A listener asked the following question:
"My company just went through an IPO.
I have been working for a large technology company for the past 7 years. I am 34 years old, single, and find myself in an entirely new situation. My stock is now worth over $4m dollars and I have no idea what exactly I should do next! How do I think about this new wealth? Do I sell some of my stock or all of it? What else should I be thinking about? I’m still working at the same company but might leave soon to explore other opportunities or take some time off work.
Any suggestions or advice would be so helpful. Thanks!"
Listen in as Julie and I discuss how to think about a windfall, including:
- Congratulations! It takes a lot of hard work, sacrifice, and some luck.
- How do you navigate friends and family as you're suddenly a multimillionaire? Emotions are real.
- How to think about $4m in a single stock portfolio.
- How to handle taxes?
- What do you really want to do and who do you really want to be?
- Have a plan.
Mike: [00:00:00] Welcome to financial planning for entrepreneurs and tech professionals. I'm your host, Mike Morton, a chartered financial counselor, and financial advisor. And today we're launching into a listener question Q and A session with my great friend, Julie. Julie, welcome to the show.
Julie: [00:00:21] Thanks. Thanks for having me.
Mike: [00:00:23] All right. So we have got, a listener question for today that we wanted to cover.
And if you have questions or comments, love to hear from you, you can reach us at email@example.com. That's firstname.lastname@example.org. And we'd love to hear from people who are listening to show questions, comments, and try to cover them here. So today, Julie, why don't you read off our listener question and we'll have a great conversation trying to see if we can provide some insights,
Julie: [00:00:51] All right. Sounds good. I love this question because it's a positive one.
Mike: [00:00:56] right?
Julie: [00:00:56] nice to get some good news,
Mike: [00:00:58] That's right.
Julie: [00:00:59] we've got a listener who Wrote to us because their company just went through an IPO. He says I've been working for a large tech company for the past seven years.
I'm 34 years old, single and find myself in an entirely new situation. My stock is now worth over $4 million and I have no idea what I should do next. How do I think about this new wealth? Do I sell some of my stock or all of it? What else should I be thinking about? I'm still working at the same company, but might leave soon to explore other opportunities or take some time off work.
Any suggestions or advice would be so helpful. Thanks.
Mike: [00:01:32] wow. That is a great question. And congratulations, great situation to be in now, before we start off, I have to put in a little disclaimer, this podcast is not financial advice, seek out professionals but we will attempt to provide insights and things that we could think about for this listener in this situation.
So an IPO working at a company for, he said seven years, working hard at a technology company is a massive effort. And I don't want to gloss over that. It's so easy to skip to the conclusion where we see the glossy photos, right on Instagram or social media and say, wow, look at what I've accomplished or something like that.
And we never see the work that's put in. I always think of the Olympics and we see the races and the gold medals and the final performance, and it skips over four years of work day in and day out. All that grunt work of trying to hone your craft and put in that hard effort. So congratulations on putting in seven years of work that might not have paid off, you never know these situations.
So that's just really great. I'm super, super excited for you. And it is a brand new situation, right? Julie, where you've gone from working hard in an unknown situation where it could Peter out your company goes through a hype curve, hires, aggressively doing lots of fun stuff. And for whatever reason, not due to lack of hard work, just doesn't work out, and you move on to a new company.
They flame out all the time. But then sometimes we get lucky and end up with an IPO or in this kind of situation where, wow, it's all new. I was working hard making, probably making some good money working in large tech company for awhile, but now all of a sudden having $4 million in the bank, you could find yourself in an entirely new situation.
Julie: [00:03:27] Yeah. And to your point major props because being a half of an entrepreneurial team myself I can tell you that the amount of hours blood, sweat, tears, time, everything is intense. Kudos.
Mike: [00:03:44] Yeah.
Julie: [00:03:44] they pay out.
