The Continuum of Building Wealth at Startups

The Continuum of Building Wealth at Startups

February 22, 2021

The startup ecosystem provides wealth-building opportunities unlike any other sector. Above-average compensation makes it easier to turn positive cash flow into investment capital that compounds over time. But more critically, owning equity in a startup offers an outside chance of exponentially increasing the financial baseline from which future compounding occurs.

Unfortunately, having a great startup mind does not necessarily translate into mastery of our complex financial and tax systems. Fortunately, there are a number of parallels between building startups and building wealth at startups that can help make the wealth building process a bit more intuitive.

The framework we’re introducing in this essay, The Continuum of Building Wealth at Startups, is borrowed from Will Larson’s approach to managing engineering teams outlined in An Elegant Puzzle.  

Whether building products or building wealth, you need to know where you are before you can figure out the appropriate steps to reach your desired outcome. Like building a great product, you will need to put together a team with the skill sets that will best fit the financial future you want to build. And, like a product, your financial future will constantly evolve as you learn more about what’s possible.

Teams, a Continuum with Four States

Larson offers a model for viewing engineering teams on a continuum with four states: 

  1. Falling Behind (growing backlog of work)
  2. Treading Water (tackling critical work but not technical debt)
  3. Repaying Debt (paying down technical debt to create capacity for core product work)
  4. Innovating (creating something new because of sustainably low technical debt)
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He writes “Teams want to climb from falling behind to innovating, while entropy drags them backward. Each state requires a different tact.” When a team is falling behind, it may be necessary to add more engineers. Treading water might require focusing on the core obstacle to scale and begin repaying debt. Innovation is possible when teams correctly navigate the different states of the continuum.  

At the risk of applying Larson’s map too literally, there are insights when used as a continuum of building sustainable wealth at startups.

Wealth, a Continuum with Four States

1. Falling Behind, whether subjectively or objectively, can be a difficult burden. A variety of factors might influence it from a financial standpoint. Maybe salary from the current startup doesn’t even cover the bills or allow for 401(k) contributions. You may have launched a company that is yet to turn a profit and the debt is piling up. Or the opportunity cost of the current gig is unsettling relative to peers at FAANGs or other recently coronated unicorns. 

          Benefits of Advice: In these situations, it’s important to focus on building resilience. Specifically, accumulating cash to lengthen the runway. It’s impossible to know what decisions or bets will pay off in the future. Building a safety net allows you to trust your intuition instead of letting scarcity drive your decisions.

          Where to Get Advice: A financial coach or hourly financial planner (generalist) should be able to help with these needs. The goal is to establish or refine habits that will help transition to treading water with positive momentum. Relying on a TurboTax-like automated return preparer is probably sufficient unless you’re exercising ISOs or making an 83(b) election.  

2. Treading Water means there’s enough excess cash flow to meet current goals and obligations. But it may not feel like there’s enough forward momentum for things to be materially different in the near-term. You might be paying off the student loans on schedule, but they remain uncomfortably high. You may have a large number of vesting stock options but it isn’t clear when to exercise them or if they are even worth exercising in the first place.

          Benefits of Advice: Decisions in this state set the foundation and create the ability to take risks over a longer timescale. Understanding conflicts in resource allocation over the next 3-5 years becomes a superpower. It also determines the investment risk allocated toward startup equity. An exit may be 3+ years down the road, but establishing systems in advance of the “yikes, my company just filed their S-1” scramble can be worth its weight in long-term capital gains rates (or QSBS exemptions).

          Where to Get Advice: This level of complexity may justify upgrading to a human tax preparer and certainly justifies proactive tax planning. For quality tax planning, look for a tax preparer (CPA or EA) or a financial planner (CFP®) specializing in equity compensation. If there isn’t much complexity beyond equity compensation, layering an automated investment solution (like Wealthfront or Betterment) on top of the tax planning is a great starting step to diversify across the public markets. *Endnote has more info on types of firms and professionals that provide advice*

3. Repaying Debt with new cash might be possible due to a promotion or a moderate liquidity event. Debt is commonly financial, but it could also be social or physical from years of deprioritizing your health and personal relationships. Repayment could look like eliminating student loans, taking a sabbatical for self-care, or reducing barriers to do something new in the future.

          Benefits of Advice: Wise capital allocation is necessary for making the most of this state. Because repaying debt is often early evidence of scale, the advice is most useful when highly personalized and provided by niche expertise. Progress down the wrong path can be as frustrating as no progress at all. At this point, inefficiency and miscommunication are increasingly expensive. Greater complexity could warrant building a core team for tax return prep, tax strategy, financial planning, and investment management. 

          Where to Get Advice: If looking for a one-stop solution, a boutique RIA* or large, multi-billion-dollar RIA* would provide the best experience. The best firms that specialize in startup wealth will do tax work in-house and operate as a board of directors for your household’s wealth. They may not handle everything directly, but they ensure continuity. The downside is that many larger RIAs have investment minimums, so hiring them may need to wait until a larger exit.

          Those who prefer a DIY approach could hire an accounting firm* and pair that with DIY investing at a custodian* like Fidelity or Vanguard. Assets could also be parked at a wirehouse/bank*, like Morgan Stanley or First Republic, for more transactional investment services. This path is naturally less personalized, but some perks include niche banking features and discounts on lending rates. The responsibility of being proactive remains with you because of the nature of these types of relationships and the underlying business models.

