided to sell my company in 2008, I already had enough.

I live simply. I hate waste and excess. I have a good apartment, a good laptop and a few other basics. But the less I own, the happier I am. The lack of possessions gives me the priceless freedom to live anywhere anytime.

Having too much money can be harmful. It throws off perspective. It makes people do stupid things like buy "extra" cars or houses they don't use -- or upgrade to first class for "only" $10,000 so they can be a little more comfortable for a few hours.

So I didn't need or even want the money from the sale of the company. I just wanted to make sure I had enough for a simple, comfortable life. The rest should go to music education, since that's what made such a difference in my life.

So I found a great way to do this. I created a charitable trust called the Independent Musicians Charitable Remainder Unitrust. When I die, all of its assets will go to music education. But while I'm alive, it pays out 5% of its value per year to me. (Five percent is the minimum allowed by law. It's still too much. I would have preferred 1%, but oh well. I'm free to use it to start new businesses to help people, or whatever.)

A few months before the sale, I transferred the ownership of CD Baby and HostBaby, all the intellectual property such as trademarks and software, into the trust.

It was irreversibly and irrevocably gone. It was no longer mine. It all belonged to the charitable trust.

When Disc Makers bought it, they bought it not from me but from the trust, turning it into $22 million cash to benefit music education.

So instead of me selling the company -- getting taxed on the income, and giving what's left to charity -- that move of giving away the company to charity then having the charity sell it saved about $5 million in taxes. (That means $5 million more going to music education.)

Also, the move of giving it away into a trust now, instead of holding on to it until I die, means its investments get to grow and compound tax free for life, which again means more goes to musicians in the end.

Many people have asked why I gave it away, so I thought I'd write my long explanation once and for all.

It's not that I'm altruistic. I'm sacrificing nothing. I've just learned what makes me happy. And doing it this way made me the happiest.

I get the deeper happiness of knowing the lucky streak I've had in my life will benefit tons of people -- not just me.

I get the pride of knowing I did something irreversibly smart before I could change my mind.

I get the safety of knowing I won't be the target of a frivolous lawsuit, since I have very little net worth.

I get the unburdened freedom of having it out of my hands so I can't do something stupid.

But most of all, I get the constant priceless reminder that I have enough.

Tim Maurer writes: I have not seen anyone more personify "The Gift of Enough," as Jim and I discuss it in The Ultimate Financial Plan. I encourage you to indulge in more of Derek's story outlined in his book, Anything You Want. The surprises don't end with his massive gift, and whether you're a successful business owner or a starving artist, you'll find a ton of money-and-life wisdom in his book and blog.

Thanks for sharing part of your story with us, Derek.

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Tim Maurer, CFP, is vice president of Financial Consulate, based in Hunt Valley, Md., and a member of NAPFA, the National Association of Personal Financial Advisors. He can also be found at TimMaurer.com.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.