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Is Your Startup Approaching an Exit? Be Ready.

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.

The strategies mentioned in this article may have tax and legal consequences; therefore, you should consult your own attorneys and/or tax advisors to understand the tax and legal consequences of any strategies mentioned in this document. First Republic does not provide tax or legal advice.

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