You IPO'd, now what?
Updated: Mar 11, 2019
We are addressing news reports that came out this past week about the large number of tech IPOs expected in 2019.
Note: The video is ~18 minutes. To skip the context, jump straight to the 8:30 mark for the financial comparison between two scenarios after an IPO: Consume or Invest. You'll be thankful you watched it. It's worth your time. Scroll below the video if you would rather read the blog version.
Funny enough, I actually wrote this blog earlier this week after seeing a New York Times article titled: “Thousands of New Millionaires Are About to Eat San Francisco Alive.” and this morning when I opened up an app on my phone for ABC 7 local news, one of the first articles I see a new article talking about an “IPO Tidal Wave, expected to drive up SF Home prices.”
These reports talk about the large number tech companies expected to go public this year and the resulting flood of “new money” in the bay area. As the author puts it:
"They want cars. They want to open new restaurants. They want to throw bigger parties. And they want houses.”
(source: the article linked above, by Nellie Bowles at the NY Times)
Now, some of the accredited investors we already work with, here at Madison Investing have already experienced at least one “liquidity event.”
For these investors, a financial windfall in tech has resulted result from an acquisition or parts of a company being acquired.
An IPO is the most brand-able way of describing these things, but the point is: these smart, successful folks who worked hard to build a career, also realized that they could buy income streams with their newfound cash, and that was a way to build that wealth, instead of shrink it rapidly on consumption.
To be clear: if you want to buy that boat, or car, or jet, or McMansion: well, then good on ya. I think life is meant to be lived. This post is for the people interested in using that growing their wealth so much so, that you can spend cash on fun for years to come… and build a passive income stream to live off of for the rest of your life.
But this IPO stuff is fun to talk about, it’s exciting right?
For quick context: I currently work in San Francisco and live nearby, in the beautiful island city of Alameda. I have worked at 5 software companies throughout the past 13 years. Three of the startups where I’ve worked actually hit that coveted status of “unicorn” achieving a $1B+ valuation.
An interesting thing happens if you work at a startup that falls in one of these categories.At gatherings with friends and family, there’s this newfound perception that you jumped on board this rocketship tech startup company, and the people in your life ask you questions like:
“When you are going public?”
“Do you think it will happen this year?”
“Will you quit your job after it happens?”
“Are you just gonna go sit on a beach afterwards?
So, this article really hit home for me and i’ll tell you why. As an equity holder, myself… I’m not ashamed to say that Jennifer and I have run the “pipe dream scenario.” Why? Well, because it’s fun!
Here was our scenario a few years ago, and how we thought through it:
Careers: We both work fulltime and have 10+ year careers
“Hot” startup: of us works at a “hot startup” that has a shot at IPO in
IPO: Company IPO’s
IPO performs: The IPO goes well, and the value of the shares rises to a healthy level
We sell some/all shares: After a while, we decide to sell our shares for a 6 or 7 figure paycheck
Next step: We now ask the question: “What do we do with all this cash?”
Who doesn’t want to sit around and day dream about a six or seven figure paycheck?
Here’s the thing, though: When we ran that exercise, we bumped up against three key questions that we never saw coming. Not only were we unprepared to answer them, I think we felt embarrassed about our inability to even start answering them. It really caught us off guard.
Those two questions were the following:
What is the absolute best way to invest this cash?
How do we transform from a one-time cash event, into a recurring paycheck that sets us up for the rest of our lives?
These are tough questions to wrestle. After those discussions, many weeks passed without any action. Until a rare, quiet moment on a Saturday when I realized…
“the wealthy have answered these questions. Let’s find out what what they do with their capital.”
Those early discussions, years ago… sparked the initial interest for us to go investigate the world of real estate investing. After hearing stories about these successful folks who formulated a plan deploy capital after this huge, one time spike in income.
What did we do next? We did what nerds do: we built a spreadsheet.
Consume or Invest?
So here’s the silly scenario we mapped: we asked the question “what if this company goes public - has an IPO - and we personally made $1M. Let’s weigh the pros and the cons of these two scenarios. What should we do?”
