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Portfolio > Portfolio Construction > Investment Strategies

From IPOs to Sudden Inheritances: Helping Clients Navigate the Hurdles of Cash Windfalls

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What You Need to Know

  • Whether from major cash-outs, accumulated company shares or unexpected inheritances, significant wealth creation can pose unexpected challenges for clients.
  • Intense success over a compressed timeframe with little exposure to loss can leave young entrepreneurs with a distorted sense of risk.
  • Financial advisors serve as a client’s guide through defining and achieving their financial goals, oftentimes shepherding them through uncharted territory.

As a longtime wealth advisor in the Bay Area, I’ve seen my share of young entrepreneurs catapulted into higher income brackets and new lifestyles after their tech startup generated a windfall of cash. But while they welcome financial success, they are often unprepared for the diversification, risk mitigation and tax liability reduction decisions their newfound wealth requires.

Such windfalls, of course, are not reserved for Silicon Valley luminaries. They are also common among early-stage employees who have accumulated shares at multiple companies and children who have come suddenly and unexpectedly into an inheritance. Whether from major cash-outs, accumulated company shares, unexpected inheritances or divorce settlements, significant wealth creation can pose unexpected challenges for these clients.

The Faces of Newfound Wealth

Clients with newfound wealth can include founders, co-founders or early-stage employees of startups that generated windfalls from an IPO during or after their employment. Some acquired new wealth may also result from a merger, acquisition or other liquidity event.

They might emerge from a six-year stint to capture a $20 million windfall after taking a tech venture public. They may be surprised by a $15 million payout as a result of an IPO at a previous employer where they thought their shares had been diluted.

The intense success over a compressed timeframe with little exposure to loss can leave young entrepreneurs with a distorted sense of risk. Most of their wealth — and therefore risk — is typically tied up in their company. Founders who became wealthy by employing risky strategies may be wired to assume outsized risk with their assets or prone to miscalculating risk with highly concentrated positions.

That distortion might be more acute with clients who invested entirely within the recent bull run — and all within the confines of the Silicon Valley ecosystem and its disproportionate number of successful startups. They may become overly optimistic and unprepared for an eventual downturn if their company vastly outperformed the broader market for several years. It’s critical for them to understand the role diversification and risk management plays.

Other clients may have seen their wealth balloon in their late 20s before experiencing additional windfalls in their 30s from multiple firms, requiring ongoing risk and balance sheet management. Instead of instant wealth from a major IPO, they have accumulated shares in the form of restricted stock units (RSU) or other compensation. As early-stage employees, they receive the most valuable equity at the firms. But that equity dilutes over time. Once the RSUs are vested, they have less incentive to stay and often leave to restart the cycle at another firm.

It could also be a client who receives a family inheritance after the unexpected death of a parent, perhaps with assets from appreciated property values, a scenario that has become more common during the pandemic.

Understanding Risk & Protecting Assets

Financial advisors serve as a client’s guide through defining and achieving their financial goals, oftentimes shepherding them through uncharted territory. While some seek advice in anticipation of a windfall, others wait until their money is in hand. By the time they reach our office, they are often overwhelmed by the management their wealth demands. That is why, in our experience, it is important to engage with an advisor they trust, and as early in the process as possible.

Some clients may struggle to understand the consequences of holding a concentrated position with company stock. They seek our expertise about whether they should hold their shares or sell them immediately and, if they sell, how to reinvest the proceeds. Others want to know the tax implications and whether they qualify for a federal exemption. For some, company stock that comprises the bulk of their compensation plan may have lost value.

Through consistent communication, we strive to help clients understand how to grow and protect their assets. Specifically, we ensure accounts are organized, estates are properly settled, and investments are seamlessly transferred. We also connect them to a wider network of accountants, estate attorneys and other third-party professionals.

Additionally, we research companies and conduct risk assessments to gauge tax liability. By generating detailed analyses, we believe we can illustrate how market events can impair businesses. We help them understand the scope of their wealth and work to deter them from making mistakes common among the newly wealthy.

As collaborators, we offer access to what we believe are timely investing ideas and walk clients through capital markets complexities that technologically based alternatives, such as robo-advisors, may not offer. As we see it, we are trusted advocates who strive to actively identify investment opportunities — many of which clients are unaware of — and provide counsel on the latest investment trends dominating headlines.

For example, we can diversify a portfolio for someone who is sitting on a highly concentrated position with company stock simply to avoid a hefty capital gains tax. We may suggest cutting existing shares to reduce that liability for a client who has vested shares periodically coming due.

Clients are typically focused on growing and taking risks. But for those prioritizing risk management over performance, we might reserve one portion of their assets for living expenses and another for risk taking.

For sudden heirs, we can serve as a guide through a time of stress and confusion. In instances where we have already advised an heir’s parents, we may be better positioned to incorporate their specific allocation needs and risk tolerances, whether conservative or uber aggressive. If needed, we can expand our role by identifying tax efficiencies or ways to unwind exposure for heirs at publicly traded tech companies.

These scenarios present a prime opportunity for advisors to help clients navigate new terrain. For us, they create an opening to demonstrate our value with younger investors who may not be sophisticated investors but are less likely to hire an advisor. We can pick up where self-directed brokerage accounts leave off. Ultimately, we can cultivate lasting relationships, helping clients achieve the financial freedom and security they crave.


Tom Connaghan is a San Francisco Bay Area-based senior wealth advisor for Kayne Anderson Rudnick, an investment and wealth advisory firm managing assets for corporations, endowments, foundations, public entities and high net worth individuals.

 (Image: Shutterstock)