Compound helps startup founders and employees optimize their wealth through a technology-powered family office (tracking, investing, equity, lending, estate, tax). This lets our clients focus on their passions instead of administrative distractions. We live at the intersection of machine and tax code.
The cleanest path to financial freedom is to join an established company, perform well, invest wisely, and coast to retirement. Breakout startups propose a hack—an alternative career accelerated through learning, wealth, and reputation. Most startups fail, though, and provide no financial return. (Even if a startup fails, it can be great fun and provide a tremendous opportunity for rapid growth.) Picking the right company is hugely important; you will want to scrutinize every aspect of this decision to the best of your ability.
Conventional wisdom says that startup equity is worthless. While most startups fail, there’s a chance your equity will become a life-changing pot of money. This guide explains how to make the most of your equity.
For a startup employee, learning about your company’s initial public offering (IPO) is an exciting time. But it’s also overwhelming from a financial planning perspective. You have a variety of different equity grants, and you must decide what to do with each one. How many stock options should you exercise and sell, and when? What will your tax obligations be, and how can you minimize them?
There’s an investment vehicle called an “exchange fund” that can help startup employees and founders diversify post-IPO without triggering taxes, though there are significant downsides to consider. An exchange fund might make sense for you if you are highly concentrated in one public company’s stock or have highly appreciated stock that would be subject to large capital gains taxes if you sold your shares. The fund pools your shares with other concentrated shareholders, to try and match the allocation of an index. You usually must be a qualified purchaser to use an exchange fund, and most funds have investment minimums (~$500k). Since there is a significant lockup period (~7 years), you should only pursue this option if you are you do not have liquidity needs in the short-to-mid term future.