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Work at a Startup? Here's How to Plan Your Finances

Do you work for a startup like GrubHubGroupon, Shiftgig, or SpotHero? Whether you are a founder, an early employee, or just coming on board to a young firm like one of these, there are unique financial planning considerations for anyone working at a startup.

While the fundamentals of financial planning are essentially the same for most employees wherever they work, staff at a startup are taking on more risk with their career and financial future, although they may be doing so for a much greater reward. Those working for an established company tend to be more risk averse and like the ideas of steady paychecks, paid vacations every year and a predefined corporate ladder to climb. While that's not to say that one path is better than the other, there are different planning considerations for each.

Here are some points that founders and employees of startups should be thinking about in regards to their personal financial planning. (For related reading, see: Sudden Wealth: How to Handle a Cash Influx.)

Plan for Today 

Working for a startup means taking on additional risk. You may not have a job tomorrow. You may be working for a fraction of what you are worth. You probably won’t have many, if any, traditional company perks. You probably won’t have a retirement plan, etc. These sacrifices are actually planning opportunities. You should save for an emergency or be ready to wake up to not having a job. You should set up an IRA for yourself to start saving for retirement. And you may want to consider personally owning insurance—like life, disability, etc.—so you can take it with you if or when you leave your job. 

Also, try to keep your personal overhead as low as possible so you can focus on helping your startup grow while not fretting about paying your own bills.

Think About Tomorrow

The additional risk of working at a startup also means potentially more reward. This reward typically comes in the form of equity (like stock or stock options) in the company you are working for. This paper wealth can be very attractive and potentially lucrative, but how and when can you convert it to actual dollars? Having a plan for this conversion (liquidity event) of paper to tangible wealth is very important. Here are some points to consider.

  • How and when are you vested in the stock?
  • Will there be a holding period before you can sell it if the company goes public?
  • How much should you sell or keep when you are able to sell it?
  • What happens to your job and stock if the company is acquired, goes public, or goes bust?

A good example is Facebook. The founders and many employees became millionaires overnight when the firm went public. When Facebook had its IPO, everyone was restricted (in a lock-up period) from selling their stock for six months. When this period expired, you could sell all or some of your stock. Everyone’s situation is different, but think about it. Those that sold right away made a lot of money, but those that kept some or all of their shares would be worth significantly more today.

What does one do in a situation like this? There are a lot of variables, but the most important consideration should be what you want your money to do for you. Really thinking this through before you have the money in your bank account is crucial to having a solid plan for the future. (For related reading about retirement planning, see: Should You Roll Over Your Old 401(k)?

Build a Team Before You Need It

While in the throes of building a startup, it is normal to think of little else than the company. Yet I have found that having a plan and a financial planning team is very important. It is like putting together the architectural plans, lining up the builders and sourcing the supplies for building a house. Although you just really want to build a house, there is a lot of work that needs to be done before you can actually break ground. Having the right team in place before you need them will make your life a lot easier!

Surround yourself with professionals who are familiar with startups. Interview professionals like the following to build your team: an estate planning attorney, a CFP, a CPA/tax professional, and a P&C insurance agent. Although their credentials and experience are very important, it is more important that you like and get along with these people first and foremost. If you don’t, then it will be almost impossible to work with them, no matter how smart they are.

Also, focus on working with professionals who use a process instead of just trying to sell you a product or service. These are potentially long-term relationships, so make sure they start off on the right foot.

Have Fun

The process of planning, thinking about, and preparing for the future can get a little boring. I think it is safe to say we all want to be set for the future, but most of us want to enjoy life and live today, too! It has been my experience that once you have done the initial legwork of building a plan for the future, it actually frees your mind from worry and stress, allowing you to enjoy living in the moment.

When going through the planning process, make it a priority to inform your team what you like to do when not working so they can help you plan for enjoying anything and everything you would like to do. Make the planning process fun; be creative and think about how spending money can make you and others happy. A great book to read while going through this planning process is Happy Money—it talks about the science of happier spending. (For related reading, see: The Importance of Finding Your Financial Literacy.)

Where to Start

Take a deep breath and trust in the process. Take it one step at a time. I encourage clients to think deeply about what is truly important to them—what is the most important thing they want their money to do for them? Once you start to crystallize this, it will make the rest of the planning process simple. By backing in to what you want to accomplish, designing and implementing your financial plan can and should be fun and liberating.

My experience working with startups has taught me that the best professional relationships are ones that start off with a casual conversation to see if you get along with each other. Once you establish trust and rapport, the rest of the planning process is actually very simple. (For related reading, see: Why Flying and Working With Advisors Are Similar.