Focused Entrepreneurs Can Miss a Lot of Things
The life of an entrepreneur is one of constant change and challenges. Building a business while navigating around all the obstacles on your path to success can be overwhelming, leaving you little time and energy to attend to other important matters in life. With so many distractions and possibilities, one quickly learns the importance of focus. But it may well be that your laser-like focus on your business is leading to an out-of-focus view of your personal finances. Like the bookworm who can't see anything beyond the book in his hands, many entrepreneurs suffer from a similar form of near sightedness.

Money Matters are More Complicated for Business Owners
If you're building a business, chances are your personal finances will be much more complicated than if you were an employee working for someone else. Your decisions at work are likely to have a greater impact on your personal net worth, too. Risk, return, personal liability, cash liquidity, tax exposure…. — across the board, all of these dimensions of personal finance become less predictable and more volatile the second you become your own boss.

Creating an Educational Community for Entrepreneurs
Talk about being between a rock and a hard place! The very people who have the least amount of resources are the ones facing the greatest number of challenges. This sets the stage for a new kind of podcast on personal finance — one that caters to the unique needs of entrepreneurs. That's why we've decided to launch the Wealth Bootcamp podcast. Our objective is to become the online community of choice for entrepreneurs interested in personal wealth creation and sharing their experiences with others. Subscribe to the podcast to tune in to weekly episodes about personal finance told from your perspective.

What You'll Learn In This Episode
Why we're launching Wealth Bootcamp - 1:10
How entrepreneurs are different when it comes to managing wealth - 2:58
How entrepreneurs expose themselves to greater risk - 3:18
Success story: Reid Hoffman - 4:04
Not so successful story: Nikola Tesla - 5:11
How business decisions at work spill over into personal finances - 8:56
Cash crunches and how to reduce your exposure to them - 13:12
«ig pay outs and how to prepare for them - 15:12
Why entrepreneurs suffer more from behavioral bugs - 19:52
How entrepreneurs can use technology to more effectively manage their wealth - 23:48

Key Words:
  • entrepreneurs
  • investing
  • finance
  • risk
  • cashflow
  • liquidity
  • 83(b)
  • retirement
  • automation
  • Agile

Resources and Related Content

Ask Wealth Bootcamp
If you're an entrepreneur or business owner interested in better managing your personal wealth, then you're in the right place! Let's make this podcast as good as it can be. The more you tell us about the challenges you're facing and the areas you're interested in, the more we'll improve. If you have a question you'd like us to answer, an issue you'd like us to address, or a suggestion which guest to invite, give us a shout at

Here are the kinds of questions and issues we can help you with:
  • What financial issues keep you up at night?
  • What are the risks you worry might really set you back financially?
  • What areas of your financial life would you like to better understand?
  • What financial challenges as an entrepreneur do you see around the corner?
  • What risks in your business is your spouse worried might spill over into your personal life?

E1 | Why Wealth Bootcamp?

    December 9, 2019
      Full Transcript

      I'm Matt Lewis, your host, and this is Wealth Bootcamp. We're a weekly program serving global entrepreneurs and cross border families. You know, entrepreneurs, they can be great at creating wealth, but not necessarily good at preserving it. Many are so busy building a business that they neglect their personal finances. It doesn't have to be that way.

      At Wealth Boot Camp, we'll show you how to build personal wealth alongside your growing business. We'll look at the unique risks and opportunities that entrepreneurs face in their financial lives. And we'll explore how you can immunize your lifestyle from the risks you bear in your business.

      I'm Matt Lewis, private wealth advisor to entrepreneurs and founder of Westbridge Wealth Management. You may already be building a successful business, but how about designing a successful life around the things value most. Sound good? This is the place to make it happen. Let's get started.

      Welcome to the first episode of Wealth Bootcamp. I'm so excited to play my part in building this platform and community for entrepreneurs! We're going to be discussing the major challenges of personal finance that plague business owners. Here in Silicon Valley I come across so many people, they're focused on building their companies, but they don't have time and energy left over to look into the issues that are really given them trouble and their own personal finances. Truth be told, a lot of them aren't even aware of some of the issues until it's too late. There are so many of them out there who have major blind spots in managing their own money. On the one hand, they don't recognize the magnitude of the risks they're taking on. And on the other, they simply miss some really lucrative opportunities.

