Roger Ehrenberg

@infoarbitrage

So you’ve exited — now what?

I’ve worked on Wall Street, I’ve been a professional angel investor and now I’m a venture capitalist. Throughout my career I’ve been surrounded by people who are focused on the “exit”. And even if their primary motivation wasn’t the exit, the dynamics of their activities lent themselves to a culmination that was, in substance, an exit. But the fascinating thing I’ve witnessed on many occasions, across an array of bright and successful people who made money a variety of different ways, is that once they’re faced with an exit, they are paralyzed about what to do with their new-found wealth. I suppose this is why brokers scan headlines for M&A and IPO activity, and deluge senior members of the exiting teams with lots and lots and lots of calls (and emails and Fedexes and toys and…) offering their services. The problem is both who to trust, and the feeling that doing nothing isn’t the right thing, so feeling pressured to do something.

My goals for those who have or are about to exit are five-fold:

Stop, breathe and think: there is no rush to do anything.
Focus on getting the 80% right: this is not the time for optimization.
Stay simple, stay cheap.
Only work with those whom you trust either directly or through a trusted referral, and who are aligned with you (no commission-driven brokers).
Get a referral to a great Trusts and Estates attorney, and don’t skimp.

As an investor, I’m always looking for information asymmetry: (1) what do I believe, (2) that my founders believe, (3) that no one else believes, (4) and we’re right and everyone else is wrong. I’ve previously referred to this asymmetry as having “secrets”, and it is a beautiful thing when you and your founders are aligned on these secrets and these secrets unlock multi-billion dollar opportunities. But as a newly rich-and-liquid professional, whose business is not the business of investing money, the information asymmetry is heavily stacked against you. I’ve seen brilliant technologists and businesspeople of different stripes manipulated by far less intelligent people who happen to know the investing lingo and know how to sell. They’ll prey on your ego by making you feel smart, and ingratiate themselves in myriad ways in order to gain your trust. I have three words for those who find themselves speaking to such a person: just say no. It will damage their feelings far less than it will damage your pocketbook.

The most important thing to do at this point is to focus on first principles:

How much money do you need, in cash, to sleep well at night?
Is there something that you absolutely, positively, want to buy with your new-found wealth?
Do you want to commit some amount of money to passion projects and charitable donations?

Everybody has their “number”, but is often hard to discern. It is important to go through an exercise with a friend or trusted advisor who can help you hone in on the answer. But the number should be the amount that if everything else went to zero, you’d be ok because you have this money safe and sound. If you are in a state with high tax rates, a good answer is often a 3–5 year duration high grade municipal bond portfolio, where you’re getting most of the benefits of the slope of the yield curve while still staying fairly short. In english, what this means is achieving the highest yield possible per unit of price risk. The goal of this part of your asset allocation isn’t achieving the highest return, but achieving safety and an acceptable return in a tax-efficient manner. With this, now you can sleep.

Next: you’ve had an exit. Congratulations! For some it is important to mark the moment by paying off long-standing debts. For others it could be buying the car you’ve long wanted but felt was frivolous. Regardless, if there is an amount of money you know you want to spend, that you feel you deserve to spend, and that isn’t stupid relative to your overall take (say not more than 5%), then by all means do it. Separate but related are amounts you’d really like to give to important charities or causes, and now that you have the resources you can write those checks or donate that stock that previously felt irresponsible. But this is something that has some complexity to it, as there are more efficient ways of giving than simply writing a check, e.g., Donor Advised Funds, Charitable Remainder Unit Trusts, etc. etc. etc. But for now, set aside some money for simple check writing, and you can figure out the more structured solutions later.

Now you may well have a bunch of money left. What to do? The first step is to reach out to a few financially successful and sophisticated friends, who perhaps have been in your same situation some years prior, and get referrals to a few great Trusts and Estates attorneys. The good ones will ask you for a ton of information about your personal balance sheet and income statement, push you on your number, ask about your long-term goals in terms of wealth creation, wealth transfer and charitable giving, and offer a recommendation that ties together your will, trusts for children and other loved ones, and long-term giving plans. I’m not talking about offshore accounts or complex (and often risky) tax structuring, I’m talking about straight-down-the-middle-of-the-fairway estate planning that fits neatly within the tax laws but can lead to different decisions on how to gift what assets to whom and when. I won’t belabor the point but the importance of this step cannot be emphasized enough. Too few people think critically about their wills and their estate plans, partly because it feels so far off, and often because it just seems so macabre. My answer to this: too freaking bad. With wealth comes responsibility and obligation, and a “head in the sand” approach will ultimately hurt your loved ones and the causes you hold dear. Because getting caught in probate is no fun. Make a plan, make your intentions clear, and keep these documents updated for major life events and material changes in the tax code.

Once you’ve got your number, you’ve segregated your immediate fun-and-giving money and developed a long-term plan, you can invest the balance of your assets in a diversified set of equity index funds across geographies and market capitalizations. Nothing fancy. Build the initial portfolio over a 12 month period by investing 1/12th in the set mix in each of the accounts you’ve established through the estate planning process. There is no need to rush this. First get the estate plan in place, and then gradually build the equity portfolio for the long-term. Now, if you have particular access to great alternative asset managers (essentially people who run hedge funds and venture funds) or direct investment opportunities (like real estate partnerships or portfolios of assets run by family offices), take perhaps up to 10% of this money and slowly build a portfolio of alternative investments, but only if you truly have special access and enjoy managing these kinds of investments. If not, forget it. Life is too short, and this likely isn’t the highest and best use of your time, energy and money.

If this all seems overwhelming, it’s only because it’s new to you. And remember, it’s a luxurious problem to have, because if any of this resonates with you it’s because you’ve done something amazing. Take the time to let it sink in, the enormity of what you’ve accomplished. But once that’s done, it’s time to take a sober look of how you’re going to use that wealth for good, without getting your face ripped off in the process. If you follow this basic road-map, you are almost assured of creating a simple, straightforward financial life that will work for you over the long run.

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