Scenario A: Consume
After taxes and some convenient rounding, I have got a nicely rounded $500k
Turns out, I really like cars. So i start looking at new luxury cars that fit my baller budget.
We’ll use the 2018 Rolls-Royce Phantom for the sake of relevance. I was checking out other awesome cars at the time, including Tesla’s, Bimmers, Audis, etc.
The 2018 Rolls-Royce works for this story, since it runs close to budget at $450k. I can buy that!
By the end of year five, my super cool 2018 Rolls-Royce Phantom will have lost significant value. To be fair, i’m not an expert on how fast these cars lose value, but the assumptions plugged in here are actually more conservative than recommended estimates. That’s for the skeptics out there.
So, by the end of year 5 after buying the phantom, it’s now worth less than $400k.
Scenario B: Invest
Buy passive income streams
Starting off, after taxes, we would still have that nicely rounded $500k
What if we thought about it differently? What it we took that $500k and partnered with the right people who could put it to better use
So, we ran the scenario that we could break our $500k down into 10 $50k chunks, and invest those into commercial real estate syndications, as limited partners.
In the first full year after doing that, we would already be generating $40k in passive income, for doing no work except for vetting the deal up front and signing some paperwork
This was based on an assumed 8% preferred return on syndications with a 5 year hold period
Just in year 1, we saw that if we that invested that $500k across 10 deals, in $50k chunks… it would generate $40k per year for us in the in that first year. And based on how these syndications are structured, I’d receive those payments,monthly or quarterly, depends on the deal I invested in.
Monthly income would look like this:
Monthly: $333 per deal / $3333 total
Quarterly: $1000 per deal / $10,000 total
That would be like hiring an employee who we
didn’t have to manage,
who generates income for us while we sleep.
Then, we took a look out for the full 5 years and it got even more compelling to us. Why?
Because, unlike the Phantom scenario, after we invest this capital…
..the money comes back to us again in 5 years, with more money.
These projects we had invested in, would be sold at the end of the 5 year hold period
Each of these investments would return back our $50k back to us, along with $25k per project
… and through that whole 5 years, the investment was generating $40k in income, per year. That would be $3,333 per month
And that $3,333 in income would be taxed less than the W2 income from our day jobs!
SO, when it’s all said and done. We saw that 5 years after our tech company had an IPO… we had two potential futures ahead of us.
Scenario A: Where we bought a rad car that left us with no passive income, and no additional capital to invest.
It would probably be a blast to drive and our friends would think it’s cool
Scenario B: We didn’t have a rad car, which is a bummer. But we saw what else we would get:
Passive income of $40k per year, the same year we invested it. That income could be spent on life, giving back or on fun
We would still have our $500k at the
We would also have $250k more capital from the sale profits after these projects finished
Those were the scenarios we ran, when we bumped up against those two questions. So i’ll pose them back to you know, in the hope that you will lean into these questions, if-and-when you are faced with a GREAT PROBLEM TO HAVE: you brilliant, hard working and successful tech executive.
Are you prepared to answer the questions when you encounter your company’s liquidity event:
What is the absolute best way to invest this cash?
How do you transform that one-time cash event, into a recurring paycheck that sets you up for the rest of your life?
The tech executives and investors we already work with us built a strategy to address these questions, and in partnership with us, have taken steps to step up life to a different level… sustainably.
At Madison Investing, we educate accredited investors on how to build passive income. If you to learn more about how this works: sign up for our monthly newsletter - fill out the simple form on our website homepage at www.madisoninvesting.co.
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Have a great week, investors.
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Under no circumstances should any material at this site be used or considered as an offer to sell or a solicitation of any offer to buy an interest in any investment. Any such offer or solicitation will be made only by means of the Confidential Private Offering Memorandum relating to the particular investment. Access to information about the investments are limited to investors who either qualify as accredited investors within the meaning of the Securities Act of 1933, as amended, or those investors who generally are sophisticated in financial matters, such that they are capable of evaluating the merits and risks of prospective investments.
Disclaimer: This article is intended for educational purposes only and does not constitute investment advice. You should always contact a registered financial professional before acting on this, or any advice. I am not a tax advisor or financial planner. This article represents my opinions.