Asset Rich But Cash Poor - The Tech Founder's Dilemma

When you hear the term ‘millionaire’ — what comes to mind? Penthouse apartments? Lamborghinis? Jetting around in a private charter (owning a jet is for billionaires unfortunately)?

Sure, in some cases, that might be accurate, but when we’re talking about tech founders, their lifestyle can often look more like that of a recent university graduate rather than a typical multi-millionaire.

And it’s not because they’re humble and unswayed by the trappings of modern society. It’s down to one concept.

Liquidity.

Because while an entrepreneur, and tech founders in particular, can be worth millions on paper, without liquidity, this doesn’t translate into real life.

In this article, we’re going to look at exactly what liquidity is, how it impacts tech founders and how they can ensure that getting wealthier actually improves their quality of life rather than just adding an extra zero to their paper wealth.  

What is liquidity?

So if you don’t already know what we mean by liquidity, you’re probably starting to get a sense of it. But before we get into the nitty gritty on how tech founders should manage their own liquidity, let's cover what it is.

Liquidity is essentially how quickly you’re able to turn your assets into cash. So cash itself is fully liquid because it’s already there and can be used immediately.

Publicly traded stocks in large companies like Apple, Citi or Nvidia are pretty liquid too, because you can sell them today, and you’d have the cash in your account within a few days. That’s the same for ETFs, and even some index funds which can be turned into cash in less than a week.

Beyond that, liquidity is often measured in weeks or even months rather than days.

Real estate is the obvious example. You could have £5 million in property, but even in a good market, it could take you months to go from listing to sale to cash in your bank account. Other types of illiquid assets are things like artworks, wine, antiques and classic cars. 

All of these can have substantial value, but turning them into cash can take some time.

The liquidity profile of private companies

But arguably, the most illiquid asset class of all is private companies. 

Privately held, non-publicly traded companies can be worth huge amounts of money, but they can also be very difficult to sell. Even selling stock in the most valuable private companies — think Uber or Airbnb before they went public — can be a time-consuming and complicated process.

Secondaries allow early employees or founders to sell part of their equity to another investor. But to do that, they need to find a buyer who wants to purchase the number of shares and the share price they’re looking to sell. 

For larger companies, there is often an employee liquidity pool which helps facilitate the transactions between the buyers and sellers, but even then, it’s not likely to be a quick process.

For founders, this can be a particularly relevant problem. Because while it might mean you have a net worth into the multiple millions, you aren’t necessarily able to access any of that cash. 

And if you can’t access any of it to improve your quality of life, are you really wealthy at all? 

The ability to spend money on quality of life is the reason we earn money

Because, at the end of the day, spending money to improve our quality of life is what makes us wealthy. Now sure, there are limits. At a certain point, people spend money for other reasons, such as status or philanthropy, but if that’s important to them, then it’s still potentially spending that can improve their quality of life.

But far before that point is reached, money is able to create a life that is enjoyable, rewarding, fun and fulfilling. 

Money can mean paying others to do chores and tasks that we hate doing and freeing up more time to spend with our family and friends or in pursuit of hobbies we love.

Money can mean being able to visit incredible places all around the world, experiencing different cultures and trying new things.

Money can mean not having to worry about the heating bill or the cost of groceries or school fees. 

Money means the freedom to make choices in our lives based on what we need and want rather than what we can afford.

Everyone's definition of needs and wants are going to be different, but at the core, that’s what financial freedom is all about. And that’s why liquidity is so important. Because without being able to access the money we’ve accumulated, it means nothing.

Sure, it might be that it grows more for the future big payoff, but it’s incredibly important not to put off living now for a ‘maybe’ down the line.

The typical tech founder journey

For many tech founders, the issue doesn’t end with their own company. Because entrepreneurship, and especially tech entrepreneurship, has a very strong sense of community. 

Founders often work on projects together, network together, are part of the same Telegram communities and start companies in accelerators or incubators with other founders. In that community, they see lots of incredibly talented people building exciting things.

And so, if they do take a secondary at some point and finally have some liquidity to play with, they want to invest it. But not in the public markets where they can access it. No, often, these initial investable assets go into angel investing.

They finally manage to extract some cash from their own illiquid balance sheet and then immediately put that back into assets that are even more illiquid. Because this time, they’re likely to have far less control over how, when, or even if they get their money. 

We don’t need to go into the odds of those angel investment bets amounting to anything. You already know how slim they are. But even for the ones that do succeed, the investor could be looking at years and years before they’re able to access their returns or initial capital.

There is a better way

So for many tech founders, they have this key problem of limited liquidity that can be used to improve their lifestyle and quality of life. So if maintaining all their net worth in their own private company and angel investments isn't the way to go, what is?

Simply put, tech founders should take their liquidity profile very seriously. There are two key aspects to this for those in this position.

Seek secondaries

We’re big believers in founders taking secondaries. Taking some money off the table doesn’t show a lack of belief in your business; quite the contrary. By unlocking value that can allow you to survive and thrive in your own personal finances, it means you’re free to make decisions that are best for the business without worrying about how it might impact an IPO or future acquisition.

It allows founders to take a long-term approach that isn’t impacted by their own needs to buy a home for their family or pay for medical treatment.

Taking a secondary allows you to move funds from an illiquid source into a liquid one. But what you don’t want to do is take £250,000 from private company stock and simply have that sitting in cash, earning next to nothing.

Invest in liquid assets that diversify away from tech 

You want those funds to be invested in a way that can allow them the opportunity to grow over the long term. That way, you’re covering yourself against rising inflation and ideally generating real growth over and above that.

But you want to do this by maintaining liquidity. Luckily, this is simple. Investing in a wide range of publicly traded companies or highly illiquid assets provides the best of both worlds. Exposure to high-quality investments with the potential for growth while also maintaining access to the funds at short notice.

For tech founders especially, diversification away from tech is important. If your own company is in tech, your angel investments are in tech and your mainstream investment assets are heavily biased towards tech as well, you’ll be in a world of hurt if tech goes through a rough patch. 

Imagine if you’d ‘retired’ in 2022 with a portfolio like that?

Diversifying your assets means that your plans aren’t impacted by a rocky period in a single sector or market.

Diversify to thrive

A word of caution. A ‘robo’ or DIY portfolio isn’t necessarily going to work for a tech founder with significant assets. One of the key concepts of portfolio management is ensuring sufficient diversification. This helps minimize volatility, but more importantly, also helps avoid long-term underperformance.

Proper diversification isn’t just about spreading the portfolio assets. It’s about understanding how that portfolio fits into your overall net worth. For example, say a founder has a company that offers a tech solution to UK supermarket chains.

Would they really want an investment portfolio heavily weighted towards UK supermarkets? Should they go through a downturn, the founder would not only suffer a hit to their portfolio valuation, but their company would probably come under pressure too.

That's why, at Rosecut, we take a holistic view when providing advice to our clients. We look at their whole situation and ensure their assets are positioned for long-term returns while also managing risks that are unique to their own circumstances.