      But with your participation, we're going to change that. By tuning in and being an active member of our Wealth Bootcamp community, you'll be on top of these issues before they get out of control. Incidentally, if you have a question you'd like us to answer, any issue you'd like us to address, or perhaps a suggestion of a guest to invite, please email us at Wealth Bootcamp - it's designed for you. The more you can let us know about the challenges you're facing as an entrepreneur, the better our podcast will be.

      Now, before we dive into today's episode, we have an important message for you, our disclaimer:

      Please be aware that the information provided in today's episode is for educational purposes only. Unfortunately, I haven't had the opportunity to get to know you. So I'm not in a posit ion to give advice that will suit your particular needs. We have a lot of different listeners in our audience, and a one size fits all approach isn't going to work. I do provide investment advice to my clients at Westbridge Wealth Management, but there I'm able to tailor my advice to their unique circumstances. While I encourage you to use the Wealth Bootcamp community as a learning platform, please bear in mind that we're providing education, and not investment, legal or tax advice. And with that, let's return to our program.

      In this first episode, I'd like to give you a taste of what we'll be discussing in the coming weeks - a lay of the land. So today's subject: how entrepreneurs are different - that is, what sets them apart from everyone else when it comes to managing money and building wealth. Today, we're going to cover six of these differences.

      №1 MORE RISK
      Risk is the price of entry that entrepreneurs pay for a chance to make it big in business or do something truly meaningful. As they chase opportunity, they tend to move much more quickly between businesses and companies than the rest of us. And what's more, their compensation is skewed towards equity. So the instability of this career path leads to really extreme outcomes. That could mean exponential growth for their company — and it turns into a unicorn. Or, let's say, on the other end of the spectrum, they burn through all their cash and they have to shut their doors. Therefore, the entrepreneur's individual cash flows are much less predictable, too, and much more volatile. How about a few examples?

      Many of you know Reid Hoffman, one of the founders of LinkedIn, and before that, a senior executive of PayPal. But did you know that his first company, SocialNet, was a dud? This was a website used to find dates and connect with friends, but it couldn't cut it as a business, and it shut down in '99. SocialNet was born some seven years before Facebook. So, basically, it was a social network way before its time.
      Fortunately, while at SocialNet, Hoffman was invited to be a board member of PayPal, and soon enough, he left SocialMet to join PayPal in a full time position as Chief Operating Officer. This was in early 2000, just two years before eBay acquired PayPal for $1.5 billion. Hoffman then went on to co-found LinkedIn, which IPO'd in 2011, and was eventually sold to Microsoft for $26 billion. Hoffman may have had a rough start with SocialNet, but he quickly found his footing as an entrepreneur, had some phenomenal exits, and today he's a very successful businessman and a partner at VC firm, Greylock partners. But not every entrepreneur's story has a happy ending.
      Take the case of Tesla. I'm not talking about Elon Musk or his electric car company. And I'm not trying to make a negative call on the stock - no, not at all. I'm talking about Nikola Tesla, the great inventor of the alternating current motor. The royalties from his patents for this device made him a wealthy man and might have eventually made him one of the richest people on Earth.

      But market adoption was slow for alternating current (let's call it AC) and Tesla, he had a formidable opponent in Thomas Edison. Edison was promoting a competing technology based on direct current. And using his good name and his partners' money. He launched a misinformation campaign against Tesla and tried to show that AC was somehow unsafe for public use. The battle between the two sides raged, became known as the War of Currents, and it nearly bankrupted Tesla's main company, his main customer, the Westinghouse Company. Then, in 1907, Westinghouse, on the verge of financial disaster, came to Tesla and asked for financial relief. Nikola Tesla took a lump sum, and he complied by ripping up his most valuable asset - the contract with Westinghouse. Had he not torn up that agreement. Today, the AC motor royalties would have generated billions of dollars every year for Tesla's descendants. But it was not meant to be. And Tesla? He died penniless.

