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There’s an excellent flowchart on Reddit’s r/personalfinance subreddit that’s designed to help people DIY their own financial plan. It breaks down your personal finance journey into 7 distinct phases, with additional steps on how to progress through each phase:
Most people can DIY their personal financial plan, by basically following the steps above. For the average person, personal finance is an exercise in simple planning, a bit of clever frugality, and consistency over long periods of time.
If you work at a startup, you might find that your finances are more complex than the average person, and that a DIY financial plan can lead to you making preventable mistakes. So how do you know when it’s time to bring in a licensed financial planner?
Let’s take a look at some common inflection points when it might be prudent to call in some outside help.
Stock options are complex. Depending on the type of stock options you’re earning — and your other financial factors — a financial planner can help you understand how to exercise your stock options in a tax-efficient way, when and how to sell your shares, and how to reduce stock-option related financial risks.
There’s no one-size-fits-all advice for stock options that will make sense for everyone. It’s hard to put stock options on a personal finance flowchart.
For example, Secfi’s licensed financial planners recently worked with a startup employee who had been saving a lot of money for his wedding and honeymoon. He was saying how he regretted not using some of that money earlier to exercise his stock options.
But after taking a look at his stock options and his other finances, we told him we thought he was actually doing the right thing in prioritizing saving for his wedding and honeymoon — there was quite a bit of risk involved in his stock options, and locking up money in an illiquid asset didn’t make as much sense right now as saving for an immediate life expense.
If he followed the conventional wisdom to exercise often to reduce taxes, he might have found himself being forced to pay for the wedding with high-interest credit cards.
If you’re working at a startup that experiences an exit, it can be tough to figure out what to do financially. That’s especially true if you joined a later-stage startup and received stock options at a relatively high valuation.
For example, we recently read about a startup employee who exercised their stock options shortly before their company went public, investing $100,000 in exercise costs to do so. The company went public, and the employee’s shares were at one point worth $500,000.
They decided to hold onto their shares for at least one year, to take advantage of long-term capital gains. However, the stock crashed, and is now worth less than $100,000. On top of that, the employee found out that they had forgotten to account for alternative minimum tax, and owed the IRS $150,000 in AMT.
A financial planner could have flagged AMT earlier, and encouraged the employee to sell a portion of their shares at IPO, despite incurring short-term capital gains.
Financial planners are helpful when things go right, too — ideally, a startup exit gives employees the ability to sell their shares at a premium. If that happens, a financial planner can help you reduce risk through diversification.
Are you ready to make a major investment, like buying a house or investing in a startup? Are you getting married, divorced, or becoming a parent? Or maybe you’re thinking about retirement?
A good financial planner will help you invest in the things you care about. For startup employees, that could mean reducing risk in their portfolio, or selling shares in a tax-efficient way.
Financial planners don’t have the same emotional stakes tied to an investment portfolio, and can provide a clear-eyed view of risks and rewards tied to the portfolio.