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.