      Wow. Talk about extreme outcomes. As these examples show the potential for instability in an entrepreneur's career are significant. But what can we do about it? How can we keep these risks from bleeding over into our personal balance sheet?
      Let's take a simple example. If your company is focused on tech, then wouldn't it make sense to cut back on exposure to technology in your personal investments? The last thing you want is for everything to fall at the same time at work and at home. If we could find some investments that suit your risk and return profile, but that don't correlate with your business, we'd be reducing risk without necessarily giving up return.
      Let's take another pretty straightforward example. Let's say your company has unpredictable cash flows. Then it would make sense to lower the risk at home to build up your emergency account and allocate more capital to your retirement plan. At the end of the day, the key to managing risk is to develop a sense of balance.
      Or the flip side of that would be to develop a system that keeps our bad impulses in check. For many, the best way to do this is to work with a financial advisor, who will put in place a plan and process for making financial decisions. If you allow yourself to just emotionally respond to events as they occur in the market or in your personal life, you're setting yourself up for trouble.

      I've seen some pretty schizophrenic investment behavior. There are people out there building a tech startup who have all their personal investments in that same particular segment, because they feel they understand it and they're comfortable with it. But when the inevitable correction or bear market comes, they get spooked and they sell everything ending up just just sitting in cash. Then the market recovers and they feel they've waited too long on the sidelines. Next thing you know, they're trying to play catch-up and they're buying really risky assets like like Bitcoin. God forbid that's like going from the warmth of your bed into an ice cold bath and then taking a plunge in the hot tub! Can your heart take that kind of change? Don't you want to sleep at night?
      So, to finish up with #1, entrepreneurs take on more risk than your average person. The solution? Have a plan and process in place to better manage the risk to your personal finances.

      №2 Decisions at work have a Much Larger Impact on Your Finances.
      As a business owner, you make a lot of important decisions at work - many more important decisions than if you were an employee in someone else's company. And because you are a shareholder, those decisions are going to impact your personal wealth.

      For example, one of the first decisions you'll make as a business owner is which legal entity to go with. If you choose a sole proprietorship, you can get started very quickly, and it's easy to set up, there's very little in the way of paperwork for you to fill out. However, there is a downside. For one you'll end up paying much more in self employment tax. Another significant downside is that you will be on the hook for the creditors of the business. That is, if the business can't cover its debts, those creditors are coming after your personal assets.

      If you instead organize your businesses and LLC and say, elect to pay taxes as an S corp, you could classify some of your income as salary and some as owners distributions, you'll still be liable for self employment tax on the salary portion of your income. But you'll just pay ordinary income tax on the distributions. And the LLC can now shield you from any personal liability for the debts of the business.

      A C Corp is yet another option. This choice of legal entity is best if you have a startup that's raising money from venture capitalists. The main reason is because C Corp can issue different classes of stock like preferred stock. Venture capitalists like preferred stock because it usually pays higher dividends and puts them first in line to get paid when you finally have your big liquidity event. By liquidity event, we mean an IPO or an acquisition. And as far as taxes go, if you choose a C Corp, unfortunately, you'll have double taxation. The C Corp pays taxes, and then you, too, will pay taxes on dividends you receive from the company. As for personal liability, like an LLC, the C Corp can shield you from the creditors of the business. So you can see how something as basic as just setting up shop and choosing a legal entity can have really big ramifications for you personally.

      Let's look at another fundamental decision you have to make as a business owner: compensation. How and how much should you pay yourself? Many entrepreneurs are tempted to pay themselves too little. At the end of the day, you should pay yourself a reasonable salary. Let's say you have an S corp and you scrimp on your salary as an employee. That could trigger an audit. Some entrepreneurs think they'll get a higher value for their company if they depress their salary and keep money in the firm, but investors are generally smart, and they will attribute a market salary to your position. So don't shoot yourself in the foot by paying yourself less than you should. Let's avoid trouble with the IRS and present an accurate picture of our business to potential investors.

      Now, here's a business decision a lot of entrepreneurs overlook and boy, is it a doozy. In fact, ignoring it might cause you to lose control of your company. And it might really undermine the value of your firm and scare off investors. But because entrepreneurs are typically optimists, they don't like to think about worst case scenarios, and they often don't prepare for them at all. Of course, bad things do happen. People get divorced, they quit, they die. How do you like to wake up one morning to find you've lost your business partner, and that you are now running your company with that person's spouse. Not ideal! Especially if the spouse knows nothing about your business and doesn't have the right skill set.

