How Not To Blow Your IPO Windfall
With Lyft now a publicly traded company and other companies — among them Airbnb, Slack, Palantir, Pinterest, Postmates, Robinhood, Uber, WeWork — gearing up for IPOs one thing is certain. There are going to be a lot of early employees whose lives are transformed by sudden wealth, as they take advantage of their stock options and large payouts.
I know what it’s like to receive a sudden windfall overnight. I was a senior accountant at Glassdoor and received enough money after the company was acquired by Recruit Holdings to co-found my current financial advisory practice where I specialize in managing the finances for a select handful of individuals and families, many of which have had huge success with an IPO and/or acquisition. I also have the experience of helping other tech professionals implement prudent investment strategies for their IPO payouts and/or large bonus packages. If you’re in the lucky position of expecting a windfall, it’s important to be mentally prepared, so you don’t end up back where you started. Here’s my advice.
Get tax advice first. Many people who exercise stock options or sell company stock end up with a big surprise: A big tax bill. You are going to have to pay taxes on your windfall and may end up in a higher tax bracket.
Before you do anything else, talk with your accountant to make sure you know what you will owe in taxes and put that money away, where you can’t touch it, so you don’t end up going into debt to pay your taxes.
Find an advisor. When you receive a windfall that grows your bank account to a size it’s never been before, there’s going to be a learning curve. It won’t be as steep if you get professional advice or at least talk with a trustworthy, very money-savvy friend before spending anything.
It’s very easy to get tempted to spend the money on something you never could afford before, like a sports car, especially if you’ve been scrambling to get by all these years. Don’t set foot on the Lamborghini or Ferrari lot until you’ve had a conversation with your advisor about your biggest personal goals and figure out how you’ll budget for them
Make sure you’ve built your own safety net. Ideally, everyone should have three to six months of living expenses in the bank, in liquid cash, in case of financial disaster or in case unplanned expenses come to light. With some financial analysts & economists talking about a possible recession in the near future, you’ll feel more secure if you know you’ve got things covered. Be sure to talk with your advisor about how much you really need. People often overlook common living expenses when running the numbers themselves.
Think about your retirement goals. If your windfall was big enough, you may have given notice to your boss already. But if it was a smaller chunk of change and you’ll still be working, it’s time to give some fresh thought to your plans for the future. Do you expect to keep working as long as you can? Is there an end date you’re planning for your current career, so you can try something new? Are you planning to transition to working part-time at some point? A good advisor will help you manage your money in the right kind of retirement and non-retirement accounts for your future goals.
Find an insurance broker.
Many people are underinsured and don’t have adequate coverage for things like disability or long-term care — or even life insurance. If you’re a breadwinner in your household, a windfall could be a good opportunity to increase your insurance coverage, so you and your family are covered. A good insurance broker can help you determine what you do and don’t need, taking into account your current life circumstances.
Ask about alternative investments. If your windfall was substantial, ask your advisor about opportunities to participate in alternative investment opportunities. Many of these opportunities are only available to high net worth individuals. Sometimes, they may pay better returns than standard stock market investments.
Consider paying off debt. Debt can weigh you down, financially and emotionally, so if you have credit card debt or substantial student loans, talk with your advisor about how much of your windfall to use to wipe the slate clean. Getting rid of debt could be the best gift you give to yourself.
Make a difference. Many people who are accustomed to donating $50 or $100 a year to their favorite charities take advantage of a windfall to increase their commitment. As you discuss your financial plans with your advisor, make sure you mention any donations you’d like to make. If you’re thinking of donating a substantial amount, there may be opportunities to do so in creative ways that you aren’t aware of. A good advisor will be able to point you in the right direction, so you can multiply your impact in brand new ways.
Practice gratitude. It sounds cheesy, but it’s healthy to reflect on how you got to where you are. There’s no doubt, you put in an immense amount of hard work but I think you’ll find additional satisfaction in active gratitude. What do I mean by that? Take a moment (or several) each day to remember the folks who gave you cogent career advice, taught you invaluable skills in school, or gave you solid mentorship as you faced tough life decisions. Think of your bosses and colleagues who encouraged you to stick with it while you were having a tough time at work and thought about leaving. None of us achieve success ALL on our own. I think if you implement this your daily routine, you’ll be in a better position to enjoy this special time and enhance your own ability to help others achieve the same kind of next level success.
