Managing Your Equity Stake to Maximize Personal Wealth

For many founders, building a business is all-consuming. Their focus is on scaling, innovating and growing their companies, often at the expense of their personal financial planning. Yet managing their equity stake during this busy time is often key for maximizing their long-term personal wealth.

While creating wealth is typically a core goal for founders, they're not necessarily focused on it during the early stages of running a business. "Many of them view their equity holdings as just paper, something that's not meaningful in the moment," says Ann Lucchesi, managing director at First Citizens Wealth. "Yet it's critical that founders are aware of how these holdings may affect them later."

Tax savings with the QSBS exemption

Understanding the impact of the qualified small business stock, or QSBS, exemption is an important first step. This robust federal tax benefit can help shareholders dramatically reduce the amount of capital gains tax they'll owe when they sell eligible stock. In fact, if a founder qualifies for a QSBS tax exemption, they could potentially exclude millions of dollars in sale proceeds from taxable income.

"I always tell founders that QSBS is the No. 1 way to save taxes downstream," Lucchesi says.

Michael Conway, managing director and wealth advisor at First Citizens, agrees that the QSBS exemption can be a game changer, particularly as a company progresses through funding rounds. "When companies are at a Series B or Series C stage, it's common to see a secondary liquidity event," he says. "It's also an inflection point, where we start to see meaningful growth in a founder's personal wealth, which can be a great opportunity for longer-term planning."

Access to liquidity as the company grows

The discussion around liquidity is quite different today than it was for previous generations. In Lucchesi's experience, it's now common for companies to remain private for longer—often well beyond the 7-year mark that was once typical.

"We're seeing companies stay private for 14 years or more, and that shifts how founders think about liquidity," she says. "By the time you get to a B round, if you're successfully growing your company, it may be time to take some money off the table."

Especially in times of uncertainty or volatility, founders must understand how to gain access to cash. "I'm a big believer in pursuing liquidity in these situations," Conway says. "After years of taking a below-market salary to build something with exponential growth, it may help relieve a lot of financial pressure."

However, Conway cautions that liquidity isn't just about immediate access. Rather, it's about securing financial stability while also planning for the potential dilution of ownership. "With any type of secondary liquidity event—especially equity fundraising rounds—comes dilution," he explains.

Ultimately, founders should balance their need for liquidity with strategies to protect their equity stake. This often means requesting additional equity grants.

Maintaining an equity stake

When it comes to equity grants, founders should carefully weigh their options. Every founder's journey is unique, and decisions around equity grants should reflect their personal financial situation.

Founders who've taken a below-market salary are certainly entitled to take a little off the table as the company grows. "If you were to replace yourself with an outside CEO, for example, you'd be adding an equity grant for that person," Lucchesi says. "So it's reasonable to take one for yourself."

If a founder already has liquidity and wants to start the long-term capital gain clock ticking, an early exercisable nonqualified stock option might be the way to go. "However, if liquidity is a concern, then an incentive stock option to the maximum amount will aid your annual planning," she adds.

As founders explore their options, personalized planning will be key. "It's essential to understand the nuances of your unique situation," Conway says. "The goal is to ensure that equity decisions align with your broader financial objectives and long-term wealth strategy."

When to consult an advisor

A question that frequently arises in these discussions is when to start working with an advisor. According to Conway, it's never too early to engage the support of a professional.

"As a full balance sheet advisor, I work with clients throughout their journey, especially during those pivotal funding rounds," he says. "Any time there's money in motion within a business, it has a direct impact on a founder's personal balance sheet. Working with an advisor who understands their journey as a founder and all of the issues and nuances that come with it can have a long-lasting impact."

The bottom line

Developing a long-term wealth strategy is an essential part of a founder's path to prosperity. From understanding the value of QSBS for tax savings to navigating equity grants and secondary liquidity events, founders who take the time to plan their financial futures may help ensure that their success in business translates into lasting personal wealth. It's something every founder should be thinking about from day one.