Silicon Prairie

Derek Notman |

4 Money Management Tips for Entrepreneurs, Founders, and Employees of Startups

Do you work for a startup like EatStreet, Abodo, Exact Sciences, GrubHub, Groupon, Shiftgig, or SpotHero?  Whether you are a founder, early employee, or just coming on board, there are unique financial planning considerations for entrepreneurs working at a startup.

 

Silicon Prairie

Although there are similarities the world over, I am focusing on the Midwest of the United States, also known as the “Silicon Prairie”.  I focus on this region for three reasons. 

  1. It is a fast growing startup ecosystem
  2. The cost of living is relatively lower than most other startup ecosystems.
  3. I live and work here.

Financial Planning^ for Startup Founders & Employees

So what is different about financial planning for startup founders and employees, versus financial planning for the average Joe who works for an established company?  The fundamentals of financial planning for either group are essentially the same, but that is where the similarities end.

It could be said it comes down to an appetite for risk, career risk.  Those working at a startup are taking more risk with their career and financial future, but are doing so for a much greater reward.  Those working for an established company tend to be more risk averse and like the idea of a steady paycheck, paid vacations every year, and a predefined corporate ladder to climb.  I am not saying one is better than another, but that there are different planning considerations for each.

In general, the financial planning process consists of 6 stages, as illustrated below:

4 Money Management Tips for Entrepreneurs, Founders, and Employees of Startups

As a Financial advisor CFP® Professional designation with over 10 years’ experience, I have worked extensively helping people who have founded or work at startups, as well as those in more traditional career paths.  The following 4 tips are some things founders and employees of startups should think about in regards to their financial planning.

  1. Plan for today.

Working for a startup means taking on additional risk.  You may not have a job tomorrow.  You may be working for a fraction of what you “are worth”.  You probably won’t have many, if any, company perks.  You probably won’t have a retirement plan.  Etc., etc., etc.  These sacrifices are planning opportunities. 

  • Save for an emergency or waking up to not having a job
  • Set up an IRA for yourself to start saving for retirement
  • Consider personally owning insurance (life, disability, etc.) so you can take it with you
  • Keep your personal overhead as low as possible so you can focus on helping your startup grow, while not fretting about paying your own bills

  1. Think about tomorrow.

The additional risk of working at a startup also means potentially more reward.  This reward typically comes in the form of equity (stock or stock options) in the company you are working for.  This paper wealth can be very attractive, and lucrative, but how and when can you convert it to actual dollars?  Having a plan for this conversion (liquidity event) of paper to tangible wealth is very important, some points to consider are:

  • How and when are you vested in the company stock?
  • Will there be a holding period before you can sell it if the company goes public?
  • How much should you sell, or keep, when you are able to sell it?
  • What happens to your job, and stock, if the company is acquired, goes public, or goes bust?

A good example is Facebook.  The founders and many employees had stock, in fact the IPO created about 1000 millionaires overnight! When Facebook had its IPO everyone was restricted (lock-up period) from selling their stock for 6 months.  When this period expired you could sell all or some of your stock.  Everyone’s situation is different, but think about it.  Those that sold right away made a lot of money, but those that kept some or all of their shares would be worth significantly more today.

So, what does one do in a situation like this?  There are a lot of variables, however the most important consideration should be what you want your money to do for you.  Really thinking this through, before you have the money in your bank account, is crucial to having a solid plan for the future.

  1. Build a Team before you Think you need them.

While in the throes of building a startup it is normal to think of little else than the startup!  Yet, I have found, that having a plan and team is very important.  It is like putting together the architectural plans, lining up the builders, and sourcing the supplies for building a house.  Although you just really want to build a house, there is a lot of work that needs to be done before you can actually break ground.  Having the right team in place before you need them will make your life a lot easier!

  • Surround yourself with professionals that are familiar with startups.
  • Interview professionals like the following to build your team:
    • Estate Planning Attorney
    • Certified Financial Planner®
    • CPA/Tax Professional
    • P&C Insurance agent
  • Although their credentials and experience are very important, in my opinion it is more important that you like and get along with these professionals first.  If you don’t, then it will be almost impossible to work with them, no matter how smart they are.
  • Focus on working with professionals that use a process instead of just trying to sell you a product or service.
  • These are potentially long term relationships, make sure they start off on the right foot.

  1. Have Fun!

The process of planning, thinking about, and preparing for the future can get a little boring.  I think it is safe to say we all want to “be set” for the future, but most of us want to enjoy life and “live today” too!  It has been my experience that once you have done the initial leg work of building a plan for the future, it actually frees your mind from worry and stress, allowing you to enjoy living in the moment.

  • When going through the planning process make it a priority to inform your team what you like to do when not working so they can help you plan for enjoying anything and everything you would like to do.
  • Make the planning process fun, be creative and think about how spending money can make you, and others, happy.
  • A great book to read while going through this planning process is Happy Money, it talks about the science of happier spending.  This book has had a great impact on me and my personal spending and what I am teaching my son about money and the amazing tool it can be.  I recommend it to all my clients.

Where should you start?

Take a deep breath, and trust in the process.  One step at a time.  I encourage my clients to think deeply about what is truly important to them, what is the most important thing they want their money to do for them?  Once you start to crystallize (make sure to write these points down) it will make the rest of the planning process simple.  By backing in to what you want to accomplish, designing and implementing your financial plan can and should be fun and liberating.

My experience working with startups has taught me that the best professional relationships are ones that start off with a casual conversation to see if you get along with each other.  Once you establish trust and rapport, the rest of the planning process is actually very simple.  Please consider me a resource and feel free to contact me should you have any questions.

Looking for personalized advice?  

Feel free to jump over to my other site, Intrepid Wealth Partners, to learn how we help our clients.

Thank you for reading!

Cheers,

Derek Notman^