      A buy-sell agreement, usually in conjunction with an insurance policy is an agreement that can protect you from all these risks. In a nutshell, a buy-sell agreement gives you the ability to buy the stake of your partners in case something horrible goes wrong with him or her. That could be death, disability, disfigurement, divorce. By the way, why do all those words start with the letter D? So that concludes #2, how entrepreneurs business decisions spill over into their personal finances.

      №3 Cash Crunches
      Now let's talk about cash or more exactly the lack of it. There are times when entrepreneurs and their key employees can really take a hit if they're low on cash. Let's imagine you're leaving your company to form a new startup. You've been working at your private company for five years now. And your stock options have a lot of value. Your company gives you just 90 days after departing to exercise your vested options. And, obviously, you'd like to exercise them, but you have just 90 days to come up with all that money to pay for your stock. Not only that, but you may have to pay AMT, as well. Many individuals in this predicament end up losing their vested shares because they just can't afford to exercise the options. And all the time and effort they spent over five years suddenly goes up in smoke. As an entrepreneur or someone leaving a company to become one, you may find yourself in a similar cash crunch. To truly reap the benefits of equity compensation. You need to anticipate and plan for these critical times.

      To make matters worse, companies have been staying private for much longer than they used to. If 10 years ago, the average period of a company staying private before its IPO or merger was seven years, it's now 12. That's a lot of additional burden for founders and key employees who could really use some cash to buy a bigger house, send them kids to college, or pay down debt. They've put in a lot of time, made a lot of sacrifices, committed themselves to the company. And yet they're not adequately getting compensated for that risk if they're locked in too long, if they're being made to shoulder the burden for not 7 years, but 12! That's a lot to ask of your employees. In a future episode we'll take a deep dive into this subject to better understand the misalignment of interest between employees and companies, when it comes to the timing of raising cash.

      №4 Big Paydays
      it's wonderful to see an entrepreneur have a big liquidity event - to see someone's sweat equity finally turn into a large sum of cash. But what if you fail to prepare for your big payday? What a shame if you could have reduced your tax bill by millions of dollars through a little timely planning.
      But there's even more at stake. If you prepare early enough, you'll have more choices to manage your windfall In line with your goals, whatever those goals may be. It could be early retirement, a transfer of wealth to your kids, maybe giving to your favorite charity. If you earmark capital for the things in life that are really important to you, and you go about this in a tax efficient manner, this will really lower your risk by putting constraints on your own behavior. This way you stand a much better chance of reaching your financial goals. Depending on your particular situation, there may be a host of tax strategies available.

      One of the more common strategies is something called an 83(b) election. How about an example? Let's imagine you're the founder of a high growth startup and you've received $5,000 in restricted stock that vest over time. At each vesting date, you'll need to pay ordinary income tax on the fair market value of the stock. But after a few funding rounds, that stock could be worth a lot more. This means you might have a significant tax bill at each vesting date, and no cash on hand to pay for it. An 83(b) election allows you to prematurely recognize ordinary income on the restricted stock. Okay, that was a mouthful. In other words, you'll pay ordinary income tax on the grant date when you receive the stock rather than the vesting date.

      Now, wait a minute, you're thinking. Why would anyone choose to pay taxes early? That's a reasonable question. But you might be motivated to do this if the value of your stock on the grant date is insignificant. In our case, its values just $5,000. So if your tax rate on ordinary income is say, 35%, you know, $1,750 it's entirely manageable in the grand scheme of things.

      Let's imagine your firm is acquired five years later. The additional gain over the initial $5,000 at the grant date will be treated as a long term capital gain and taxed at this lower rate.

      So in our example, I can see at least four benefits to the 83(b) election. Number 1, you pay ordinary income tax on the fair value of your stock when its value is low. Number 2, you avoid having to pay ordinary income tax on a higher valuation at each vesting date. Number 3, when your firm is acquired, you pay tax on long term capital gain. And finally number 4, you'll have much more control over the timing of your tax payments. With an 83(b) you'll avoid being forced to pay a tax bill each time shares vest. This helps you avoid the challenging cash flow issues that we touched upon in the previous section, Cash Crunch. In fact, an 83(b) election could save you millions!