Mike: [00:03:45] . Yeah. That's fantastic. Now, depending on this, person's where they're coming from. It could feel very awkward too, because it, depending on what your friends and family situation was growing up and through your twenties, some person said in mid thirties now, I think and now suddenly having $4 million and your friends and family might not know exactly that, but they know you're working at this company.
They know what's gone public. And so you could have a lot of people knocking at the door, quote, unquote and really be in some awkward situations or. It might be that you grew up upper middle class or, whatever it is and people are just congratulating you and you're moving on.
, you know, I can't speak to that too much, but I just , did want to highlight that there's a lot to navigate there and think about depending on how your family and friend and financial situation of those around you could impact the way you think about this new wealth and how , you're interacting with all those relationships.
Julie: [00:04:38] Yeah, and definitely seeking out some advice is always a really good idea because $4 million might seem like a ton of money in the moment, but you'd be surprised how quickly people can go through it irresponsibly or accidently
Mike: [00:04:52] Yep.
Julie: [00:04:52] for that matter,
Mike: [00:04:53] correct. Correct. And all the feelings and everything that come around it again, depending on how you've grown up and where your situation is currently. But let's get to a couple of nuts and bolts. Obviously a big elephant in the room is you've got $4 million, all of a sudden. In a brokerage account you've amassed stock options or restricted stock units or whatever it was.
And now you have stock and it's gone public. And so it's sitting in some account that might be trading windows and other things, but essentially you've got $4 million amassed one stock. Now I'm assuming also that this is a vast majority of this person's wealth. They probably , been making a pretty decent salary, but depending where they are living expenses can be very high where these tech companies are located.
So I'm assuming this is just a vast majority of newfound wealth. So I wanted to speak to that and the question, he was asking, should I sell some, should I sell all still working there? So how do you think about navigating still working for a company and feeling good about its prospects and where it's going?
So at the one end, I would say it's very good to diversify out of a single stock position. Into a massive diversified portfolio across U S international and large and small and everything. And I'm going to tell you the reasons why that is. But let me talk a little bit about getting rich versus staying wealthy.
And I've spoken about this and written about this in the past. And there are two different mindsets. This person has just gone through a situation where they got really rich. They got really wealthy all at once. A lot of hard work on the backend seven years worth, but then all of a sudden, Oh my gosh, I'm in this situation where I got really rich all at once.
, there's a number of ways that can happen. It's the entrepreneurial and the gold mining where people would try to strike it rich, he'd go out pan for gold and you either make it. And all of a sudden you're super wealthy or you spend all the savings you had and you try to pan for gold for a year and you got nothing left.
It's just kind of one way or the other, getting rich is about being risky and going all in. You can go to the Vegas and try to double down, double your money. Or, other ways of trying to strike it riches by taking risks, being in a single stock is another way of doing that betting on one company and saying, ah, I really believe in this and watching it go straight up.
And obviously right, Julie, we've seen that happen over the last 12 months with certain stocks. We talked about that last time.
Julie: [00:07:21] Yep.
Mike: [00:07:22] Yeah.
Julie: [00:07:23] But you bring up an interesting point by making the comparison to Vegas in that one of my questions that this person didn't address, but I think is really important is when you think about getting a large massive wealth all at once, I always think of the tax. side of that. And so for instance, when, I had an aunt once who won $10,000 on a scratch ticket.
Right. But she really only got $4,000 out of it.
so when When you think about a $4 million stock payout, Whoa, does that really mean he's only going to get one or so I'd love to hear the answer to that too.
Mike: [00:07:58] Yeah, absolutely. . Let's jump over that right now. You're definitely going to be paying taxes. So this is capital gains. So you have stock, which is an asset. And so we're going to pay capital gains taxes on that. And depending on if it's a short or long-term holding period, then you'll either pay ordinary tax rates or long-term capital gains.
So anywhere between 15% at the low end to 25 or 30% at the high end is what you're going to pay on the 4 million. So it's a really good point that if you look in your brokerage account and $4 million think of that maybe as 3 million. Okay. That's 25%. It might not be that high. It could be long-term capital gains at 15 or 20%.
