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An Entrepreneur’s Guide to Wealth Planning

Building a company can be a very rewarding experience.  It takes vision, determination, luck and a whole lot of hard work.  Many of the entrepreneurs I work with embody these characteristics but also have a unique ability to have a laser focus on their company and avoid distractions from the outside world.  While this focus is a key to driving their company’s success it often leads to other parts of their life being put on the back burner.  One of the areas I often see neglected is their long term financial well-being.

Now, I hate to be the bearer of bad news, but not all new companies are successful.  The failure rate is quite high.  With that said, failure or success of a company doesn’t have to be the only driving force behind the success or failure of your long term financial goals.  Simple planning strategies throughout the lifecycle of your company can put you in a position to fully reap the rewards of your hard work if your company is successful while also creating a foundation for the future if things go more Quirky than Google on you.

Here are some simple strategies that can help you build that foundation for your future and when your company does take off, allow you to maximize your long term wealth. I plan to do a deeper dive into a few of these at a later date but this will give a quick overview:

  • Understanding Paper Wealth vs. Actual Wealth: As entrepreneurs build their companies, go through various stages of funding and reach certain levels of success they may find themselves wealthy on paper, with little actual money to show for it. This can often complicate any forward looking financial planning they may be doing.  It is difficult to think about saving any money outside the company or focusing on any outside planning when so much of their financial well-being is tied to their company.  However, putting a strategy in place to manage the dollars outside of the company and protect against the unforeseen can provide a level of security and can provide a much better footing if things don’t go exactly according to plan.  Paper wealth has a tendency to be very volatile so it is important to plan with this in mind.
  • 83(b) Election: How does the saying go? “The only things certain in life are death and taxes.” Building and selling a company, or shares of a company, is a very rewarding experience. And at times can be very lucrative. However, when that payday does finally come there is the unfortunate but inevitable requirement to pay taxes. While you can’t avoid taxes all together there are certain steps that can be taken early on to help minimize this burden. An 83(b) election can allow you to determine when you pay ordinary income tax and when you pay capital gains.  With the current difference between long term capital gains rates and the higher levels of ordinary income rates, this can have a drastic effect on your overall tax bill and allow you to keep more of what you built. This election must be made within 30 days of receiving any stock so planning early in the lifecycle of a company is essential to take advantage of this benefit. An 83 (b) election is not right for everyone and it is very important to speak with an advisor and tax counsel to determine if and when it is appropriate.
  • Estate Planning and Gifting Strategies: Entrepreneurs work hard to build great companies but often fail to do any planning when it comes to proper ownership structure of their company equity. Most entrepreneurs don’t like to get ahead of themselves and think of the money they could potentially make if their company takes off or is sold.  However, in this day, these types of pay days can often mean generation changing wealth for an owner and their family. While this initial payday is great, in order to make sure this wealth fulfills any legacy goals certain estate planning and gifting strategies must be implemented.  Utilizing different types of trusts, gifting shares at certain points along a company’s lifecycle and realizing any philanthropic intentions can have a drastic impact on the amount of wealth that is subject to estate tax or passes to the next generation. Implementing these strategies early in a company’s lifecycle allows for the greatest amount of flexibility in this planning and provides the greatest number of planning options. Again, I will stress the importance of speaking with an estate tax attorney before implementing any of these strategies.
  • Traditional Saving: This one may seem so simple but I find that many entrepreneurs are so focused on building their own company that they fail to do any savings outside of the company.  Whether you are bootstrapping a company and  plowing any and all money back into it or have received funding from outside investors, a disciplined savings plan can help to reduce taxes and provide a safety net should things not go according to plan.
  • Balancing Risk Vs. Stability: As I mentioned earlier, the success rate for start-ups is not very high. This means founding and building a company is a very risky endeavor. More often than not, I see entrepreneurs devoting all their time, money and resources to their business. While this risk can have a great payout there are also certain times that it is important to take a step back and understand this risk and see if there is anything that can be done to balance this risk with some stability.  This could come in the form of setting some money aside for a rainy day or managing some investments outside of the core business.  This balance between risk and stability is especially important after a liquidity event.  Many serial entrepreneurs receive a payout from one company and immediately put it all toward their next venture. I understand that the way these people were initially successful was to take risks, however having the discipline to set some money aside can help provide a life of stability while still allowing them to take other risks.

This is not an exhaustive list, by any means, but implementing some of these strategies can have a drastic impact on long term financial success, regardless of the success of your company. Utilizing some of these strategies also does not have to be a time consuming burden but should be considered as part of the company building process. With the lives of entrepreneurs so intertwined with their companies personal financial planning should be used to compliment and strengthen your company not be an outside burden that takes away from it.