Entrepreneurs who have a liquidity event are often like lottery winners. They are not well equipped to know how to manage the money especially if they are not from a wealthy family and have always lived a more normal/middle class lifestyle. They can end up being too conservative or take too much risks and the worst part is that they may not even be aware of it. Entrepreneurs also have an added problem of usually having a big ego, always optimistic and wanting to make all the decisions ourselves which is a good recipe for investment failure.
I am writing this article so share some learning experiences which i had over the years. Both from reading, own experience and from others. Please feel free to comment and add experiences.
1) Don’t touch bulk of the money for the next 6-12 months
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Say you suddenly now have X million in the bank after a trade sale. There is a further prospect of another Y million over the next 2-3 years. You feel rich and super liberated. At the same time, everyone seems to expect you to give back and to start showing the moolah.
I would suggest to just do nothing major with the money. Put 90% of it in FD or a 6 mth super safe bond. Let yourself and your family get used to your new found wealth. By all means, go for nice $$$$ dinner, buy a cartier ring or hermes bag for your loved ones. Or take a 5 star vacation with the family for once. But don’t spend anything more than 1% max 2% of your new net worth on these extravagant purchases. For Singapore, it means don’t go buy a sports car that costs $500K right away unless you have $25M or more.
Note i don’t mean that we should not buy the sports car unless we have 25M or more. What I mean is that we should let the money sink in and let our brains adjust first. Then if 1-2 years later, you still think that 500K sports car or 100K luxury watch is worth buying, then go get it!
After 6-12 months is up, if you have been doing your homework below, you will have an idea how to invest or work it. Your sense of value will also have adjusted and you will be less prone to impulse buys or dumb financial decisions.
2) Admit you are not a financial planning expert
Entrepreneurs do well because we are experts in our own micro area. Whether it is software, internet, manufacturing, F&B etc. We need to admit we are not experts in the field of financial planning and portfolio management. So get a private banker(s) to help you.
Most private banks will let you open an account with min US$1M USD and especially if you show you have more to come or with other banks. Be discerning, there are private client solutions out there which is a sandwich tier between Priority Banking and Private Banking. Not so good because their fees tend to be higher. Go for the actual private banks and if possible get a referral so you start with a good relationship manager.
Apply your same determination to build your business to understanding the world of personal finance. Be patient and take the time to learn from others. For starters, learn indepth about the following terms :
Fixed income, equities, interest rates, private equity, hedge funds, portfolio allocation, rebalancing, yield, ROI, options, structured notes, dividends, commodities, gold, property, leverage, inflation.
3) Set Goals for the Money
Now that you have a lump sum, you need to decide what goals you have for it. Is it to preserve and grow this capital? Is it to take high risks with it? This topic is frequently tied up to the actual number you require for financial freedom. For most living standards in SG, it is about S$3-5M range that will allow for retirement in your 40s to 50s. For people who live it up more, even $10M is not enough – skies the limit.
A good advice i got from a tech “qianbei” (older expert) is to build a stable property/bond/equity portfolio that generates cash flow that pays for all annual expenses. So if you spend $360K a year, then at 4% inflation adjusted real returns, this portfolio needs to be about S$9M excluding your residence. The extra money above this 9M can then be used for starting a new business or investing in startups etc.
One word about investing in startups. Be very careful and be prepared to lose all the money. A wise man told me before to spend not more than 10% of your net worth in such investments. Also, for this 10%, spread it out into 50K angel sizes and make sure you can invest in at least 10? Otherwise no diversification. If you can spare less than 500K, i think it makes more sense to be an investor with a venture fund. I know readers may disagree on this. Feel free to comment and share.
4) Be aware of vastly higher mountains, maintain humility, give generously
Don’t let money change you. We are still the same people. We just have more responsibility since we are lucky enough to have exited our businesses. Continue to be useful to your family and people around, continue to learn and be generous. One method that has worked very well for me is to interact with people who are both a lot more successful and a lot less successful in terms of wealth or career. Listening to the both groups share their experiences and perspective and observing keeps me grounded.
We can’t take our money with us. So give generously annually if you can. Many people lose out on the genetic/life lottery which you won. So give back to society and worthy causes in a sustainable way.
5) Spend within your means!
Be careful not to be seduced by the ever upward spiraling lifestyle which one segment of society espouses. If you are below 35 and have self-made millions, there is a tendency to think believe you can duplicate it again and be overconfident in your next venture or investments. There is also a possibility you may upgrade your lifestyle to beyond your income and wealth. Note, i am not advocating to be stingy, upgrade your lifestyle by all means just don’t go above it. A good rule of thumb is that you should aim for total spending <70% of total income per year.
You did not get to exit your business without brains, so apply it to model carefully what you can or cannot afford, use it to plan out your investment plans and act on it.