But anyway, that's just a good way of thinking about it and you're absolutely right. You're going to pay a lot of taxes. Now, my answer to that is don't let the tail wag the dog. All right. You're going to have to eat the taxes at some point. And there's pros and cons, but that's not the major thing to be thinking about.
So think about the dog first and not the tail. And here's the dog. You've got $4 million in one stock, and we feel good about that stock. He's worked there for seven years. He knows the business inside now. , it's going to go to the moon. I This thing is still growing. It's still doing great.
That's fantastic. Okay. And so you can leave all 4 million in there and hopefully it does well. If it does well, great. Maybe it goes to 8 million. That's out, man. It's incredible. What if it doesn't do well for no fault of your own, the economy, the marketplace, who knows? And it drops by 50%, which happens all the time.
These large companies that have gone up for the past year, we're recording this March 2021. Some of them just dropped 20, 30%. Boom. Where as the stock market has gone down 2%, two and a half percent. So your single holding could go down 30% in two weeks for whatever reason, and then it could continue going down.
Julie: [00:09:58] As Easter purchase that the old adage of don't put all your eggs in one basket, right?
Mike: [00:10:03] There you go. So let's talk about that. So I do believe it's worth diversifying to some extent, taking the tax hit and getting out of a single holding just for that reason. Here's another way of thinking about it. We just said, Oh, could double from 4 million to 8 million.
Okay. , how much is that going to change your outlook and what you're really interested in doing them pretty significantly, but you've already just got 4 billion. Okay. That already, had maybe the biggest impact. What if it goes down to 2 million or 1 million from here? How would that feel?
Would that really change your outlook? So in other words, can you lock in these gains and keep them steadily moving forward rather than the rollercoaster? So back to the getting rich versus staying rich, we had the first part of the conversation. How do you get rich?
You go all in you work seven years at a startup company that eventually goes IPO. You had some luck, you had some hard work, you took a risk, and it paid off. Awesome. To stay wealthy, completely different mindset. You want to diversify across every single asset class there is stay invested for the long haul and year in and year out
you'll be rewarded with some gains, 5%, 10%, great. Maybe it goes down a little bit one year and then up a little bit the next year. But over time it will continue to chug along, up into the right, as long as capitalism still continues. And companies make profits and people buy their products.
That's what's going to happen. And so you no longer have to be on the rollercoaster ride of trying to strike it rich, but you want to maintain that wealth.
Julie: [00:11:37] You have a couple of really good blog posts. People could look into to get more information on this. That is the market overpriced. And then one about selling high. speak to everything you've just mentioned.
Mike: [00:11:50] Yeah. as you listen to this podcast more and more, you'll hear me saying the same things because it makes sense and it's true. And people need to keep hearing it too, just to gain, continue to gain confidence and Oh yeah, these are the right moves and not get distracted by all the nonsense.
That's out there, all the the clickbait, that's trying to get you to move and do things. This is about doing less. Now. It is important to , this person is still young and maybe they want to take another at bat. Perfect. Great. I love that. You could keep the money in this stock, some of it and say let's keep riding it.
You could he mentioned maybe wanting to take some time off, which we'll get to in a minute, but maybe there'll be something else, another entrepreneurial or another tech startup or whatever, and take another risk there and try to go again, but I would highly recommend looking at the overall portfolio and saying let's make sure we stay wealthy with a bunch of this.
Julie: [00:12:43] And now what about in terms of diversification if you were inclined to not just put it into the market, but in, for instance, real estate, a lot of people will say, Oh, I've just made it big. I'm going to go buy a giant house. Should they do that? Should they not do that? .
That's a really important question.
Mike: [00:13:00] Yeah. Perfect question two things there. Let me highlight one. When you have a windfall like this, you might want to go out and spend some, and that's great. Maybe I want that new car. I've been I in this car I really wanted, or for me, I think back. I had a startup company that we sold and I really wanted a plasma screen TV.