      See how a little planning can save you a whole lot of money?

      Please note that an 83(b) election must be filed with your local IRS office within 30 days of receiving the restricted stock. There are no exceptions to this deadline. So don't forget! Please bear in mind, too, that this is a simplified example.
      There are a lot of considerations when making an 83(b) election that will depend on your particular situation. For instance, what if the value of your stock falls in the coming years? Then this tax strategy would ultimately mean that you overpaid in taxes by pre-paying on a higher equity valuation. Or what if you were to leave the company before your shares vest, then you'd have paid tax on shares that you'll never receive. So again, please do consult your tax advisor.

      In addition to the 83(b) election, there's a wide assortment of tax vehicles that may make sense for you. These include GRATs, dynasty trust and charitable LLCs. Using them you might not only be able to lower your taxes, you could transfer more money to others, to your loved ones, to charities you care about and meet your estate planning objectives, too.

      As with a lot of things, the devil's in the details, so again be sure you get proper guidance when preparing for your big cash out. That means a financial advisor, tax expert lawyer, and quite likely your investment banker. All these people need to be talking to each other and coordinating their activities. To really maximize your windfall you need to set up this team 18 to 24 months before the transaction. At the end of the day, time is often your most valuable asset.

      #5 Entrepreneurs Suffer More from Behavioral bugs.
      We have seen the enemy, and he is us! No one sets out with a goal of losing money, and yet a good number of us out there will make decisions that lead to a permanent loss of capital. As humans, we have behavioral bugs hardwired into our DNA. If we do nothing about this, sooner or later, they will lead us astray. That's why it's so important to recognize our weaknesses and set up a framework, that is, a systematic way of doing things. That way we can remove the behavioral bugs, or at least keep them at bay. Let me give you an example of what we mean by behavioral bugs. There are two main categories: one is faulty thinking; the other is emotionally driven decision making. Let's touch upon one example of faulty thinking, what they call confirmation bias. This is our tendency to look for evidence that supports the beliefs we already hold.

      Let's say you decide to join a firm. Some weeks after you start work, you begin researching the company and its competitors more closely. You're looking for evidence that your decision to join was the right one. At work, you find yourself drinking the corporate Kool-Aid, always emphasizing anything that suggests the firm will do well. And discounting anything that suggests otherwise. In a few years, when you're presented with a chance to sell some of your shares, you decide to hold on to them, and you even add to your position. In the end, you end up with a large, risky, concentrated position and a really poorly diversified portfolio. Suddenly, the company's fortunes change, the stock collapses, and your investment portfolio loses half its value! Not a happy ending.

      Now, let me give you an example of emotions leading us astray. There's something called the status quo bias. People are generally comfortable with the way things are. You may have heard that the only person who likes change is a wet baby. And that's because we view change as unsettling, as requiring effort, even scary. So, let's imagine your money management system is set up poorly. You're an entrepreneur with unpredictable cash flows, who hasn't gotten around to establishing a retirement plan or setting up automatic transfers to your brokerage account. The default state of that kind of money management system, if you can call it that, is to encourage you to overspend and under-invest.

      If you're a typical entrepreneur, you're preoccupied with the challenges of running your company. So you end up accepting the status quo in your personal finances and you completely miss out on generating wealth through investments outside your firm, because you have this non functioning money management system. Not only that, you expose you and your loved ones to greater risk, and you miss the opportunity to immunize their lifestyle from all the risks you're taking with your company. Now, I'm not saying that businesses owners have more behavior bugs than your average person. I don't think that at all.

      However, entrepreneurs and business owners do have many more responsibilities, and they have a belief system that inclines them to put too many eggs in one basket. I would say two thirds of entrepreneurs have a poor money management system when it comes to their personal finances. That's because their default choices lead to poor outcomes. And if there's just one thing we want to achieve at Wealth Bootcamp, it would be to overcome our behavioral bugs to keep them in check by putting systems in place. And that brings us to number 6.

      №6 Entrepreneurs are More likely to Use Technology.
      We like to play to our strengths. If your company's in the tech sector, chances are you welcome the opportunity to use technology to simplify your life. At Wealth Bootcamp, we are firm believers in using technology to manage wealth more effectively. Two ways we do this are through automation and Agile.

