I had a client that worked at a large corporation that paid him a nice salary of $150,000 a year and gave him the traditional fringe benefits that go with working for such a company. During his stint there, he managed to save his money and invest it in his 401k and other outside investments, which got him to roughly $40,000 in assets. After three years, a smaller startup recruited him. They did not have the resources to offer him the same salary that the larger firm could, so they offered him stock options instead. Instead of $150,000 in cash, he would be getting a $120,000 salary, but would be getting several thousand shares in company stock options to start, and more to come if he and the company continued to grow.
My client decided that he would take the new job, and felt it was a great opportunity for him to participate in a company that could “change the world.” He figured he was young enough to make this change and it would not have a significant impact on his life if it did not work out. That being said, losing out on $30,000 per year was not easy for him to grasp, either. He was used to living at a certain level and downgrading was not easy.
Now, three years later, my client works for the same startup company, which continues to grow and increase its value. Because of his stock options, he now has a net worth of over $400,000, with more growth in his future. He will probably be a millionaire before the age of 35. Because he received stock options, he was able to purchase the shares of his company at a much lower price than they were worth. A stock option gives the buyer the right to purchase the shares at a pre-determined amount of money and he was able to buy many shares for one-tenth of their actual price. He was able to become affluent in a very short period of time because he was willing to accept the tenets of other wealthy people: he invested his money, he took a calculated risk in working for a newer company in which he really believed, and he wanted to be an owner, not just an employee, of his business.
Now that my client has earned a significant amount of money on his investments through work, he naturally wanted to know what he should be doing with his money. He realized that, even though he was growing his wealth quickly, he was not diversified enough and he was at risk for losing the money he had worked so hard to gain. He asked me if he should “take some chips off the table,” now that he had been working there for several years and accumulated a good amount of money. So, we met and talked about all of his goals, not just today, but years from now. I asked him what he wanted from his life, his money, and his company. He told me that he loved working there and that he plans to continue, but he wanted to plan for more than just this company. Also, he expressed some concern as to what would happen if something happened to his company. What would his net worth be then?
So, being an investment advisor, I advised him to do what I advise all of my clients to do: diversify. I told him that he did not want to have all of his eggs in one basket, not matter how beautiful the basket. After discussing his goals at length and the tax implications of the transactions, we decided to take 30% of his money and invest it elsewhere, in a broadly diversified portfolio. Thus, my client now had the best of both worlds: he can continue to ride the wave of his company that he believes in, but he can also feel safe in knowing that he has other great investments with strong growth potential, which will decrease his overall risk.
Owning businesses, investing, and taking calculated risks are really important when you are trying to build wealth. You do need to be smart about it, though. You cannot simply just gamble on a whim and think that you are “investing.” It is really important to consider many factors when making this decision. You should always consult with friends, family, and a financial professional to get different ideas about how to proceed. Also, make sure you are the owner of something in which you truly believe will have a long future.
Gerber Kawasaki Wealth Management
2716 Ocean Park Blvd #2020
Santa Monica, CA 90405
Securities offered through LPL Financial, member FINRA/SIPC. Investment advisory services and fixed insurance offered through Gerber Kawasaki, Inc., a registered investment advisor and separate entity from LPL Financial.
This material contains forward looking statements and projections. There are no guarantees that these results will be achieved. Investing involves risk including potential loss of principal.