4 Ways to Protect Your Assets From Your Great Ideas
BY Bill Harris
By all means, pour everything you have into that brilliant idea. But don't drain your assets.
Whether you are in launch mode or a decade into running your venture, you know toe dipping won't cut it; entrepreneurial success requires diving into the deep end of the pool. You have to go large. Everyone else can go work for someone else.
I'm all for an all-in entrepreneurial focus--except when it means investing (and leveraging) everything you have into the business. Draining retirement accounts to get up and running. Using a home equity line of credit to smooth over cash-flow hiccups. These are the kinds of moves that leave you dangerously unprotected and underdiversified.
I've spent the past 20 years running finance and tech start-ups. The smartest investment you will ever make as a founder? It's the important dollars you leave off the table--so they are there for your personal security.
Go all in with effort, not your net worth. My latest venture, Personal Capital, provides financial advice to affluent investors. Diversification is always the first thing I preach. Smart people know the principle--but a lot of them forget it the day they decide to start a business. Until you have $1 million or more in safe assets, don't invest more than 50 percent of your net worth in your business. If you're contemplating a start-up, maybe that means taking on investors or holding on to a current job while you get your venture up and running. For anyone with an established company, that can mean pulling money out of the business and investing it elsewhere. Low-cost exchange-traded funds provide you both diversification and a lot more liquidity than your business.
Find a partner. There are some start-up scenarios in which you're better off avoiding outside investors. But destroying your personal financial security to do so is not a risk worth taking. If your business needs more money than you can safely supply, find a partner. In order of preference, find a venture capitalist, an angel investor, a friend or family member who has enough assets to put some at risk, or a banker who will make a loan to the business without a personal guarantee from you. Ideally, find someone who believes in you and your business and wants to be a long-term adviser.
Cordon off a cash cushion. I am not talking about a credit card line of credit or a business line of credit; that's illusory liquidity that can be yanked at any moment--a fact anyone in business in 2008 can attest to. You need a separate personal cash account that can cover your or your family's living costs for at least six months, and better yet a year. It can be a bank or brokerage account. Just make sure it is not easily linked to your business accounts. You want it to be difficult to funnel personal money to your business. Eliminate that temptation.
Focus on your primary business: family. The expectation of every entrepreneur is that the business will pay for all sorts of family needs. Save for retirement? Nah; your plan is to eventually sell the business to take care of that. Tuck money away for the kids' college (and graduate school) costs coming down the highway in a few years? Nope; you'll just take more out of the business when you need it. But what if when you want to retire is not an ideal time to sell, or you end up selling for less than you anticipated?
The smarter approach is to pay yourself enough from the get-go that you can sock away money for your long-term goals. Try a low-cost 401(k) for you and your employees to save for retirement and a low-cost 529 savings plan for your kids' college costs. Might those savings become superfluous if your business grows as you intend? Let's hope so. But you know full well your business carries risk. They all do. You should be passionate about making sure your family is insulated from that risk.
BILL HARRIS, CEO of Personal Capital, was formerly CEO of PayPal and also Intuit, the makers of Quicken, QuickBooks and TurboTax. He founded numerous financial technology and security companies, and served on the boards of RSA Security, Macromedia, SuccessFactors, GoDaddy and EarthLink.