Finances & Fundraising
5 Ways Founders Can Improve Their Personal Finances

5 Ways Founders Can Improve Their Personal Finances

Written by 
Pilot Team
March 29, 2023
5 Ways Founders Can Improve Their Personal Finances

Starting a business can be a thrilling and rewarding experience, but it can also be financially challenging, particularly in the early stages. As a startup founder, it's essential to prioritize personal finance to avoid financial pitfalls that can derail your entrepreneurial dreams. By taking the time to improve your personal finances, you can set yourself up for long-term success, both professionally and personally. 

Keep reading to learn how to get proactive about your personal finances—from investing early to prioritizing financial decisions.

Prioritize Your Decisions

Startup founders have a lot on their plates, and it's easy for personal finances to take a back seat. However, it's crucial to prioritize financial decisions to ensure long-term stability and success. Think about where you want to be in five or ten years and prioritize what you need to do today to get there. Be honest with yourself about how seemingly insignificant choices today could impact your business down the road.

Consider paying off any high-interest debt and building an emergency fund to cover unexpected expenses. It's also important to set financial goals and create a budget aligning with them. Also, Investing in retirement accounts is essential, and seeking professional financial advice is needed. By prioritizing these decisions, startup founders can set themselves up for financial success in their personal lives and businesses.

Finally, it is also important to remember is that as you become more successful, you will have many opportunities and people asking for your help or investment in their ventures. You have to fight the temptation to take on more than you can handle financially and prioritize the things that will get you to your goals.

Take a Diligent Approach to Angel Investing

While you should embrace opportunities to become an angel investor, think hard about the source of liquidity you’re using to make investments. If you have cash on hand but aren’t sure where else it could go (i.e., paying down debt or funding operations), consider whether to dedicate some portion toward angel investing.

If you don’t have cash on hand, consider the opportunity cost before selling stock in your business to invest in someone else’s. Ask yourself, “Is there more money to invest in other areas of my business?”

You should also be aware of the time commitment involved in angel investing and how it can distract from your core business. When you’re busy looking for investments, it’s easy to lose sight of what matters most: building a solid product or service that customers love.

Have a Personal and Corporate Budget

When starting a business, your finances will fluctuate, so having a personal budget is just as important as a corporate budget. In addition, what you need to cover expenses may change over time, so it helps to know where your money is going at any given moment.

The last thing you want is to be in a position where you need to find liquidity elsewhere because it typically comes at a cost. So, for example, if you’re spending more than you’re making and resort to borrowing, you may be doing so in a downturn when the terms wouldn’t be favorable. The same is true for the corporate side—if you become too reliant on capital markets, the most expensive time to take equity is when you’re desperate.

Manage Your Expenses

Successful founders focus on managing expenses well. The easiest way to get your finances in order is to monitor costs closely so they don’t creep up. If you are good at monitoring your spending and understanding how much it costs to maintain your lifestyle, you will feel confident that you can keep things in balance.

Avoid being in a situation where your expenses grow exponentially (equivalent to your company’s burn rate growing), requiring you to rely on taking more income from the business or liquidating assets to fund your lifestyle. 

As mentioned earlier, taking a proactive stance toward your personal finances is just as crucial as getting your business’s books in order. Some important factors to consider when managing expenses include:

  • tax optimization strategies,
  • qualified small business stock options for employees, and
  • compensation (including employee benefits).

Invest in Qualified Small Business Stock

While it may seem counterintuitive initially, founders should start estate planning as soon as possible. For example, with qualified small business stock (QSBS), you can gift stock in exchange for services, meaning you can use it for employee compensation and retention, saving cash. 

You can also grant stock into irrevocable trusts or other vehicles at the current valuation instead of an appreciated value. Because there are lifetime limits on how much stock you can gift to others or into an irrevocable trust, it’s a good idea to start giving stocks away early when their valuation is low. 

QSBS is only available to founders and employees who own stock in their company, and it may be helpful to know that the company:

  • must be a domestic C corporation,
  • can’t have over $50 million in assets before or immediately after issuing the stock, and
  • can’t be part of specific types of trade or business (such as health, law, or farming).

Also, the buyer has to be an individual, trust, or pass-through entity and hold the stock for at least five years before selling.

If you satisfy the above criteria, the benefits of the capital gains in stock held for five or more years and exempt from federal taxes might be worth it. That said, consulting with a tax advisor before making contributions is essential because the stock always retains its QSBS status, even if gifted relatively early and at a low valuation.

To recap, here are some tips for being proactive about your finances:

  • Prioritize your decisions. Focus on the three or four things most impacting your long-term goals.
  • Be careful with angel investing: Consider the source of liquidity you’re using to invest. Be aware that small-dollar investments can consume a lot of time that could be better spent on your business.
  • Have a personal and corporate budget. Be aware of your expenses and have visibility into your financial needs in the future.
  • Manage your expenses well. Keep a tight lid on expense growth and let revenue take care of itself.
  • Invest carefully in Qualified Small Business Stock. If you’re in a position to start investing, consider Qualified Small Business Stock a good option.

The information in this article is for general informational purposes only and does not constitute investment, accounting, tax, or legal advice.

Personal Finance for Founders
Watch the on-demand webinar with Managing Director and COO of Sequoia Heritage Kevin Slemp and Co-Founder and COO Jeff Arnold of Pilot to get even more personal finance advice.
Watch on-demand
Personal Finance for Founders
Watch the on-demand webinar with Managing Director and COO of Sequoia Heritage Kevin Slemp and Co-Founder and COO Jeff Arnold of Pilot to get even more personal finance advice.
Watch on-demand
Personal Finance for Founders
Watch the on-demand webinar with Managing Director and COO of Sequoia Heritage Kevin Slemp and Co-Founder and COO Jeff Arnold of Pilot to get even more personal finance advice.
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