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Financial advice for the ‘Snapchat millionaires’

It’s a real-life Hollywood success story.  Snap, the L.A.-based parent company of the popular Snapchat app, is going public with an IPO set for later this week. With the company’s value estimated at around $20 billion, many employees will become  millionaires — its founders billionaires.

The event is transformational for Snap’s employees, their families, even the bohemian beach community in which the company is headquartered – as mom-and-pop shops are increasingly replaced by upscale food, clothing and design retailers.

So where should they be turning for financial advice?

Snap, it appears, is not leaving this to chance. A recent New York Times article reported the company was in discussions to bring in academics from Stanford University to “explain the impact that the IPO could have on their lives.”

Having counseled many clients in similar circumstances, our wealth management team has this financial advice for Snapchat’s millionaires – and anyone else who has come into sudden wealth, be it through a business sale, inheritance, legal settlement, or lottery winnings.

1. Park the proceeds in cash. For now.

Most people find they are in no position to make decisions that will have long-term consequences for at least six to twelve months after a transformational liquidity event. Those who do rush in to major investments or expenditures often come to regret it.  If you’ve received cash, our best advice is to stay in cash in the short term. For our clients, we secure ‘wholesale’ money market rates to earn the best short-term rates and ensure maximum flexibility.  If you have debt that is not tax deductible, such as mortgages or lines of credit, it’s also wise to pay these down.

2. Set up an ‘out tray’.

It’s amazing how quickly people get wind of your windfall. You may find you’re solicited for all manner of requests – investment opportunities, donations, sponsorships, new business ventures.  Handling these can be tricky – especially if they come from family or friends.  It’s often wise to appoint a ‘gatekeeper’ – an independent source of review to whom you can refer these requests to ensure they are handled professionally, objectively and without damaging relationships you care about.  We often perform this role for our clients and it gives them peace of mind.

3. It’s not too late for tax planning.

Tax planning both before and after the sale of your stock options creates wealth.  There are a number of tax minimization strategies that may be applicable – ranging from the simple to the highly sophisticated.  One of the simplest and most effective forms of tax relief, for example, is charitable giving. If you have charitable organizations you currently support, you may want to look at ways to reduce the capital gain from your sale while creating an endurable giving plan for the charity. Talk to your tax advisor.

4. Update your estate plan

If you don’t have a will already, you should have one prepared, along with Powers of Attorney. If you do have a will, this should be reviewed in light of your new circumstances. With sizeable new wealth, you may want to add/change beneficiaries or make charitable bequests.

5. Choose a wealth manager with a safety first focus.

For many, the Snapchat IPO will be a once in a lifetime event. There may be some entrepreneurs and techies that go on to replicate the same level of success in their next ventures. Some won’t and it would be imprudent to bank on such a strategy. Setting aside a comfortable portion of the proceeds as your ‘long-term money’ in a diversified portfolio that is managed conservatively will preserve newfound wealth.

In a study conducted for us with successful business sellers in 2008, 80% of participants said that the most important attribute when selecting a wealth manager was a primary focus on safeguarding capital and providing steady returns. Just 29% wanted spectacular performance if it meant added risk and volatility. This strategy may not be how you came into wealth, but it will allow you to hang on to it.

6. Family matters.

Sudden (and even steady) wealth can change family dynamics. It helps to be very clear on what your values are and how you plan to use your wealth. Communicate this to others as appropriate.  Some people will want to give back to parents or other family members who have helped them, or financially assist their children. These are generous gestures that should be carefully managed and you may want advice on how to best deal with these.

7. Reflect on your career path.
Does the liquidity event change your career plans in any way? Will you think differently about work in light of your financial success? Is work now optional? Some people will be grappling with these questions and it’s important to “do the math” before making any decisions. When we provide financial advice for clients, we run various scenarios using different sets of assumptions, which helps to provide clarity about which options may be possible and which ones may be more difficult.

8. Connect with people who’ve been through a similar experience.
Despite its obvious advantages and opportunities, adjusting to sudden money can produce mixed emotions and isolation from friends and family. It can be helpful to talk to people who’ve been through a similar experience, to open your mind to the possibilities and potential pitfalls of wealth. We very often connect people within our practice to help them make a successful transition. Which is exactly what you hope for with a liquidity event of this magnitude.