6 Ways Founders Can Improve Their Personal Finances
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First time founders spend a lot of time worrying about business growth, but you should be spending an equal amount of time being proactive about your personal finances.
Building a business requires you to maintain a long term view. What you do now can allow you to reap big rewards or suffer major consequences down the line. The same is true with your personal finances.
The good news is you can get started on taking the right actions today. Read on to learn about how you can get proactive about personal finances—from investing early to how to prioritize financial decisions.
1. Prioritize Your Decisions
The most important thing that founders can do is keep things simple and execute well on those things. Think about where you want to be in five or 10 years and then reverse engineer and prioritize the things you need to do today in order to get there.
Also, be honest about how small decisions today might become unwieldy down the line.
“My belief is if you choose the three or four things that you can actually focus on that happen to also really move the needle and just have a blanket ‘not interested’ in engaging on everything else, that'll likely lead to better outcomes than seeing the new shiny objects pass by,” Kevin said.
As you become more successful, more and more opportunities will come across your desk, and more people will reach out to you to invest or get involved in their ventures. You have to fight the temptation to do more, and prioritize the things that will get you to your goals.
2. Watch Your Time Investment With Angel Investing
When you start finding opportunities for angel investing, think hard about the source of liquidity you’re using to make those investments. If you’re selling stock in your existing business to be able to invest in someone else’s business, make sure the opportunity cost works out. Is there more to gain from investing in someone else's business than your own?
The other major thing to consider is the time investment of angel investing. It has the potential to be a distraction and take away focus from your own business.
There are understandable motivations to invest in other companies. One of which is that it establishes reciprocity between you and companies you believe in. It can create a network or affiliation that feels validating.
Angel investing allows you to align your own values “with founders that [you] respect and/or companies that are working,” Kevin said. It’s a powerful tool for building trust between like-minded entrepreneurs.
It’s important to be honest about what you’re solving for beyond just the potential financial returns that come from active angel investing. But beware that small dollar investments can consume a lot of time because as you become more successful, the amount of people that will knock on your door asking you to invest will grow too.
3. Have a Personal and Corporate Budget
Having a corporate budget is crucial, but so is having a personal one. Where you are in life mirrors where you are in business and you’re going to see ups and downs over the first few years. What you need in order to cover expenses may be different in two years than it is now, and you need to have visibility into that.
“Thinking through that is really critical because you don't want to ever be in a position where it’s either the company or you need to find liquidity elsewhere, because oftentimes it comes at a cost,” Kevin said.
For instance, if you’re spending more than you’re taking in and you need to find other sources of liquidity, it may be at a time when the markets are like they are today. You may be liquidating one thing to fund something else when its value is falling as opposed to increasing.
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 stuck between a rock and a hard place.
“I think budgeting on both the corporate side and on the personal side is very important, just so you can get out in front of that and allow time to be your friend as opposed to a potential enemy,” said Kevin.
4. Manage Expenses
The easiest way to get your personal finances in order is to ensure that it's not a creeping number. When managing revenue and expenses, you need to keep a tight lid on how the expense piece grows.
If you have a good intuition around what you’re spending and keeping it in check, you’ll feel more confident that you won’t get upside down.
“I think the danger starts to happen when people's expenses grow, which is the same as their burn rate growing in a company context, and you become more reliant on either the amount of income you're taking out of a business growing to compensate or needing to liquidate assets and other forms of asset value in order to kind of fund that lifestyle,” Kevin said.
You have better control if you manage expenses and let the revenue side take care of itself. The people who get into the trouble of not having time on their side are the ones that try to artificially constrain the runway.
Getting proactive about your personal finances is just as important as getting your business’ finances in order. Looking into tax optimization strategies, qualified small business stock, compensation, and ways to manage your expenses can set you up for success in the long run.
5. Think About Estate Planning Early
One of the most pressing things that early founders should be thinking about is a bit counterintuitive—start estate planning as soon as possible.
“The reason I say counterintuitive is because you're in wealth creation mode, not necessarily estate planning mode, but the early decisions that you make can actually have a huge impact,” Kevin said.
For instance, with QSBS, you can gift stock in exchange for services. That means that while you’re still of that designation, you can use it for things like compensation and retention. You can also gift stock into irrevocable trusts or other vehicles at the valuation at that time instead of an appreciated value.
That matters because there are lifetime limits on how much stock you can gift to others or into an irrevocable trust. Those early days are a great time to gift more stock since valuation remains low.
“It's important to have those conversations with a tax advisor early while your ability to actually make those contributions still exists because that stock never loses its QSBS status even if it's gifted kind of early and at a low valuation,” he said.
6. Invest Carefully in Qualified Small Business Stock
When you’re an early career founder, you need to be spending as much time as possible building your business as opposed to investing on the side. But if you’re in the position to start investing, a good option is qualified small business stock or QSBS.
QSBS has an eligibility requirement. It has to be a C Corp with gross assets that don’t exceed $50 million. It should also be in one of the acceptable sectors like technology, retail wholesale and manufacturing. In addition, 80 percent of the issuing corp has to be used in the operations of those qualified trades.
If you satisfy those criteria, the benefits of the capital gains in stock that’s held for five or more years being exempt from federal taxes might be worth it. It’s also a useful way to gift stock in the early days.
Personal finances and business finances are inextricably intertwined. Your decisions in one area inevitably affect outcomes in the other. It’s vital for founders to organize and manage their personal finances to run a successful business.
To get even more personal finance advice, watch the full session with Kevin Slemp, Managing Director and COO of Sequoia Heritage and Pilot Co-Founder and COO Jeff Arnold here.
The information in this article is for general informational purposes only and does not constitute investment, accounting, tax or legal advice.