The liquidity event we are discussing typically happens when you, as a key person of a company, stand to receive a large amount of cash due to a merger, acquisition or IPO of your company. It is a big payday for those in the company with ownership as well as for any private or venture capital investors who have ownership.
Take advantage of the opportunity to assemble a qualified team of professionals, including a wealth advisor, tax specialist and estate attorney. Typically, the wealth advisor is the liaison to assist you with the others. There are important considerations and you should begin planning at least 18-to-24 months before the event. For example, gifting shares before a formal valuation begins could really have a significant impact on your tax and estate situation.
It is an exciting time, but do not count your chickens before they hatch. Sometimes deals fall through at the last minute or the big payday is significantly less than you had expected a few months prior. Have a contingency plan, and do not commit yourself to large purchases before the deal is done. Likewise, do not underestimate the bite that taxes will take out of your payday. You may have founder’s stock, restricted and control stock and stock options. There may be a lock-up period or other restrictions. You may need an estate plan rather quickly.
A windfall opens the door for a whole new set of previously unknown challenges.
How to handle all of this efficiently should be discussed with your team.
Your plans for after the event are critical for determining your future financial needs. Will you continue on with the company for a while, or will you make a quick exit? Will you work elsewhere or start a new venture? Will you stop working for an undetermined time or retire? It is important to have defined goals and to run an analysis on your ability to meet those goals with your intended future plans.
After the event, you may encounter unfamiliar complexities that often accompany significant wealth. You may be faced with having to discuss your success with old friends or even receive requests for financial assistance from distant family members. Your closest relationships may be affected in unexpected ways. You may even find yourself affected in unexpected ways that could be risky. For example, you may find yourself targeted by someone who provokes you into actions that may be cause for a lawsuit against you. You could also be a target for blackmail. When you suddenly have a lot and others know it, you face extraordinary risks.
It is important to understand that a windfall does not eliminate the complexities in life. Rather, it opens the door for a whole new set of previously unknown challenges. With effective planning, and guidance from trusted advisors, you will be better prepared for the challenges ahead for yourself and your family’s future generations.
Marie A. Moore is a Financial Advisor with the Wealth Management division of Morgan Stanley in Dallas, Texas. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC. Member, SIPC. www.sipc.org. Morgan Stanley Financial Advisor(s) engage Worth to feature this profile. Marie A. Moore may only transact business in states where she is registered or excluded or exempted from registration, www.morganstanleyfa.com/themooregroup. Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Marie A. Moore is not registered or excluded or exempt from registration. Morgan Stanley and its Financial Advisors do not provide tax or legal advice. Morgan Stanley Smith Barney LLC offers insurance products in conjunction with its licensed insurance agency affiliates. Individuals should seek advice from an independent tax or legal advisor. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the US.CRC1602966 11/16
This article was originally published in the December 2016/January 2017 issue of Worth.