The Great CEO within
If your company truly succeeds, you will likely find yourself equity rich but still cash poor. It is important to create liquidity and diversify out of your company’s stock. The general rule of thumb is that you should have no more than 25% of your net worth in “alternative assets” (illiquid assets). Because your company’s equity is likely the majority of your net worth, your net worth is likely >95% alternative assets. It will be close to impossible to sell 75% of your stake in your company. Instead know that there are two absolute numbers that are significant: $10 million and $100 million.
Alternative assets, also known as illiquid assets, refer to any assets that are not easily tradable in the market and have limited liquidity. These assets often have a low correlation with traditional investments such as stocks, bonds, and cash, and may include investments such as private equity, real estate, commodities, hedge funds, and infrastructure.
Most people at $10 million of liquid net worth have the feeling of safety. They breathe a sigh of relief. They are no longer at risk. However, once they sit with that number for a while (and start to raise a family), their mind begins to play through disaster scenarios of how that net worth could disappear completely. Once their liquid net worth grows past $100 million, the catastrophe scenarios dry up, and a sense of abundance follows. This is what you are driving for.
Reality is that $10 million is more than enough to live a wonderful life. But give the mind what it wants. After $100 million, each additional dollar will likely not add in any way to your life, but may well create a burden (if you buy assets that need to be maintained and supervised).
Therefore, as soon as your company’s equity begins to have significant value begin to sell to secondary share buyers until you have sold $10-100 million.
The next question becomes: Where do I put the $10-100 million?
You have 3 choices:
Commercial banks will hold your money and then lend it out to others. The bank gets all of the upside of these loans and your bear all of the risk. If the economy tanks and the loans go bad en masse, then the bank fails and (barring a federal intervention) all of your assets go to pay off the creditors of the bank itself. Holding your money in commercial bank is a terrible idea.
Investment banks are similar to commercial banks in that they will use your money to generate profits on their own account. The only difference is that investment banks are not restricted to loans. They can make any kind of bet or investment with your assets. The bank receives all of the upside, while you bear all of the risk. Again, a terrible idea to hold your money at an investment bank.
Finally, there are brokerage firms (ie- Schwab, Fidelity). These firms do not make loans or investments on their own account. Whatever assets you place at a brokerage firm remain in your name, are only invested in the way that you direct, and you remain the sole beneficiary. That being said, a brokerage firm is still a business and can go bankrupt if its expenses exceed its revenues for a long period of time (though this is much less likely than at a bank that is almost sure to go bankrupt in a sharp economic downturn). In that case, your assets do get tied up in bankruptcy court, with one exception: US Treasuries. US Treasuries are never held in custody. They are always held for the beneficial owner. If the brokerage firm were to go bankrupt, your US Treasury certificates would be sent directly to you, and not held by the bankruptcy court.
So, start by placing your liquid assets in a brokerage firm. Then invest all of the cash into US Treasuries while you decide on your investment strategy.
Now that the money is in a safe place, how do I invest it?