Newly Rich Are Generally Risk Averse, More Likely to Buy Tesla than Ferrari: Wealth Advisors

All across Silicon Valley, people are getting rich through sales and IPOs of startups in the social media, cloud, SaaS and data analytics sectors. They’re just not getting as rich as they thought they would.

While Instagram, LinkedIn, Splunk and a few others have secured and sustained better-than-anticipated returns, the more common story in recent quarters seems to be one of underperformance relative to expectations. From Facebook to Zynga to Groupon, the most closely watched offerings in the social media space have all recently posted dramatic drops.

Granted, they’re all still worth billions of dollars. And early investors and founders should still walk away with enough to add their names to the world’s richest lists. But for those with smaller stakes – in particular, early employees with stock options – selling shares won’t deliver the kind of payback expected just a few quarters ago.

So what’s a newly sort-of-rich, stock option-holding working person with a day job to do? The yacht and private island are out of reach, and paying down the mortgage is so mundane. Launching or funding a startup sounds appealing, but it’s fraught with risk. And putting money in the stock market – well, that’s been a good way to make 0% returns for the last decade.

To put in perspective where much of the wealth from the latest run of exits will and should go, I spoke to a couple of wealth advisers with expertise in Silicon Valley new money. John Benevides, president of family office services at Harris myCFO, says he’s seeing increased risk-aversion. Hilary Martin, of the Family Wealth Consulting Group, says she’s seeing people becoming more socially and environmentally conscious about their conspicuous consumption.

Following are excerpts from our conversations:

peHUB:  We keep hearing about all the Facebook millionaires. Do you know just how many there are and, with the recent stock drop, what kind of windfall they’ll be looking at?

Martin: After lockup, I expect the majority of option holders at Facebook will come out with between $2 million and $5 million if the stock stays around the IPO price [but about 25% less at current prices]. Overall, among founders, employees and investors, there were a handful of billionaires, dozens of centi-millionaires, probably a hundred deci-millionaires and about a thousand millionaires at the IPO price.

peHUB: How about some of the other big exits? I’m estimating that for most venture-backed companies, about 10% of the stock goes to employees who are not in C-level positions.

Martin: In typical Silicon Valley companies, 10% is about right. In Facebook’s case, the company’s valuation rose so quickly that there was a lot less dilution. In this case, the number is likely to be 2x to 3x the normal — so the employees have more like 20% to30 percent.

peHUB:  The technology industry has long been a big generator of new wealth. But are there noticeable changes in the ways the newest of the newly wealthy – particularly those with earnings of a couple million as opposed to billions – are spending and investing their money?

Benevides: If you’re talking about what has shifted in terms of cycles, clearly 2008 and 2009 had a profound impact on everyone. For the most part we’ve seen a more conservative approach to wealth. For those getting several hundred thousand to a million or two million dollars, we’re seeing a more conservative approach to how they’re investing their funds. We’re also seeing, for larger portfolios in particular, a tendency of people to want to invest privately. They’re pouring money into non-liquid alternatives such as real estate, businesses and commodities. Part of what’s driving that seems to be a distrust in the market.

Martin: What we’re seeing really is this consciousness about being part of the 1 percent. There is a backlash in the public perception about being rich, so I think that people are making an effort to do things like get involved in movements. If you’re going to be public about your small windfall, then I think the cultural trend would be to get involved, give back, donate to charity, or invest in startup stage companies. That last one I would estimate to be very financially risky.

peHUB: Are there types of conspicuous consumption that are more popular, stable or in decline?

Martin: You’re more likely to buy a Tesla than a Ferrari or a Leaf or a Prius. But I actually think there’s some cache to people who keep their old cars. They drive around in their beat up cars because Warren Buffet does that. People are consuming more experiences, like taking three months and hiking Machu Picchu or taking a sailboat from Greece.

peHUB: What’s your general advice for techies who are poised to get a couple million bucks as a result of an IPO or acquisition?

Martin:  Windfall recipients are subject to costs that others aren’t. That’s because most people make money steadily over time, so they have the opportunity to figure out how to budget. With a windfall, the problem is if you make a mistake with that money, it’s gone forever. But people who’ve never had that kind of money don’t really get their mind around how much it is and, frankly, how much it is not. Five million dollars is spendable very quickly.

I’d say you should probably wait a year before you make any major decisions such as buying a home or doing something with more than 5% of the money. You really have to wait until the emotion from that windfall event. There’s a period after which those emotions subside and it’s afterward that you should put your investments into action.

Benevides: Planning is critical and pre-planning is even more critical. We focus on the national scene, and our opinion is that taxes will increase as we go forward, so active planning to address tax optimization becomes more important. Another part of the discussion is when and under what conditions to sell the options.

Wealth gets complex quickly, no matter what size windfall. And if you receive $500,000, $1 million or $1.5 million, you likely aren’t going to go off into the sunset for the rest of your life,  even though that is a significant sum.

Image credit: Photo of Tesla Roadster courtesy of Tesla Motors

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