Personal Finance for Founders

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Finance is a professional specialization. It’s not uniquely difficult (or fun), but you shouldn’t expect to be a natural finance whiz any more than you should expect a random person off the street to be an expert at your job.

Companies employ entire departments to create budgets, manage risk, raise capital, make long-term investments, maintain compliance, and handle reporting. Strong financial planning and operations help companies minimize risk and maximize upside.

Startup founders and successful business owners have a similar job to be done. You need to forecast your personal liquidity, pay taxes, source financing/refinancing, and protect your savings. There’s a lot of administrative minutiae, and, while not particularly exciting, it can have a material impact on your financial future. 

When it comes to managing your personal finances, it’s rarely worth getting creative (you should have plenty of other opportunities to innovate in your day job). Instead, set up the appropriate basic infrastructure so you can save tons of time, headache, and money in the long run. 

Disclaimer: Compound—my employer—is a financial platform specifically designed to help startup founders and business owners manage and optimize their finances. You can check out our net worth dashboard here. 

This essay speaks to founders who believe their startup equity may one day be worth a life-changing sum of money. 

There’s a spectrum of life-changing-sums-of-money. Hundreds of thousands of dollars can be life-changing. As can millions of dollars. But in this essay, we’re going to focus on the possibility of breakaway success: imagine your liquid net worth exceeds $100M at some point over the next ten years. 

It takes a bit of irrational confidence to expect this for yourself—but this level of wealth may become reality if you found a very successful venture-backed startup worth billions. 

Of course, the probability for any random person achieving this outcome is very low. But this is not a stochastic exercise. You have the power of the conditional probability on your side (i.e. your probability of success includes the impact of your personal superpowers). 

This amorphous equity that you own—some call it a “lottery ticket”—may be insanely valuable one day, or it may end up worthless. 

This situation creates a number of weird side effects on your psyche and how you manage your personal finances: 

• You can’t complain to your friends or family: “I’m so annoyed that I may make millions of dollars” doesn’t really sit well. 
• You may be wealthy on paper but not have a lot of liquidity. This means you won’t be able to upgrade your lifestyle. It also means that most banks won’t include your illiquid startup equity when you’re applying for a mortgage. 
• Your equity may literally be worth zero one day, meaning you spent a decade working for no financial gain. 
• You have hugely concentrated risk tied to your single source of income. 
• Traditional personal finance advice like “save for retirement” seem at odds with your mindstate. 
• You have a weird tradeoff with your time. Any time you spend not making this asset be worth $100M+ feels like (and likely is) a suboptimal financial decision. 

If the above resonates, I hear you. It’s unique and weird and not straightforward how you should handle this situation. But there are some best practices. 

First, recognize there are no right answers, and no one is operating perfectly. The most important thing—the only prescriptive advice I’ll give—is that you do what you want with your life (and bear the consequences). This essay shouldn’t change that approach. 

Second, I encourage you to write a memo to yourself now (before you have stupid amounts of money and three homes in Tahoe) articulating what you think the purpose of money is. Seriously: type “docs.new” into your browser toolbar, and spend an hour thinking deeply. Highlight all the things in your life that give you energy and all the things that you want to do with your money. Use money as a tool to remove the things that take away energy from you. Consider updating this list often, but even doing it once is worth the squeeze. 

Third, review the cheat sheet below. A lot of tax and legal information is boring – this sheet provides you with a summarized, Pareto version of what you need to know. 

Another shameless plug: here at Compound we have a net worth dashboard to help you track all of your assets (cash, public investments, private equity, angel investments, crypto, etc.) and also an equity modeling tool to help you get comfortable with your potential financial outcome. They’re both free. Take a look here. 

Personal finance for founders: cheat sheet

Equity 

You likely received restricted stock awards (RSAs) as your equity in your company. These are shares in your company that you purchased for a very low price. You then needed to file what’s called an 83(b) election to let the government know that you’d be pre-paying taxes on the shares (which locks in a preferential tax treatment). You can dive deeper into this topic here but if you handled this up front there may not be much for you to do now. 

You should use the qualified small business stock (QSBS) tax exemption if you can. This exemption can be a big deal: upon the sale of your stock, you won’t have to pay taxes on the first $10M of gains if you meet the criteria (hold the shares for 5 years, have no more than $50M assets in the business when you acquired the shares, and own original, issued shares from a qualified C-corp). There’s more information on this topic here. You shouldn’t have to do much before selling the shares besides keeping documentation, but that documentation is very, very worthwhile. 

I don’t suggest you waste your time exploring the Peter Thiel Roth IRA thing. It borders the line of legality (could be considered “self-dealing”) and isn’t worth the benefits. 

Taxes

There aren’t very many tax “silver bullets” that can hack the system and save you a ton of money (outside of QSBS). 

To save on state taxes, you could move states. However, most people have more important reasons to choose their living location than taxes (community, lifestyle, etc.). If you’re truly flexible, however, you can read about the tax implications of moving in this article. 

