When you become a founder, there’s a chance that you could soon find yourself with equity that may one day be worth a life-changing sum of money. Or on the flip, it unfortunately could end up being worth nothing. Regardless of the outcome, there’s a lot you have to think about early on to set yourself up for success. It’s critical to start forecasting your personal liquidity, figuring out what tax implications you may have in your new situation, sourcing financing and refinancing options, and protecting your savings all at the same time. And while all of those things may not be particularly fun or interesting, they do have a material impact on your financial future and in turn your business’ future.

It’s rarely worth getting creative when you start to build out your personal finance plan (you should have plenty of other opportunities to innovate in your day job). Instead, consider setting up the appropriate basic infrastructure so you can save tons of time, headache, and money in the long run.

Compound, an all-in-one solution for managing your personal finances and a customer of Brex, has a similar mission to us—only they’re focused on helping founders with their personal finances. Their tools allow founders to track their finances across thousands of providers in real-time for free – check it out here. We worked with Compound to put together a personal finance “cheat sheet” for founders to help you get started.

This is for informational purposes only and does not constitute tax advice. Please consult with your tax, legal, and finance professionals for questions specific to your business and personal finances.

First, let’s talk about equity.

You likely received restricted stock awards (RSAs) as your equity in your company. These are shares in your company that you purchased for a very low price. From there, you probably needed to file what’s called an 83(b) election to let the government know that you’d be pre-paying taxes on the shares (which locks in a preferential tax treatment). You can dive deeper into this topic here, but if you handled this up front there may not be much for you to do now.

If you can, you should consider looking into using the qualified small business stock (QSBS) tax exemption. This exemption can be a big deal: upon the sale of your stock, you won’t have to pay taxes on the first $10M of gains if you meet the criteria (hold the shares for 5 years, have no more than $50M assets in the business when you acquired the shares, and own original, issued shares from a qualified C-corp). From there, you shouldn’t have to do much before selling the shares besides keeping documentation, but that documentation is very, very worthwhile.

Next, let’s get into taxes.

There aren’t very many tax “silver bullets” that you can use to hack the system and to save yourself a ton of money (outside of QSBS).

To save on state taxes, you could consider moving states. However, most people have more important reasons to choose their living location than taxes (community, lifestyle, etc.). If you’re truly flexible, however, you can read about the tax implications of moving in this article.

Hiring a good accountant may feel like a large investment, but the price of having one could be worth the peace of mind. Before founding your company, perhaps TurboTax was a sufficient stopgap, but you’ll quickly outgrow it as soon as you’re dealing with any sort of equity decisions (or crypto!). Your CPA can handle all the administrative overhead you now have, and make sure that you don’t miss any small details. You can think of a CPA as “paying for confidence that you will survive an audit”, as an audit might be distracting you from running your company and could get very expensive if you did not file correctly.

Getting Liquidity

Consider selling secondary shares, especially if your company is doing well. Ideally this sale is done with your board’s blessing. (Consider offering this to early employees as well, as a reward for their helpful work!)

Now onto the importance of investing.

The first step you should consider before investing (if you haven’t already) is to understand how much money you need to live. That includes how much you want to pay yourself. You should work with your board and finance leadership to come up with a number you think is fair. If you’re a startup with hundreds of millions of dollars in valuation or millions in revenue, you should not feel bad about paying yourself six figures. But also don’t pick a number you wouldn’t be proud of appearing in the New York Times.

A good rule of thumb to figure out how much money you can invest is to set aside expenses that are due in the short-term in cash. This can include an emergency fund (generally 3-6 months of living expenses), taxes for next year, and life’s larger goals (house payment, wedding, etc.). The amount of money you have remaining is the amount you can invest. With that money, consider creating a budget for “safe” and “risky” investments. Remember that your net worth is already largely in the bucket of “risky startup investments.

Outside of your startup, consider diversifying into more stable bets like public markets. And a reminder that most investors perform better by keeping things simple and predictable (don’t try to actively manage all of your investments).

And finally, estate planning.

Estate planning may not be as exciting as investing or receiving equity, but it is incredibly important to do. If you don’t have a trust or will when you die, your estate undergoes a process called “probate.” Probate places all of your assets in the public domain where everyone can see them… and you have to pay for the privilege! The alternative and more responsible approach is to set up a trust.

There are two kinds of trusts: revocable trusts, which help you avoid probate, and irrevocable trusts, which help you avoid estate taxes because the grantor cannot change or end the trust after its creation. Furthermore, when you transfer assets into an irrevocable trust, you must relinquish control and assign a trustee (someone other than yourself) to be the legal owner of the assets. Why would you do this? Moving assets outside of your estate by putting it into an irrevocable trust can provide two major benefits:

• Estate tax advantage—assets outside of your estate are not subject to estate tax upon death. As of 2022, the estate tax exemption is $12.06M ($24.12M for couples). Anything above this threshold is subject to the 40% federal estate tax. Gifting assets into an irrevocable trust uses your lifetime exemption by the value of the assets at the time of gifting, meaning any future growth is not subject.  Moving assets later will make it more expensive to transfer them outside of your estate.
  • If you’re already above this threshold—consider exploring something called a Grantor Retained Annuity Trust with a qualified attorney, which helps you move assets out of your estate without using any of your lifetime gift exemption.
• Income tax advantage—any tax obligations (e.g. capital gains) from assets outside of your estate are the responsibility of the trust, not you. The irrevocable trust is a separate entity with its own taxpayer identification number so it must file taxes annually. If it has no additional income, this process is very simple. Further, you may set up an irrevocable trust in a state with no state-income tax to ensure the assets grow most efficiently.

If you're a founder who has raised any venture capital, you have more than enough assets to get a revocable trust. Once you have more than the estate tax exemption threshold, get an irrevocable trust for the tax advantages.

Bonus: Think about your lifestyle

In your new role as founder, you could find yourself with more wealth than you’ve ever had, but lack liquidity. It’s important to keep your “personal burn rate” in line with this reality. Ensure you’re spending your time building a large business, not dealing with unnecessary expenses.