They were brand new flat screen plasmas, and they were not cheap. They had just come out and that's what I wanted. That's great. And so what I did and what I recommend is make a list and stick to a budget. And just say, okay, yeah, I'm going to take a trip or I'm going to give money to my parents to pay off this thing, or I'm going to purchase this car or whatever, make it, some reasonable amount of the overall, if it's 4 million, maybe 5%, I'm just making that number up.
Just something , where you're going to feel really great and say, Oh my gosh, I really want these things. It's been a long seven years. I did get lucky. I did put in hard work, write it down, have a list. Go out and have some fun. And then, but stick to that, don't overreach. Don't just keep going.
So that's one way of going about that. The second thing, and this I think is more important. Julie, what you're talking about is the lifestyle creep. Hey, now I'm in this other whole thing. I've got 4 million, I can go get this a one and a half, $2 million house here in the Silicon Valley or wherever I am and the stuff is expensive and I'm going to get the new car, and all of a sudden that's what all your peers are and it's people driving and where they're living and all of a sudden now, You could afford it.
Not saying you couldn't afford it with that 4 million, but you've locked in ongoing upkeep for all this lifestyle. And that ongoing upkeep is your house. 1 to 2% of the worth of your house is how much it's going to cost and ongoing upkeep. I'm not talking property taxes and mortgages.
I'm just talking literally like stuff. Plus you got to fill that house, and the same with the cars, it's shocking that the more fancy cars. They're great. I love them. But their maintenance costs. You take it to the shop. All of a sudden it's double or triple what you used to be paying.
You're like wait a sec. Cause everything just costs more. , the more that you do that, the more you're locking in ongoing. lifestyle expenses. And so I'd be very I'd go into that with eyes wide open and say, okay, if I'm, buying X, Y, and Z, that has, is changing my lifestyle a little bit, then that's ongoing costs and you've got to continue to support that lifestyle ongoing.
Now this leads into sort of my last point around this topic. Newfound wealth and other major changes in life really help you to look at your, what you want out of life. And it highlights who you already are. These kinds of changes bring forward who you already are and to a more of a degree.
So I think it's a great opportunity to understand what you really want to do. Maybe it's just next year, next couple of years, I don't really know what I'm going to do in 10 years. That's fine. But really take a look at that. And he mentioned might want to take some time off, take some time off work.
I think that's fantastic. So budget that in and say, what's it going to cost, to take a year off? How often can I do that? If that's something you want to do ongoing, if you wanna have more retreats or more vacations or activities or stuff. So anyway, take a look at the things that you want to do in life that are important to you.
And use this as a mechanism for enjoying more of those things.
Julie: [00:16:22] Be mindful of how much those things cost.
Mike: [00:16:24] Yeah. I guess I meant in that more, the introspective what do you value time with friends? And family, do you value, exploring the world, do you value, helping out others? So those kinds of things, these overarching values and the ways that you want to live, this is a great time to explore it.
Any other things that we haven't really touched on? I think we do a pretty good job.
Julie: [00:16:46] I think so. I think you answered all of his questions , and then some probably.
Mike: [00:16:52] cool. Definitely reach out if you have questions. And the important thing was, in all of this has to have a plan. You heard us mention that multiple times, just really think through what you're doing with this new found windfall and congratulations. It's a great experience to go through and really provides a lot of opportunity.
And that's, where my last comments were just being introspective about what's important to you. And moving forward and having a plan for moving forward in that direction. So it was always, if you have a question or comment, you can email us at email@example.com. And until next time, Julie we'll catch you soon.
Julie: [00:17:27] All right. Have a great one.
Mike: [00:17:28] Thanks for joining us on financial planning for entrepreneurs. If you like, what you heard, please subscribe to and rate the podcast on Apple iTunes, Google play Spotify, or wherever you get your podcasts. You can connect with me on linkedin or mortonfinancialadvice.com. I'd love to get your feedback. If you have a comment or question, please email me at firstname.lastname@example.org. Until next time thanks for tuning in