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Wealth Tips for Founders

When I started my first business I had no idea what I was doing with my personal finances. I slept on a futon and drove a car roughly as old as my age. This was fine. (I still suffer Frugalisis. I never buy the HD streaming option. Save that dollar! Invest it.)

You don’t start companies to get rich. You start them for reasons you don’t fully understand, and like a runner at the 18th mile, often question why you subjected yourself to such euphoric misery that is a startup.

We got acquired by Apple, and I made some money. I managed to avoid many of the common pitfalls like spending it all on bottle service, acquiring colorful cars, buying Bitcoin in 2013 whoops, or shorting TSLA. I did make some minor mistakes. Here is some underrated financial advice to avoid them. Warning: I’m not an accountant and you should talk to a real doctor.

We’ll discuss two types of optimizations. One in terms of how to think about optimizing wealth, and another more tactical section.

Cognitive Optimizations

Dilution Matters. Founders treat equity as binary. Worthless until the video game ends. Suddenly you ring in the IPO and you’re a billionaire. For the most part this is the right way to think about it. I don’t think startups could survive if they were instantly liquid. (Proof of this can be found in dozens of overfunded cryptocurrency projects, drunk on the alcoholic toxicity of instant liquidity, moving with the productivity of a beached whale.)

However, you’re very likely to have an outcome in the middle. One where 1% of your company isn’t worth a billion dollars, but it’s worth a million. So when that VC offers you more money for more dilution, think twice! Don’t make this classic error.

Penny Pinching. Overbearing frugality prevented me from spending any money, which creates inefficiencies. Spend like a king on speed, like a pauper on everything else. Faster computer? Go. Faster Internet? Go. Better sleep? Go. Expensive dinner? Stop. Expensive dinner to close a candidate? Go. If you can, use your capital to move faster. Your competitor is taking the shorter flight. Book it.

Stop hacking airline miles and credit cards. Take all that energy and focus it on your startup. The ultimate ticket to First Class will come through making money, not flyertalk.com. Flying in coach is an excellent time to inspire yourself on why you want to be successful. (I still fly in coach. You might find other cognitive roadblocks prevent you from buying business class, even if you have the financial ability.)

Taxes Are Real. I didn’t understand taxes until I got rich. It seemed unimportant until one day I had a small aneurysm watching my bank account dramatically shrink, sending my hard earned dollars to fund the F-35. Even today, taxes are most interesting to me because of efficiency. This brings us to the second section.

Tactical Optimizations

QSBS. If you have gross assets of $50 million or less, you can avoid federal (and occasionally state) tax. This is a big deal: if your company is acquired for $100M and you own 30%, it’s an extra $10,000,000 in your pocket. You need to own the asset for at least 5 years. If you don’t you can roll it over to another asset and defer taxes. You don’t need to pre-emptively do much to qualify. Just read about and be aware. I didn’t, and now I get to write a blog post about it.

Roth IRA. This is a piggy bank you put post-tax money into now, and withdraw from when you retire with all gains being tax free. If you bought $10k of AAPL at IPO from your IRA, the difference is an extra $24,000,000. No need to start wondering what to invest your IRA in. You can figure that out later. You should start contributing to it now, as there’s a limited amount you can do each year. You want to start building your base.

Class FF Shares. Class FF is a special kind of stock that converts to preferred (not common) when you sell secondary shares. Normally, when you sell common shares you’ll inflate your 409A price and you’ll create a burden for the purchaser. This all might sound confusing, but the main homework item is to set this up early, when you incorporate your company. Talk to your lawyer about this. If you don’t have a lawyer, you can try and email Pioneer for emergency help.

Secondary. Ah yes. Conversations with your investors about secondary. Only slightly less awkward than a first kiss. If you’re “doing well”, you deserve to de-risk yourself a little bit. Unfortunately, most founders who sell secondary generate a large tax event. If you’re generating serious revenue there might be ways to minimize this, and the careful reader who made it this far could email me for further info.

Simplicity. Here is the most important tip that nobody told me about: keep your finances simple. Assuming you have assets, confusion might be the largest cause of financial stress for you. I felt more relaxed with one large position than I do now, with many different complex investments (despite those positions being lucrative). I’d maintain limited, large positions in efforts that you (a) understand and (b) can exercise control over. Do not invest in a zillion small things. It’ll confuse you and create Tax Reporting Hell, a special kind of place that involves lots of .xlsx files. Pro-tip: if you do invest in stuff, hand out a different email, like ops@me.com. That way you’ll have a neat inbox for all of your K-1’s, reports, etc.

Illiquidity. I find it much easier to live my life with illiquid assets that aren’t valued every day. I’m an easily triggered infovore, and I’d be checking Bloomberg every minute if I had a large commodity or stock portfolio. You might find the same. Invest in things that quietly compound over the long term.

Portfolio Allocation. On the one hand, most of your net worth will be in your startup and startups are risky. This means you should keep all your other capital in “safe” investments, like a T-Bill. On the other hand, life is long. You probably have a lot of earning potential in front of you. Shouldn’t you invest it in interesting things? Do whatever will enable you to sleep best. If leading a simple life in a checking account lets you relax and focus on work, do that. The extra 10% financial CAGR isn’t worth a 1% decline in cognitive CAGR. The largest way for you to get super-rich is to focus your mental energy on your startup stock, not fret over Robinhood trades.

Get An Accountant. As you can tell from this post, the keyboard of capitalism has a near infinite number of keys, and button-mashing the right combination is a full-time job. Which isn’t yours! If you’re a 22 year old with no assets other than your stock, quick Googling and TurboTax will do. If you’re not, I suggest getting an accountant.

Pioneer helps you properly incorporate your business, provides funding, and generally tries to kickstart you into success. If you’re even remotely curious, click on the link below and check it out.

Also, I’m sure I missed many great ideas, hacks and concepts. Please do share! daniel@pioneer.app or https://twitter.com/danielgross.