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A Guide to Wealth Management for Startup Founders

Posted by Early Growth

July 10, 2014    |     6-minute read (1091 words)

One thing that’s probably not occupying much mind space as you’re building your company is managing your personal assets. Too often, entrepreneurs neglect planning for and managing personal finances as they focus on building their business, lining up financing, and steering toward an eventual liquidity event. But it’s not too early to start thinking about your options and doing some advance strategizing. Darin Donovan, Shareholder at Hopkins & Carley, and Glenn McCrae, EGFS’ Strategy Officer, shared ways to tackle this during a recent webinar. Read my take below and get the download here

Personal planning issues tend to fall into these 3 areas:

  • Financial investment

    - Diversifying a concentrated position, whether in the form of founder’s stock, stock options (ISOs) or restricted stock (RSUs).
  • Complex income tax planning needs

    - Deferring income tax and converting assets subject to the maximum federal income tax rate of 40% to ones that qualify for the much lower capital gains tax rate of 20%.
  • Wealth transfer opportunities

    - Transferring assets in the most tax efficient manner while positioning yourself to still benefit from gains post transfer.
Gifting, once you’ve squared away your own net worth, can be a really tax efficient way to hit all three of these areas. And transferring assets before a liquidity event can make gifting more tax effective than transferring the same ones afterward. It works especially well for managing private company stock and other forms of equity compensation.

Gifts are subject to a maximum lifetime tax-free exclusion of $5.34 million (indexed for inflation). There is also a $14,000 annual gift tax exclusion, meaning that donors can receive up to those amounts tax free. But there are important exceptions:

  • Spouses — There’s an unlimited deduction on transfers for U.S. citizens. Gifts to spouses who aren’t U.S. citizens are subject to a limit of $145,000 on annual deductions.
  • Donations/gifts — Direct payments for medical or tuition expenses are excluded from annual gift tax limits.
  • Stock grant — If done for estate planning purposes, there are usually exemptions from restrictions.
You really need to understand the nature of and restrictions on the assets you have. For example, gifting ISOs will disqualify associated income tax benefits, while transferring unvested options could lead to income tax problems.

You’re also required to file a gift tax return declaring the fair market value for gifts that exceed the annual tax-free limits. If you’re gifting private stock though, you may want to file even if you don’t hit the annual limit in order to avoid later IRS challenges on valuation.

Bottom line: make sure you keep all the documentation related to your gifts.

What are your options for gifting? There are several, ranging from pretty straightforward to more complex.

Transferring shares:

    • Outright — These are best for passing wealth on to siblings, partners, and children over 18 (assuming your plan allows them).
    • Custodial accounts — For transfers to children (with assets held for their benefit).
    • Irrevocable trusts — Use for children, grandchildren, future children, and other beneficiaries who lack the capability to manage finances. Bonus: if you’re single, you can create trusts for the benefit of your planned future children.
Trusts are legal entities consisting of a creator, a trustee (you need to give away enough rights for the trust to qualify as not under your ownership), and beneficiaries that hold and manage assets until they’re ready for distribution. They are really common in Silicon Valley. But be careful: it’s difficult, time-consuming, and expensive to change the terms of distributions once trusts are set up.

Some more sophisticated ways to transfer assets and avoid the federal transfer tax:

Grantor Retained Annuity Trusts — Allow you to transfer the anticipated future appreciation of your shares to beneficiaries you choose. They also drastically minimize the risk of an IRS valuation challenge by creating a trust funded with private company stock. In return, you retain the right to an annuity for the trust’s full value.

Defective Grantor Trusts — Allow you to transfer assets without incurring an immediate income tax liability by taking your proceeds in the form of a low interest promissory note. The catch: you’re still on the hook for paying taxes at some point. Why would you want to do this? Your beneficiary could inherit without having to pay taxes on your gift.

Charitable Remainder Trusts (CRTs) — Allow you to diversify your stock holdings while deferring income tax liability. By exchanging public shares for a lifetime annuity, you can transfer assets into non taxable vehicles with income tax recognized only as you receive distributions. And CRTs qualify for an income tax deduction of a minimum 10% of assets.

Lead Trusts — Allow you to fund and diversify assets just as CRTs do. The catch: distributions have to go to charities.

Family Limited Partnerships & LLCs — Allow you to keep some ongoing control over the management of your assets.

But of course, there’s no free lunch. Transfers come with two flavors of risk and potential complications:

Tax driven

— The main one is an IRS challenge to your valuation. You can minimize that by:
  • Using valuations that are specific to the assets gifted (depending on the situation, this could be your 409A valuation. You could also commission one specifically for transfer purposes, or go with your funding valuation).
  • Filing gift tax forms. The IRS has 3 years to challenge your valuation. It might be worth filing even if you’re not expressly required to, because it starts the clock running on any potential challenges.


  • Make sure you take care of your own security before concentrating on managing excess wealth.

  • You can see, it gets pretty complicated. And you’ll need good advice to get it right. But some planning and the right professional assistance will help make sure you reap more of the rewards of a liquidity event.

    Want to get started with succession planning? Tell us about it in the comments section below or contact Early Growth Financial Services for a 409a valuation or other financial support. David Ehrenberg is the founder and CEO of Early Growth Financial Services, an outsourced financial services firm that provides small to mid-sized companies with day-to-day accounting, strategic finance, CFO, tax, and valuation services and support. He’s a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.
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