Most people would agree that coming into a significant sum of money is a nice problem to have. Wealth, after all, opens up a multitude of enviable possibilities. Yet it tends to arrive at a moment when financial planning has been the last thing on a person’s mind. The legacy inheritor who is still grieving, or the company founder who has spent years building and then selling a business, may not have considered in detail how to manage their assets.
That was the case for a tech company founder in California who consulted us while selling his startup for a nine-figure sum. The amount was significantly more than the entrepreneur, then aged 30, had expected or could imagine needing.
“Sometimes people who make money in the technology space behave like lottery winners. They make a lot of new friends, trust the wrong people, and three years later they have nothing left,” says Charles Kolstad, a partner in our private client team in Los Angeles, who oversaw the case. “What struck me with this individual was how level-headed he was from the start. He recognised that he had just acquired vast wealth and he wanted to be sensible about what he did with it.”
Rather than jump into any decisions, the newly wealthy founder bought himself a condominium to live in while continuing to work for his company as part of his agreement with the buyer, a publicly traded company. We introduced him to a sensible investment manager and the bulk of the windfall was put in an overseas trust. Unusually, he opted to make his parents the beneficiaries of the trust, putting the funds beyond his own reach for the foreseeable future.
“He’s investing in things that make sense and his lifestyle hasn’t altered too radically,” says Charles. “In the long run, he will keep more of his money that way.”
Having the right team in place from an early stage is important. One UK entrepreneur whom we assisted had taken considerable personal risks, including remortgaging her home, to build a startup in the beauty industry. A private equity house had expressed interest in buying the company but the deal had not gone through; consequently when a serious buyer approached she expected a similar outcome, and only sought legal advice a few months before the sale went through.
“Ideally we would see people a year before they sell,” says Ceri Vokes, a private client partner in London. “Often, though, people have been so consumed with running their business that they almost don’t believe the sale is coming. When it happens the relief is immense, but they aren’t necessarily prepared.”
In this case, the entrepreneur had promised equity to a family member who had helped to establish the business. Because the arrangement had not been formalised, the relative ended up with a far higher income tax bill than if the shares had been awarded when the business had a lower valuation.
Those who inherit large sums tend to be better prepared to manage it, Ceri explains "In wealthy families there is often an educational process where children are told that they have family money. There have been honest, frank conversations from the start and prenuptial agreements are expected."
That said, there are well-documented examples of trust beneficiaries who, finding that they have no need to work, are led astray. Having the right structures in place is important when families need to intercede, for example in cases of substance abuse.
One father of three in Asia decided not to risk that when he reached another kind of defining moment: retirement. Having run a successful company for many years, he put some of his personal savings in trust for each of his three children and consulted us on how to transfer ownership of his business to a charity.
There were a number of conditions to the legacy. The business was almost a fourth child to its founder, and he was keen not to see it simply sold to the highest bidder, even if that would benefit a cause he cared deeply about. “We structured the agreement in such a way that the company could not be broken up,” explains Hong Kong partner Tim George. “In the event that the charity wish to sell it, a management buyout would be preferred, and any external buyer would have to honour agreements with employees.”
That situation was, however, unusual. More commonly, people who have had a significant liquidity event through a company go on to start or invest in another business.
After selling his fintech startup, one London-based entrepreneur chose to focus on health and happiness in his next venture. An ultramarathon runner who was passionate about wellness, he started a second business sharing expert advice on longevity with subscribers. The business is far less profitable than his first, but far more rewarding to run.
“I’ll tell you what people don’t do after a large liquidity event – they don’t go off and sip mai tais in the Caribbean,” says Charles Kolstad. “That never seems to happen.”
