A new wave of dot-coms is turning heads and building paper wealth for tech company workers. Unlike many who suffered in the crash of 2000, "dot-com 2.0" option holders are apt to assume they're riding a bubble — and they're looking for help to make the most of their unrealized riches.
This cautious view may ultimately pay off for employees with financial stakes in companies like LinkedIn Corp., Groupon and Zynga, according to Sekai Farai, an anthropologist who has studied technology startups. "It makes them more receptive to advice."
Rob Francais, head of the wealth manager Aspiriant in Los Angeles, agrees. "People worth $25 million, $35 million on paper are quick to call it a bubble this time," he said. "Whether they're right or wrong isn't the point. The point is they see a need to take action."
Managing a paper millionaire's wealth should take into account many variables. It matters, for instance, if the client owns company shares, options or both. In addition, a company's policies on buying or selling shares and options can determine investment and estate planning strategies, as can a client's age, the extent of his fully realized wealth and his estate planning needs.
Today's market for initial public offerings isn't as hot as it was in the late 1990s. Back then hundreds of companies went public, not dozens like in recent years. But when an IPO is in the cards, financial advisors can help employees who can't immediately sell shares to hedge concentrated positions, and help them structure eventual payouts to make the most of pre- and post-IPO share price spreads.
This arbitrage can play into wealth-transfer strategies too. One involves making gifts to the shareowner's heirs, issuing a short-term annuity to the donor to offset the gift, and allowing any increase in the stock price (above today's low interest rates) to go to the donor's heirs, free of gift and estate taxes.
But some promising dot-com 2.0 companies may delay IPOs because they raise cash from private investors. And if capital market conditions deteriorate, others may not get to an IPO for years. So, where companies allow such transactions, employees turn to wealth managers for help selling unexercised options in hard-to-access private exchanges.
Dot-com 2.0 millionaires whose companies keep them from selling options need advice on when, how and to what extent they're likely to cash in on their holdings. In this context, they may need help making long-term financial plans that don't depend "on a paper asset that may never be realized," Francais said.
New dot-com millionaires reflect a broader demographic than their late-1990s counterparts, and include seasoned veterans who missed the first tech boom altogether or failed to profit from it.
These older workers often call for more conservative investment approaches than their younger counterparts, Francais observed, and they're likely to have existing savings in addition to their new and largely unrealized wealth.
Dave Shore has seen the price that paper millionaires can pay for poor planning.
A friend of his got a call about 12 years ago, when Internet stocks seemed unassailable. "It was from an advisor — and it wasn't me," said Shore, founder of Marin Financial Advisors in Larkspur, Calif. "He told my friend that he could set him up for life." The other advisor was offering to help Shore's friend turn stock and options in the publicly traded dot-com that employed him into less risky holdings. His pal took no action — and the company in question then succumbed to the dot-com meltdown.