4. Innovating is easiest after a large exit or when investment capital produces enough cash flow to cover all lifestyle expenses. Uncertainty becomes less threatening because fewer things in the future need to be true to facilitate an experience you’d be happy with. You have the freedom to extend the timescale for strategic bets and leverage human capital for outsized impact and returns. New baselines of wealth allow for significantly greater control over your future and the financial flexibility that may have been unthinkable in the past.

          Benefits of Advice: Advice in this state will be oriented around maintaining this state. To operate from a place of abundance over long periods of time, strategies should be comprehensive and coherent. Everything from customized investment strategies to risk management and estate planning to tax planning should be operationally efficient and aligned with your values.

          Where to Get Advice: The same options make sense as for Repaying Debt but, depending on the size of the exit and desired client experience, a Family Office* style firm may be wise. A Family Office has a high-touch client experience like a boutique RIA does and offers a broader set of services such as lifestyle management and household staffing.

Deciding What’s Right for You

From a “jobs to be done” perspective, it’s important to prioritize function over features. Function helps you develop an intuitive understanding of trade-offs so you’re more confident navigating the continuum. Features are helpful to the extent they help staying engaged with the core function. 

If DIY is not your style, be thoughtful about the team you put together. Consider the culture of the firm(s) you hire, their experience working with people like you, or alignment on the fundamental value exchange in the relationship. As part of due diligence, we encourage you to learn about the incentive structures and business model of the firm(s) you hire and make sure they always put your interest ahead of their own (not just when convenient). As you get the right team in place, you can be more attuned to what’s next.

Where Upstart Shines

We are world class at our craft but we aren’t right for everyone.

We work best with people who thrive on collaborative relationships and proactive planning. We do not have investment minimums and instead use complexity as a barometer for whether we’re the best fit for a prospective client. Upstart is structured to build long-term win-win relationships, whether that begins when a client is treading water or when they want help innovating. 

Positioned somewhere between the boutique RIA and a Family Office, we serve as our client’s core team for strategizing about money and life. Our service offering reflects what we have learned is most relevant for folks in tech. Beyond the in-house tax return prep, this includes customized investment strategies - like integrating personal ESG values and managing concentrated stock positions - through individualized planning frameworks to navigate meaningful financial transitions from first principles.

A startup mindset helps us remain focused on constantly innovating our service offerings to ensure we scale with our clients and that our clients scale with us. When client needs exceed the scope of our expertise, like writing trust docs or preparing an international tax return, we either partner with other world-class professionals or coordinate directly with service providers that our clients trust and have an existing relationship with. Our understanding of what’s important to clients helps us weave those threads through the entire strategy.

Next Steps

If you're reading this, you are either trying to figure out where you are on the continuum or already know where you are and need to figure out what steps to take next. Our driving mission is to help people get access to the guidance that is right for them, even if we aren’t the right solution. If you aren’t sure what’s best for you feel free to send us an email and we’ll help you narrow your search. Otherwise, please use the Endnote below as a launching point for your journey along The Continuum of Building Wealth at Startups.


*Endnote

Types of firms

  • Accounting/Tax Firms can provide tax return preparation and tax planning services. If tax attorneys are on staff, you can even hire them to write opinions on complex tax situations. If you’re paying for tax return prep only, don’t expect much proactivity. The business models for return prep-only firms is a volume game. Those companies need to compete on cost with H&R Block or TurboTax, so preparers will be working on 500+ returns. Iterative analyses throughout the year will require a retainer.
  • Registered Investment Advisor (RIAs) firms are companies that provide “financial planning”, “investment management”, or “wealth management” services by a team of advisors such as CFP®s, CPAs, and/or CFAs. The function of a firm will vary as will the business models. It ranges from firms that use planning services to sell investment management to firms that are planning first and offer investment management for the convenience of the client. 
  • Boutique RIAs are usually smaller, niche, planning-forward firms that can be a great solution if you need more personalized attention or want a more flexible engagement. They may offer hourly or project-based planning as well as ongoing planning and investment management services.
  • Large RIAs were often established serving retirees/pre-retirees and are now offering broader services to a broader audience at scale. That scale comes with investment management minimums for new clients, but the broader services may not include in-house tax prep. 
  • Wirehouses/Banks primarily serve an investment management and banking function. Planning services are often provided to see which of the bank’s offerings could be suitable for you. CFP®s, CPAs, and CFAs might be found on these teams.
  • Family Offices private firms providing private wealth management to one or several “ultra-high-net-worth” families. The full suite of services can include everything from paying bills to tax preparation, financial planning, and investment management for public and private investment opportunities. 
  • Custodians hold assets for people and entities in accounts created at the custodian. Any firm that provides investment management services will help you open an account(s) at a custodian. The advisory firm will have Limited Power of Attorney privileges that allow them to place trades so that they can provide ongoing investment management . Using registered, third-party custodians ensures that the client’s assets are safely held and always remain under direct control of the client. 

Types of professionals

  • Certified Financial Planner (CFP®): designation for comprehensive financial planning and investment management with experience and examination requirements. 
  • Certified Public Accountant (CPA): designation for tax return preparation and tax analysis with examination requirements. 
  • Chartered Financial Analyst (CFA): designation for investment management with examination requirements. 
  • Enrolled Agent (EA): designation for tax return preparation and tax analysis with examination requirements.

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Upstart Wealth Management has offices in
San Francisco and New York City, serving clients across the country.

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