Start-Up Equity Is a Great Retirement Plan, if You Can Pull It Off

Start-Up Equity Is a Great Retirement Plan, if You Can Pull It Off

Credit…Miriam Martincic Nearly two years ago, Trevor Ford left a job at Lending Tree that gave him a 401(k) plan and a generous employer match to work at Yotta, an online banking app.

When Mr. Ford began working there, Yotta, like many early-stage start-ups, didn’t offer its employees a 401(k) plan. Instead, Mr. Ford received equity compensation in the form of incentive stock options, which give him the right to buy shares of company stock at a discounted price. He believes that owning early-stage equity provides a better opportunity to accumulate wealth than an employer-sponsored 401(k) plan with matching contributions.

“The equity could be worth well into the seven figures, hopefully, and maybe more,” said Mr. Ford, who is 33 and lives in Austin, Texas. “That’s more than enough to retire on.” But Mr. Ford’s equity will have value only if Yotta becomes a successful public company. (Yotta recently gave employees access to a 401(k) but doesn’t match their contributions; Mr. Ford makes a small contribution.)

Trading in a corporate job with a traditional 401(k) plan for a job at a start-up that offers equity gives employees a rare opportunity to receive a large payout at a young age. While the potential payoff can be far greater than with a traditional retirement plan, the equity is worthless until someone buys it or the company goes public.

“In terms of building wealth, investing in a 401(k) is like running a marathon, whereas investing in company equity is like a running a sprint,” said Jake Northrup, a certified financial planner at Experience Your Wealth in Bristol, R.I., who specializes in helping millennials manage their equity compensation. “If a start-up hits a home run, you may be able to achieve financial independence at a very early age via your company equity,” Mr. Northrup added. He estimates that about 20 percent of his clients have received some type of payout from equity.

Mr. Ford is banking on equity in part because he witnessed his friend Andy Josuweit, the founder and chief executive of Student Loan Hero, receive a huge payout when LendingTree acquired the start-up for $60 million in cash in 2018 . “At age 31, he walked away with a life-changing amount of money,” Mr. Ford said.

Not every start-up is successful, of course. An analysis conducted this year by CB Insights, a firm that studies venture capital and start-ups, found that 70 percent of start-ups fail.

“You have to keep in mind that it might not work out,” said Chris Chen, a certified financial planner at Insight Financial Strategists in Lincoln, Mass. “When you’re in your 20s or 30s and work at a start-up, it looks like time is infinite, but, at one point or another, you will have to retire,” Mr. Chen said.

Annie Fennewald was among the first dozen employees of a fast-growing tech company in Missouri, and she worked there for almost seven years. In May, after she sold her stock through a private equity sale, Ms. Fennewald, 44, was able to retire about eight years earlier than she had planned.

Although she received a seven-figure payout, Ms. Fennewald said she didn’t rely on her equity as her only retirement plan.

“I always treated stock as a lottery ticket,” she said. “It could be valuable, but I didn’t really bank my retirement on it.” When the company began to offer a 401(k) plan four years ago, she contributed the maximum amount. Often, as start-ups move out of early-stage funding and grow to 50 or more employees, they will offer a 401(k).

But not everyone is able to sell their equity.

Danielle Harrison, a certified financial planner in Columbia, Mo., has a client who wants to retire but is waiting for her company to go public so she can cash in almost $2 million in equity. “To be completely reliant on something like that is tough,” said Ms. Harrison, owner of Harrison Financial Planning .

If you’re a start-up employee considering giving up a more traditional route to retirement savings in favor of relying on equity, here is what you need to know. How equity compensation works

Employees with equity compensation are typically granted several thousand shares of stock that they can buy at a discounted price before the company goes public. If they leave the company, they typically have 90 days to buy their options. For instance, one of Mr. Northrup’s clients worked at a start-up and had 65,000 stock options that were granted at 13 cents per share. His client paid $8,450 to exercise those options.

The company’s stock is now […]

source Start-Up Equity Is a Great Retirement Plan, if You Can Pull It Off

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