There are many ways for entrepreneurs and executives to generate liquidity from the high-growth businesses they have built, such as:
- Recapitalization through venture funding or private equity investment
- Selling the business
- Selling private shares on secondary markets
Each of these transactions raises its own set of questions. We believe the biggest question you face is: Are you ready? On the surface, this might seem simple. Of course, you are. You are ready to generate some cash and unlock the wealth you have worked so hard to build. But it can be more complicated than that.
Having guided many startup entrepreneurs and executives through these events, William Blair has identified the most important considerations to determine whether you are ready for a liquidity event. These questions generally fall into two categories: personal and financial. Here, we start with the personal questions to consider before entering a liquidity event.
Do You Have the Right Foundation in Place?
Many executives at high-growth companies think about their wealth from a long-term perspective for the first time and have not yet established some of the basics of a solid financial plan. From budgeting for cash flows and estate planning to tax-advantaged retirement accounts and insurance and risk management, there is plenty to consider when it comes to personal wealth.
As you raise capital and generate liquidity, your financial life will get more complicated. You need to have a team of trusted advisors in place to help you navigate these complex decisions, including an accountant, estate planning attorney, investment banker, and insurance and wealth advisors. You also need to ensure you have someone to coordinate the team and make sure all the pieces are working together in unison. Often, a wealth advisor is in the best position to take on this role.
What Are You Looking to Accomplish With Your Wealth?
First, identify your short-term and long-term wealth goals and quantify what you will need to accomplish those. From there, you can differentiate between core and excess wealth, and think about new opportunities.
Often, high-net-worth individuals identify four high-level areas for the distribution of their wealth: taxes, core wealth (lifetime spending), a wealth transfer, and philanthropy. But for startup executives, there is often a fifth category: funding the next venture.
This next venture could be starting another company, becoming an angel or venture investor, or establishing a non-profit or foundation that looks to drive social change. Regardless of what that next chapter looks like, the more planning you do on the front end, the more opportunities you will have in the future.
Do You Have Realistic Expectations?
Having realistic expectations about how much your equity is worth is critically important to making the most out of your opportunities. One of the biggest problems plaguing executives at private, high-growth companies is unrealistic expectations.
Some executives assume that the most optimistic projections of the company's growth will naturally come to fruition and result in sky-high valuations that will be easy for them to monetize. Others take the opposite approach and believe that projections about the company's growth and valuation are not of value.
Making good decisions requires an honest, realistic, accurate, and data-driven assessment; and understanding your personal risk tolerance and risk capacity is an important part of this assessment. This is where scenario planning can be helpful.
How Will You Maintain Your Identity After the Transaction?
Selling a large portion of equity in a company that you have helped build can be difficult. Beyond the fear of giving up financial participation in the company's continued growth and some level of control in how the business is managed, entrepreneurs and executives often struggle with the prospect of losing something that has defined their identity and fueled their passion for years.
It is important to realize that these feelings are normal and understand that change is a natural part of life. When major life changes occur, it takes time to work through them; you do not need to have all the answers about what your next phase will look like right away. Stay focused on your long-term goals and give yourself time and space to work through the transition.
Are You Prepared to Deal With the Pressure That Comes With Your Next Level of Wealth?
Achieving a new level of wealth opens new opportunities and subjects you to new levels of visibility and scrutiny. Many executives are surprised by how much active interest they receive once news of the liquidity event becomes public. Wealth will also bring heightened visibility and make you a bigger target, so make sure that you do a security and insurance assessment to protect you, your family, and your assets.
You will want to have your long-term plan and trusted team in place before these opportunities arise. This allows you to be proactive and intentional, rather than reactive, in how you assess these opportunities.
After the liquidity event occurs, your wealth goes from theoretical to tangible. In the case of selling a company, you transition from having a steady income to relying on your portfolio to generate a paycheck; this requires adopting a new mindset, managing your expectations about market fluctuations, and remaining focused on your long-term goals.
Now that you know what to think about from a personal perspective, find out what financial questions to consider.