The money you spend on an accountant is worth the peace of mind. Before founding your company, perhaps TurboTax was a sufficient stopgap, but you’ll quickly outgrow it as soon as you’re dealing with any sort of equity decisions (or crypto!). Your CPA will handle the administrative overhead and make sure that you don’t miss anything. You can think of a CPA as “paying for confidence that you will survive an audit”, as an audit might be distracting from running your company and could get very expensive if you did not file correctly. 

Getting Liquidity

Consider selling secondary shares, especially if your company is doing well. Ideally this sale is done with your board’s blessing. (Consider offering this to early employees as well, as a reward for their helpful work!)

If you do sell secondary shares, do an analysis of the opportunity cost of selling the shares now compared to waiting until a liquidity event. 

• For example, think of a scenario where your company is raising a Series C, it’s valued at $250M and you own 20% ($50M). You talk to your board, and they approve you selling $5M in secondary (10% of your shares). This is one side of the equation. The other side is the opportunity cost. The best case alternative might be a $5.0B IPO without additional dilution. In this case those shares would be worth $100M! The worst case alternative would be that the company goes under and the shares are worthless. Do the math yourself and ask if selling shares as secondary is worth it. Ultimately, only a gut-check will do. 

Having money doesn’t mean you need to spend it. It’s easier than you think to spend your first $1M (or $10M or $100M). Instead of buying fancy trips, cars, and toys, consider investing in a house or the public markets depending on your financial goals. 

Investing

Create a cash flow plan to understand how much money you need to live. This plan will also help you figure out how much to pay yourself. You should work with your board and finance leadership to come up with a number you think is fair. If you’re a startup with hundreds of millions of dollars in valuation or millions in revenue, you should not feel bad about paying yourself six figures. But also don’t pick a number you wouldn’t be proud of appearing in the New York Times. 

To figure out how much money you can invest, set aside expenses that are due in the short-term in cash. This can include an emergency fund (generally 3-6 months of living expenses), taxes for next year, and general spending (house payment, wedding, etc.). The amount of money you have remaining is the amount you can invest. With that money, create a budget for “safe” and “risky” investments. Remember that your net worth is already largely in the bucket of “risky startup investments.” 

Outside of your startup, consider diversifying into more stable bets like public markets. You’ll have some financial advisors pitching you on actively managed funds that they claim will beat the market. I wouldn’t buy this pitch—beware of pseudo-science seeming terms and charts. Instead, most people perform better by keeping things simple and predictable.

If you have additional budget, consider investing in private funds across real estate, private equity, and venture. Thanks to the power of diversification, these investment vehicles enable additional returns without significant increase in risk. 

One competitive advantage you have as a founder is your network. Consider angel investing in your friends that are starting companies. You can get the money to do this by becoming a scout for a VC fund or by finding a wealthy friend and having them split deal economics with you. 

Some will tell you this is a distraction, which may be true to some degree. Only you can tell whether angel investing is worthwhile for you in its scouting benefits and returns or simply a distraction from running your own company. 

Estate and death planning

If you don’t have a trust or will when you die, you’re estate undergoes a process called “probate.” Probate places all of your assets in the public domain where everyone can see them… and you have to pay for the privilege! The responsible approach is to set up a trust. 

The tl;dr on trusts is that revocable ones help you avoid probate while irrevocable trusts help you avoid estate taxes if the estate is so large as to actually be taxable (which yours will be, right? :) ).  Irrevocable trusts are not mutable—anything you put in, stays in. Furthermore, when you transfer assets into an irrevocable trust, you must relinquish control and assign a trustee (someone other than yourself) to be the legal owner of the assets. Why would you do this? Moving assets outside of your estate by putting it into an irrevocable trust can provide two major benefits: 

• Estate tax advantage—assets outside of your estate are not subject to estate tax upon death. As of 2022, the estate tax exemption is $12.06M ($24.12M for couples). Anything above this threshold is subject to the 40% federal estate tax. Gifting assets into an irrevocable trust uses your lifetime exemption by the value of the assets at the time of gifting, meaning any future growth is not subject.  Moving assets later will make it more expensive to transfer them outside of your estate. 

• If you’re already above this threshold—consider exploring something called a Grantor Retained Annuity Trust with a qualified attorney, which helps you move assets out of your estate without using any of your lifetime gift exemption. 

• Income tax advantage—any tax obligations (e.g. capital gains) from assets outside of your estate are the responsibility of the trust, not you. The revocable trust is a separate entity with its own taxpayer identification number (so it must file taxes annually. If it has no additional income, this process is very simple). Further, you may set up an irrevocable trust in a state with no state-income tax to ensure the assets grow most efficiently.

The ballpark conversation: if you're a founder who has raised any venture capital, you have more than enough assets to get a revocable trust. Once you have more than the estate tax exemption threshold, get an irrevocable trust for the tax advantages. More information here. 

Lifestyle 

You could be very wealthy all of a sudden but currently lack liquidity. So long as you keep your “personal burn rate” in line with this reality, you have nothing to worry about. 

Your efficiency and effectiveness are of paramount importance. Ensure you’re spending your time building a large business, not dealing with silly expenses. 

Find opportunities to impact the things you care about. Your startup is one, but you should also find opportunities to serve or donate where you can. Philanthropy is not only good for the world – it’s also satisfying and encouraging. 

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