      Like an airplane, most people have their finances on automatic pilot. Everything seems stable, there's no turbulence, you look out the window and you seem to be flying on the same level. But that's not the case. Up front in the cockpit, there's an instrument called an altimeter that measures the distance from the ground. The greater the altitude, the lower the pressure, which is generally true both for planes and your finances. For most of us, your altimeter shows you're either going up or down. If you're ascending, that means you're saving more and investing more every month. If you're descending, you're spending exceeds your income. And if you really are cruising at the same altitude in finance, that means you're just not really going anywhere. So we need a positive trajectory to get our money management system working properly.

      Now, here's the thing. Once we set up the system correctly, we can just let it run on autopilot. The last thing you want to do is to be flying the plane yourself and constantly messing with the dials. If you set up your autopilot correctly, you can go back to your seat, watch the movie, and enjoy the flight. If you're always behind the financial control panel, that means you're expending way too much effort on your finances, you're relying on sheer willpower, and sooner or later, you're likely to give up. The classic way of burning out is to create a detailed budget. For most of us a budget - it's like a diet, only more boring. You can build a much better money management system using automation. And entrepreneurs, especially ones with an engineering background, just love this kind of thing. We'll be covering all of this step by step in a future episode dedicated to automation.

      Well, we're running out of time, but I wanted to touch upon Agile before concluding today's episode. The tech entrepreneurs among you are already familiar with Agile as a software development methodology. But did you know it also has a place in wealth management?

      Let me quickly walk you through four ways applying Agile values can lead to good outcomes in managing wealth.

      1. Emphasis on Individuals and Interactions. Humans aren't machines, and life isn't always predictable. When there is a shock to your financial life and your needs undergo drastic change, you need more attention from your advisor, not a rigid process. With Agile, communication is more fluid and increases or decreases with your needs.

      2. Priorities and Phasing. Using agile, a financial plan is implemented in manageable stages, starting with your key priorities. Most people prefer this to an overly ambitious approach that attempts to do everything at once. Some traditional advisors are even in the habit of preparing financial plans of over 100 pages. If you can't even bring yourself to read it. That's not a plan. That's a dead document.

      3. Collaboration Keeps Advisor and Client in Sync. In a traditional approach, a client explains what he thinks he wants, and then the service provider does the work. And afterwards the client gives feedback. Since no communication occurred while the actual work was being completed, it's much more likely that the end result will be less than optimal. With Agile, you and your advisor are engaged in an ongoing collaboration and communicating periodically as the work gets completed. This keeps the client and advisor in sync, leading to better outcomes.

      4. Responding to Change over Following a Plan. In Agile, a sprint is the time that elapses between planning sessions Sprint's are relatively short, so client feedback can better shift priorities from one sprint to the next in response to changes in the client's financial life.

      Before we sign off today, let's recap. In today's episode of Wealth Bootcamp we discussed six ways entrepreneurs are different with respect to managing their wealth.
      1. Number 1 was they take on much more risk.
      2. Number 2, their decisions at work frequently spill over into their personal finances.
      3. Number 3, they periodically experience severe cash crunches.
      4. Number 4, they sometimes have big paydays, big cash-outs.
      5. Number 5, they suffer more from behavioral bugs.
      6.And finally, number 6 they are more likely to use technology in managing their wealth.

      Well, we've covered a lot of material today. I hope that gives you a lay of the land and a taste for what we'll be discussing in the coming weeks. Thanks, everybody!

      Thank you for tuning into this episode of Wealth Bootcamp. We're a community for entrepreneurs where we make sure you're building personal wealth, even as you build your company. If there were any parts of today's show you'd like to revisit, you can locate them quickly by running a search of the show's written transcript. You'll find all our transcripts at on the podcast page, as well as show notes, and links to all the authors and books we've mentioned.

      Be sure to tune in next week we'll explore artificial intelligence and its impact on the economy and investing. Until then, have a great week. And thanks again from Wealth Bootcamp.

      Information provided by Westbridge Wealth Management, LLC and/or Wealth Bootcamp®, whether through the Wealth Bootcamp podcast or any other public media, is not meant to be and shall not be construed as a general guide to investing, or as a source of any specific investment recommendations. Such information is provided for illustrative purposes only and shall not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions.
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