Business, professional & real estate | Five smart moves startup employees should make

Whether you’re a recent college graduate working at your first startup or a seasoned executive, windows exist early on in the life of a company to make decisions that can affect your net worth in a big way. After an IPO, acquisition or merger, new and surprising challenges appear. Having insight about what lies ahead is crucial for making good decisions.

Here are five smart financial moves everyone working in a startup can make now.

1. Project your personal cash flow

If you’re working in an early stage startup, your salary is probably below market. If you’re eating Top Ramen, sharing a flat and are otherwise focused on keeping costs down, prepare a personal cash flow projection for at least two years to understand the commitment you are making.

2. Consider early exercising of stock options

If your company allows it, consider making an 83(b) election on unvested stock options or restricted stock. This is an important planning tool that many startup employees don’t learn about until it’s too late. If the cost to exercise your options and the “spread” between the option price and fair market value is low, determine how much cash you’ll need for both the exercise and the tax bill.

3. Don’t spend money you don’t have

Even if you’re sure a deal is about to happen, it’s risky to spend until it actually does. So many things can go astray at the 11th hour. Even after the event, if you’re restricted from selling stock for a period of time, it’s best to vest in peace rather than spend in haste. Paper wealth is not the same as money in the bank, and with all the uncertainties leading up to a deal and after, it’s especially important not to overspend. Wait until after you have real cash to buy a new car or home.

The water coolers and watering holes of Silicon Valley are filled with tales of companies that went public with insane valuations and made the founders and executives worth a lot of money — on paper. They borrowed against their shares and bought huge houses; when they finally sold stock it was worth a fraction of the IPO value. Many lost their homes and wound up living off the kindness of friends and family. Don’t go down that road.

4. Diversify away from a concentrated position

If you get lucky with your startup, take at least some of your profits off the table, so you have something to show for your hard work. It can be hard to contemplate the downside and diversify out of your own company stock if it’s rising. Setting price targets and time triggers allows you to have a rational plan.

A decision tree analysis can provide a quantitative, rational perspective on when and how much stock to sell, and is ideal for analytical types who hold in-the-money options or a concentrated stock position. This sensible approach to assessing the probability of each outcome is an eye-opening way to determine the best course of action.

Why sell? It’s impossible to predict the market high for your company stock, and technology quickly can become obsolete.

5. Protect your wealth with a 10b5-1 plan

If you’re considered an “insider” working in a publicly traded company, establishing a 10b5-1 plan with your employer is a great idea. The plan allows you to sell a predetermined number of shares on a set schedule and effectively avoids insider-trading restrictions. Having a 10b5-1 plan will keep you in compliance of the law while minimizing your risk of concentration in your company stock. It also enables you to be disciplined, rather than reactive, emotional or helpless when the stock price changes. (And it will.)

Joyce L. Franklin, CPA, CFP®, is the founder of JLFranklin Wealth Planning in Larkspur and San Francisco. This article is adapted from her book “Life, Liquidity & the Pursuit of Happiness: How to Maximize and Preserve Your Startup Wealth and Live Your Dreams.”