March 24, 2017
The other day, I had one of those moments I look forward to most as a wealth manager — I was able to call a client and congratulate him on reaching all of his life goals.
How did he do it? It all started with a financial plan, which centered on what he wanted to achieve for his family and retirement. This plan included strategies to manage his incentive stock options at a fast-growing tech company where he had worked since its early start-up days.
From my unique experience as a former tech executive, venture capitalist and wealth manager, I understand the importance of deferred equity compensation for employees of successful venture-backed companies. Incentive stock options, also known as ISOs, can have a huge impact on reaching one’s life goals. But success requires careful financial planning until that big liquidity event.
An independent financial advisor offering a range of services can take a holistic look at your goals, map out the journey, and identify the right financial approaches to get you there. The financial plan includes looking for potential setbacks along the way, and re-adjusting if necessary, so you can be sure you eventually reach your objectives.
Our relationship with this client, “Michael,” started just three years ago. Even though he was earning a good salary at the company, a very substantial chunk of his compensation was contingent in the form of ISOs. Michael came to us wondering how a successful company liquidity event could help him achieve the goals he and his family had made.
First, we sat down with him and his spouse to talk about their plans for the future. They both wanted to retire at 65 and hoped to maintain the same lifestyle in retirement they were enjoying today. They needed to save for college for their two children. And they wanted to set up trusts for the kids so they would have a good start in life.
Once we understood their vision, we embarked on a financial planning project that looked at a range of outcomes for the future success of Michael’s company.
ISOs present planning challenges. The company could be going great today, but those options could be worth nothing when it comes time to exercise them. Michael had faith, however, that the company would continue to grow and experience a major liquidity event soon.
We factored the ISOs being worth anywhere from $0 to the company’s valuation at that time. And we projected his spending through age 95.
ISOs present planning challenges. The company could be going great today, but those options could be worth nothing when it comes time to exercise them.
After running some calculations, we helped Michael understand various scenarios, such as early exercise of his options and potentially selling some shares on the secondary market prior to a liquidity event. And we developed a diversified investment plan for his other assets based upon the risk he needed to take for the greatest potential of reaching his goals. We also set up an estate plan for tax management and to make sure both his and his wife’s wishes were acknowledged in a living trust, which they did not previously have in place.
Of course, nothing in life is static, and the financial facts can change. Two years later, Michael’s company filed for an initial public offering. This filing put a new value on the shares. But as is typical for an IPO, Michael would be subject to a lock-up period of 180 days. Thereafter, as an employee, he could only sell shares within the company’s stipulated open-window periods.
He could, however, sell back some of the shares to the company at the current, private valuation. So he decided to do that in order to have some certainty and control over his financial future, rather than leave it up to the whims of the stock market. Remember Facebook? Its shares fell after its 2012 IPO and took over a year to recover, according to Kiplinger. Twitter, four years later, is selling around 40% below its IPO price.
By selling a portion of Michael’s vested shares, we were able to put the proceeds to work toward meeting some of his goals outlined in his financial plan.
Before the IPO went through, however, his company was bought by a Fortune 500 technology company. As part of the deal, Michael received a combination of cash and stock in the buying company.
After reviewing the terms of the acquisition and updating his financial plan, I was able to call him with the great news for his family.
Some of his colleagues weren’t in the same situation. They were scrambling to understand the tax implications of the acquisition and what it would mean for them.
But for Michael, everything was outlined in his financial plan. As soon as the deal closed, he knew what his financial future held in store. And that peace of mind is a great feeling.
Today, Michael is working on his next big start-up. And I’m confident it will be at least as successful as the last because now Michael can give it his full concentration and energy, without worrying about whether his family and retirement are financially secure.
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