Top 5 Financial Mistakes Made by Tech Founders

Technology entrepreneurs live in a world where the ground is always shifting, responsibilities dwarf resources, and the clock never stops ticking. In this pressure cooker of a career, staying focused on company priorities is key. Little wonder many tech entrepreneurs and early hires do a poor job of managing their own investments. So that you don't end up in the same camp, let's take a look a the top 5 mistakes startup execs make when managing their own finances. 

1. Putting It all on Red 

Launching a new tech business is by definition risky. And yet many tech entrepreneurs and their early hires decide to double down by putting their personal capital in technology stocks. As far as investing goes, the old adage about there being no free lunch is actually false. The free lunch of diversification is still on the menu! By investing in asset classes and sectors whose returns are less correlated with tech, you can reduce the risk of your portfolio without sacrificing potential return. So have your cake and eat it, too — and spread your investments. 

2. Failing to Prepare for Your Big Payday 
It's wonderful to see an entrepreneur have a big liquidity event. That is to say, your sweat equity is finally turning into a large sum of cash. But what a shame if you could have practically cut your tax bill in half with a bit of planning and preparation. This can be a lot of money to leave on the table, but there's even more at stake. By putting a plan in place early enough, you have more options to manage your windfall in line with your overall goals — whether saving for retirement, transferring wealth to your children or contributing to a favorite charity. Importantly, by choosing the best option for your situation in advance, you not only reduce taxes on the transaction and enjoy potentially more tax-efficient investments in the future, you lower risk by putting constraints in place that reduce the likelihood of poor financial decisions in the future. 

Depending on your situation, there are a host of tax strategies that may be available before your liquidity event, including: 

• making an 83(b) election — to pre-pay your tax liability on a low valuation 

• early exercise of incentive stock options — to avoid alternative minimum tax and pay lower capital gain tax in the future 

• setting up a GRAT, Dynasty Trust or Charitable LLC — to lower your tax bill while addressing estate planning goals 

The devil is in the details, so be sure to get guidance from knowledgable advisors before jumping in. And to maximize your windfall, reach out to them at least 12-24 months before your anticipated liquidity event. Time is often your most valuable asset. 

3. Getting Hurt by a Concentrated Position 
If you're an entrepreneur, your big payday may involve receiving stock in the company acquiring your firm. If you're a tech executive, a large portion of your compensation may take the form of your company's stock or stock options. Either way, you'll end up with a large concentrated position that may not be a good fit with your financial goals. 

Depending on your objectives in terms of in terms of risk, liquidity and time horizon, there are a variety of ways to counter the effects of a concentrated position: 

• selling the position (often with tax consequences) 

• hedging the position with financial instruments 

• creating liquidity by selling a portion of the position, borrowing, or using options 

• diversifying through an exchange fund, or if estate planning is of interest, a charitable remainder trust or charitable LLC 

These strategies are sometimes complex, carry tax implications and may involve constraints originating from your company like restricted stock. Therefore, it's important that you are guided by experienced tax and financial advisors to ensure the strategies are aligned with your wealth management plan and that they're implemented correctly. 

4. Ignoring Liquidity 
A startup dies when its runway ends or when its founders go broke. In either case, it comes down to managing liquidity. In fact, according to a survey by U.S. Bank, 82% of small businesses fail because of cash flow mismanagement. Now that we've touched upon death, let's move on to taxes. :p 

Not quite as dire, but immensely important to one's wealth is managing liquidity when deciding when (and whether) to exercise incentive stock options (ISOs). First things first: you need to be reasonably confident your company's stock will continue to appreciate and that there will be a market for the shares when you sell. Of course, there's a cost to exercising stock options. And there's almost always a tax bill, too. So you'll need to estimate the tax you'll owe and make sure you have the cash on hand when the bill comes due. While exercising early is generally a good practice, one needs to be vigilant and disciplined in following ISO tax rules to avoid costly mistakes. 

5. Thinking You Can Do It All Yourself 
As an entrepreneur or early hire in a rapidly scaling company, you are constantly facing new challenges outside your field of expertise. This can turn you into a jack-of-all-trades. The more success you experience, the easier it is to believe that you can do everything. But sooner or later, growth hits a wall when you take on too much yourself. For at the end of the day, the success of your company hinges upon your ability to find and delegate to the right people. 

The same holds true for navigating the complexities of your personal wealth transformation. If you're facing any of the challenges touched upon in this article, we encourage you to contact us for a free consultation. 

Matthew Lewis, Private Wealth Advisor 
TechView Wealth Advisors 

Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market, economic or political conditions. This content was created as of the specific date indicated and reflects the author's views as of that date. Past performance is no guarantee of future results. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.