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We’ve said it before and we’ll say it again: Minding your personal finances is just as important as managing the cash that flows in and out of your startup.
Apart from separating business and personal expenses , proactively planning ahead, seeking out advice, and making prudent choices early on will ensure that you are in good financial shape.
It’s easy to get pulled in many different directions as a founder, but you certainly don’t want to place your personal finances on the back burner. We’ll share some practical tips that can help you make informed decisions and lay the groundwork for long-term financial growth.
If you want to get even more pointers in real time, don’t miss our personal finances for founders session—led by Pilot Co-Founder and COO Jeff Arnold , and Sequoia Heritage Managing Director and COO Kevin Slemp —at Founder Tactics , our one-day, virtual conference for early-stage startup entrepreneurs on June 15.
Proactively Get Investment Advice
Any financial advisor should be able to provide the advice you need as long as you know what to ask. Your finances will inevitably become more complex as you grow as a founder, so find an advisor who’s also willing to grow and learn with you. Getting investment advice from an expert who has worked with startup founders in the past can help you determine what you need to be thinking about today, tomorrow, and beyond. Below are some tips for where to start when beginning conversations with these professionals.
Take Advantage of Tax Optimizations
The main area to consider here is QSBS (Qualified Small Business Stock)
Being an early-stage startup founder can come with some benefits, especially when it’s time to file your income taxes.
If your startup is an active C corporation , has no more than $50 million in assets at all times, and is using most of it to conduct business, there’s a chance that it may be recognized as a qualified small business for tax purposes. If you receive shares in your company and are thinking of maybe selling them later on down the line, the qualified small business designation can enable you to receive a tax exemption on gains worth up to $10 million or 10 times your original investment, whichever is greater. There may even be opportunities to maximize the benefits of this tax exemption, depending on how your company was set up.
If you expect to receive unvested stock or exercise unvested options as part of your compensation package, it may also be worth considering the benefits of an 83b election .
Carefully Consider Your Compensation
Companies are staying private for longer periods of time, so when it’s time to put together compensation structures, you should be laying down a solid foundation that can optimize your returns over time. Investors and founders aren’t always aligned on compensation, so the conversation with your board may get uncomfortable, but it’s certainly one that’s worth having. Figuring out how much to pay yourself can be tricky, especially since investors may already have their own ideas, but knowing how much other founders are paid can help you negotiate a fair compensation package with your board.
It may seem a bit morbid or premature to think about how your finances should be handled if something happens to you, but not creating an estate plan could put the fruits of your labor at risk or at least create bureaucratic hassles for your loved ones.
Without an estate plan in place that specifies what should happen if you unexpectedly die or are otherwise unable to communicate your wishes, all of your assets—including real estate properties, bank accounts, and securities—may need to go through probate in one or more states, a default court process for people who don’t provide legal instructions. In general, probate courts would then determine who your heirs or beneficiaries are, how much your property is worth, take care of your remaining financial responsibilities, and transfer your assets to whoever has been legally designated as an heir or beneficiary—this is generally your spouse and/or closest family members.
Although the outcome doesn’t sound so bad, there can be some drawbacks. Since the probate court or anyone else for that matter wouldn’t know what your explicit wishes are, there’s a chance that your property and assets may not go to the right people. Family members or other loved ones who want to claim your property would also have to go to probate court, which could require significant resources.
On the other hand, different types of estate plans let you designate someone who will distribute your property and specify who will receive specific things, including
- Last Will & Testaments and Revocable Living Trusts , which generally ensure that there’s a smooth transfer of property and responsibilities after your death.
- Irrevocable Trusts , which can be beneficial for future giving without the specter of paying gift or estate taxes
There are also estate planning options that can safeguard and carry out your wishes when you’re alive but unable to communicate your wishes, including
- Living wills , which enable you to specify your healthcare wishes, such as the refusal of certain medical treatments or procedures.
- Medical durable power of attorney , which designates a specific person to make healthcare decisions on your behalf.
Be Cautious of Angel Investing
As a founder, you will often have many people in your network who are interested in and asking to become angel investors. On the flip side, people may ask you to become an angel investor as well. When you evaluate these investments, make sure you have a structure in place for assessing opportunities and remember that they can become a distraction from your overall position and mission. Don’t hesitate to close some doors and protect yourself. As with many choices, there is an opportunity cost to consider when it comes to what to do with your liquidity.
Plan for Future Scenarios
You may not be there yet as a founder, but it’s always good to know where you’re headed and what to look out for. Consider founder secondaries around Series B stage or later when you’ve proven the company to investors. If you do it too early, it can be dilutive. You want to take some, but not too much, so how much is typical? We see some founders take around 5 to 10 percent of their equity. This strikes the right balance between paying yourself enough, but not so much that you’re not incentivized to grow your company. This is another area where you and your investors may not be aligned, so it’s good to benchmark off other founders. There are real risks here that can range from IRS involvement to securities laws and tax implications, secondaries should be handled with great consideration and discussed in detail with your advisors and legal counsel.
Tune into Founder Tactics for more information
Want to get even more personal finance pointers? Join us on June 15th for Founder Tactics , an exclusive, founder-focused event, where top-tier VCs and serial founders provide insider perspectives and answers to questions that only founders would ask. Tune in as Sequoia Heritage Managing Director and COO Kevin Slemp , and Pilot Co-Founder and COO Jeff Arnold discuss financial opportunities that founders can take advantage of in their personal lives. In addition to answering questions live, they’ll talk about their experience with tax optimization strategies, qualified small business stock, founder compensation, founder secondaries, and more. Register now to save your spot!
The information in this article is for general informational purposes only and does not constitute investment, accounting, tax or legal advice.