Personal Finances for Entrepreneurs: Considerations
We’ve said it before, and we’ll say it again: Managing the money coming in and going out of your startup is just as crucial as managing your personal finances.
In addition to keeping company and personal finances separate, proactive planning, consulting experts, and early wise decisions will help you stay in excellent financial standing.
As a creator, it’s simple to feel pulled into a lot of different areas. But you don’t want to put your funds last. We’ll go over some useful advice that you may use to build a solid foundation for long-term financial success and make wise judgments.
And if you have any more questions, feel free to contact us.
Proactive Seeking Investment Guidance
If you know what questions to ask, any financial counselor should be able to give you the assistance you require.
Find a financial advisor that is prepared to advance and learn alongside you as you develop as a founder. Because your finances will surely become more complicated. Getting personal financial guidance from a professional who has already worked with startup founders can help you figure out what you should be considering right now. As well as tomorrow, and in the future. Here are some suggestions on how to start a conversation with these professionals.
Benefit from Tax Optimizations
The primary factor here is QSBS (Qualified Small Business Stock)
There are some advantages to being an early-stage startup founder, particularly when it comes time to file your taxes.
Your company may be classed as a small business for tax purposes. If it is an active C corporation, has little more than $50 million in assets at any given time. And uses the majority of those assets to operate its business.
The qualified small business designation may make it possible for you to earn a tax exemption on gains worth up to $10 million or 10 times your initial investment. Whichever is greater if you receive shares in your company and consider selling them in the future. Depending on how your company was set up, there may even be chances to optimize the advantages of this tax exemption.
Consider the advantages of an 83b election if you anticipate receiving unvested stock or exercising unvested options as part of your compensation package.
Think About Your Compensation Very Carefully
When it comes to creating compensation arrangements, you should be constructing a strong foundation. One that can maximize your returns over time because businesses are staying private for longer periods.
The discussion with your board may get awkward because investors and entrepreneurs don’t always agree on remuneration. But it is undoubtedly one that is worthwhile.
Knowing how much other founders are paid can help you bargain with your board for a fair compensation plan. Determining how much to pay yourself can be difficult. Especially since investors may already have their thoughts.
It may seem premature to consider how your finances should be managed in the event of your passing. But failing to make an estate plan could jeopardize the benefits of your effort or at the very least cause your loved ones administrative difficulties.
All of your assets, including real estate properties, bank accounts, and securities, may need to go through probate in one or more states. If you don’t have an estate plan in place that specifies what should happen if you pass away unexpectedly or are otherwise unable to communicate your wishes. Probate is a default court procedure for people who don’t provide legal instructions. The probate court would then decide who your heirs or beneficiaries are, how much your property is worth, and handle your remaining debts. As well as transfer your assets to whoever has been a legal heir or beneficiary. Typically, your spouse and/or close family members.
Even though the result doesn’t seem too bad, there may be some negative aspects. There is a danger that your property and assets won’t go to the people you intended because the probate court, or anyone else for that matter, wouldn’t know what your express wishes are. The probate court would also need to hear claims from family members or other close friends. Which might take up a lot of time and money.
On the other hand, different types of estate plans, such as Last Will & Testaments and Revocable Living Trusts, generally ensure that there is a smooth transfer of property and responsibilities after your death. These plans allow you to name someone who will distribute your property and specify who will receive particular things.
Irrevocable Trusts Offer the Possibility of Future Without the Worry
Additionally, there are estate planning strategies that can protect and carry out your objectives when you’re still alive but unable to express them. For example, living will let you indicate your healthcare preferences, such as the rejection of particular medical procedures or treatments.
A durable power of attorney for health care, which names a certain individual to decide on your behalf.
Be Wary of Investing in Angels
Many of the people in your network that are interested in becoming angel investors will approach you as a founder. On the other hand, some people might ask you to start investing as an angel. Make sure you have a system in place for evaluating prospects when you review these investments and keep in mind that they may detract from your position and mission as a whole. Don’t be afraid to lock a few doors and defend yourself. When you think about how to use your liquidity, there is an opportunity cost to think about.
Prepare for Upcoming Scenarios
As a founder, you may not yet be there. But it’s always a good idea to know where you’re going and what to watch out for.
When you’ve shown investors your firm has potential around the Series B stage or later, take into account founder secondaries. Some founders take between 5 and 10 percent of their stock, as we have observed. This is the ideal amount to pay yourself. Enough to cover expenses, but not too much that you won’t be motivated to expand your business. It’s wise to set benchmarks based on other founders because this is another area where you and your investors might not agree.
Secondaries should be handled with extreme care. And thoroughly addressed with your advisors and legal counsel because there are significant dangers involved. Which can include IRS intervention, potential violations of securities laws, and tax ramifications.