Is Your Startup Approaching an Exit? Be Ready.

Samir Kaji, Managing Director, Business Banking, First Republic Bank & Chris Merrifield, Managing Director, First Republic Private Wealth Management

Almost every startup founder and employee has a goal of building a great business that’ll someday experience a successful “exit”—typically through a public offering or an acquisition, after which you will finally reap significant economic rewards for all your hard work. It’s an exhilarating experience, as the cash windfall from an exit can dramatically change your life and potentially even your future generations’ lives.

While an exit may not be the first thing on your mind, planning ahead when an exit appears fairly imminent is essential.  Here are some things to consider now as you plan your financial future.  

Opportunities before the exit

Even before an exit happens, you may have opportunities to improve your financial well-being and reap some rewards from your company’s success. Startups are staying private much longer these days—often a decade or so longer. That can present financial challenges for founders and employees, whose net worth is often tied up in valuable, but generally illiquid, private shares.

In recent years, many well-established startups that have yet to experience an exit have allowed their founders and employees to liquidate a small portion of their company shares before an exit. Depending on the circumstance, shares may be sold on the secondary market, or the company may have established an in-house stock-purchase program. Some tech companies work with outside firms like SharesPost and 137 Ventures that offer innovative employee-liquidity programs. 137 Ventures, for example, offers employees loans that use company stock as collateral in addition to providing other liquidity options.

These options allow employees to take some risk off the table and provide some overall financial diversification. Portfolio diversification is important. Startups are inherently risky businesses: The dot-com bust of the early 2000s taught us the importance of planning ahead. Many tech startup founders and employees lost entire fortunes when their concentrated stock positions declined in some cases to nothing.  

Also, selling shares before an exit may benefit you from a tax perspective. You could owe significantly more in taxes if you wait to sell until when your company goes public or gets acquired. It’s important to work with a tax advisor who can evaluate your situation and advise you on the tax issues related to selling your shares.

Preparing for your future wealth

Beyond the opportunities you have to liquidate your shares today, consider how the money you receive after an exit could affect your lifestyle and goals for the future. I highly recommend starting to work with a wealth advisor well before your company’s exit is expected to occur. (And in today’s environment where the top cash-rich tech companies are clearly in buy mode, an exit, even a modest one, can happen far sooner than expected.)

An advisor can guide you through the financial decisions you will have to make—such as how you will invest and preserve that money, how much you will save or spend—and help you establish long-term financial goals. Depending on your personal situation, you may even want to consider putting some of your company shares into a trust that can help you minimize the future tax implications.

Keep in mind that your life could change dramatically, and you want to be prepared for whatever that brings. By evaluating how an exit would affect your personal financial situation and taking smart steps in advance, you can ensure you’re ready when an exit occurs.

First Republic Private Wealth Management encompasses First Republic Investment Management, Inc. (“FRIM”), an SEC-registered investment advisor, First Republic Securities Company, LLC (“FRSC”), Member FINRA/SIPC, First Republic Trust Company (“FRTC”) and First Republic Trust Company of Delaware LLC (“FRTC-DE”). FRIM, FRSC, and FRTC-DE are wholly owned subsidiaries of First Republic Bank. FRTC is a division of First Republic Bank. Investment advisory services are provided through FRIM. Securities brokerage services are provided through FRSC. Trust and fiduciary services are provided through FRTC and FRTC-DE. Insurance agency services are provided through First Republic Securities Company, LLC, Member FINRA/SIPC, DBA Grand Eagle Insurance Services, LLC, CA Insurance License # 0I13184. This document is for information purposes only and is not intended as an offer or solicitation, or as the basis for any contract to purchase or sell any security, or other instrument, or to enter into or arrange any type of transaction as a consequence of any information contained herein. All analyses and projections depicted herein are for illustration only, and are not intended to be representations of performance or expected results. The results achieved by individual clients will vary and will depend on a number of factors including prevailing dividend yields, market liquidity, interest rate levels, market volatilities, and the client's expressed return and risk parameters at the time the service is initiated and during the term. Past performance is not a guarantee of future results. Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Although information in this document has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness, and it should not be relied upon as such. This document may not be reproduced or circulated without our written authority. The investment services and products mentioned in this document may often have tax consequences; therefore, it is important to bear in mind that FRIM does not provide tax advice. The levels and bases of taxation can change. Investors' tax affairs are their own responsibility and investors should consult their own attorneys or other tax advisors in order to understand the tax consequences of any products and services mentioned in this document. Investment and insurance products and services are not deposits of, or guaranteed by, any bank, are not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other government agency, entity or person and are subject to investment risks including the possible loss of principal.