A small army of Facebook employees and early investors will wake up Friday morning with increased clarity about the magnitude of their substantially higher net worth. With this wealth comes tremendous opportunity. And potential pitfalls as well. Sudden windfalls aren’t ever to be confused with permanent.
And the reality is many of the same core financial principles apply whether you’re handling a $200,000 401(k) or $20 million in stock options. Here are some bedrock principles to put all this good fortune on the right path:
Diversify (Part 1)
Yes, you rock. And so too does Facebook. Now that we’ve established those facts, your first job is to devise a long-term strategy to put your money to work. If you have options as well as RSUs, this means selling most of your Facebook stock. Yep, sell. Sound absurd? Just ask Cisco and Yahoo employees from 1999 if they’d love a do-over for how they handled their options back then. (For the record, both stocks still trade about 80 percent below their all-time highs.) Sure, Facebook might go the way of Apple, but the stock’s direction is close to a coin toss. The stakes are about to go up significantly. Diversify.
Diversify (Part 2)
Silicon Valley rocks also. Now that we’ve established that fact, hopefully we can also agree that a portfolio that is solely riding on tech in its many forms (say, Facebook stock, maybe some AAPL and GOOG as well and a slug of money for startups you’ve got your eye on, or want to launch yourself) isn’t exactly diversified. You’re still essentially making one massive sector bet. Speaking of hedge funds, private equity, and VC investments, realize that most are losers. A few million bucks just doesn’t buy you access to the good stuff that the premier VC firms invest in. Create a strong bias against the temptation of investing in your friend’s business idea or sports bar.
Build a Smart Advisory Team
Your first investment should be in taking the time to pull together a team of pros to help you make the most of your money. An investment adviser is your go-to pro for how to diversify smartly. Don’t confuse a commission-based stock broker for an acceptable investment advisor. Find someone fee based, who puts your interests first. Adding a CPA to your mix is a must-have. Given the complexity in our tax code, it’s not what you have on paper that matters, but what you get to keep after settling all your tax bills.
And let’s be clear: Every move you make from here on out has rather hefty tax implications. In addition to what the IRS will come calling for, there’s also the not-so-small matter of California’s tax hit as well. It may also be worth sitting down with an estate-planning attorney. It might seem a tad creepy to ponder when you’re just in your 20s or 30s; especially if you’ve yet to start a family, but having a will is a must. It may make sense to address other estate planning areas as well.
The value of a team of advisers isn’t simply to tell you what to do today. It’s what they can provide months and years from now, as new opportunities, new situations and new goals materialize. The pros offer not just their subject expertise but are also a valuable sounding board.
You’ve got friends and family for that? Well, sure. But the very nature of personal relationships can cloud your judgment. Besides, what can make absolute sense for your friend or uncle, doesn’t automatically make sense for you. In addition to advisors, don’t forget to strengthen relationships with people you currently work with who you admire. For those at Facebook, the next year will be the most important networking opportunity of your life. The most successful Silicon Valley Web 2.0 companies are led by people who formed relationships a decade ago. What you do for the next twenty years will likely be determined by your ties with current coworkers.
Keep Your Friends Close
For many new millionaires the big gain from the Facebook IPO is having the freedom to follow dreams. If that means branching off to follow an entrepreneurial itch or spend some time giving back in a distant land, just make sure you stay connected to your friends, family, and valued colleagues. Money can’t buy you treasured relationships, after all.
The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.
Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.