By Carl Stegman, Senior Vice President, Private Company Practice Lead, Fidelity Investments
As you build your company, you will make many decisions over the course of your journey to growth. Wherever you are on your path, it’s always time to plan. A plan for funding, how to scale, build value for investors, mitigate taxes, how to give back, and, how to move on. Here are some things to think about at the early, growth and exit stages.
1. Early stage: For a company founder, there is no such thing as “too early to plan.”
You’ve started with a concept you are passionate about and have assembled a group of like-minded professionals and/or family members. As you seek to raise capital and plot your way through the markets, having a plan that accounts for your entire journey will be something you rely on time and time again.
At this point, careful analysis and creation of your business model will determine if you can successfully monetize your product or service. It’s critical to have a solid business plan as early in your business’s lifecycle as possible. If you fail to plan early, that doesn’t mean you can’t plan later and adjust. But it will never be as efficient as it would be from the beginning.
Success can come faster than you think.
Back your vision with the solid foundation of a great team. Having a team that’s been there from day one provides your business with important context for decision-making. Your colleagues will witness the evolution of your vision and the historic reasons for choices that have been made.
From a tax planning standpoint, planning early in your lifecycle is the most efficient from a federal, state, estate tax and gifting perspective. Consider that tax can be imposed on today’s value versus what it may appreciate to later on. Many owners could benefit from planning with a tax professional much earlier in their lifecycle to weigh the tax implications for various scenarios you might encounter.
There’s no “set it and forget it” for your journey.
Having your financial controls in place, defining your structure and how to maintain it are all critically important. Does your financing support your infrastructure and plans for growth? Early in your existence, don’t neglect your governance plan while you seek investors and pursue markets. It will be critical to be both investor- and diligence-ready at all times.
2. Growth stage: Opportunities can develop quickly. Be ready.
To grow wisely, you must stay up to speed with your industry, the broader economy and technology. An equity event might be right around the corner. Having a strong governance plan will help you be better accountable to your investors, workforce, suppliers and customers.
- Don’t be taken by surprise. That next round of testing or new client might push you forward. You and your team will need an approach that is agile and responsive while adhering to your long-term vision.
- Your structures require ongoing care and maintenance. It’s critical to build “purposely” and ensure your operations are in good working order. As you move through your funding rounds, you will need to adjust your compensation strategy. Compliance, good liquidity advice and managing taxation are just some critical areas to consider.
- How you grow is important. How you give back says a lot about your organization. At this stage, many entrepreneurs review their philanthropic ambitions. Earlier, your capital may have been tied up in the company. That might not be the case now.
Entrepreneurs as Philanthropists: A Founder’s Mindset
When the focus is on growing your business, does philanthropy fit into the picture? Research from Fidelity Charitable® says yes.
“Entrepreneurs and founders have a really unique approach to giving back that is often reflective of how they built their business. They’re ready to roll up their sleeves and build deep relationships through giving and volunteering,” says Margot Navins, Vice President of Corporate and Executive Giving at Fidelity Charitable. “That’s why entrepreneurs are giving four times more to charity than other donors—their values and passion are driving everything they do, from their business to their philanthropy.”
Charitable giving helps you create your philanthropic footprint and can position you as a socially conscious leader and add value to organizations you care about.
3. Exit stage: Is it time to expand or exit?
Expansion: If you are considering expansion, key questions to ask yourself and your team: If you decide to expand, are you scalable? Are your people prepared for the complexity that growth will bring? Will your infrastructure support your goals?
New markets and/or geographic regions may be needed and critical to your business continuity. How will you address local regulations, tax implications and local workforce demographics?
Exit: If you are considering exiting, what is your exit strategy? How will you cement your legacy? If it is time to move on, there are some common scenarios: sales of the founders’ share to another company, passing down to heirs, acquisition by another company or an Initial Public Offering (IPO).
In the case of a family business, being the creator of multi-generational capital is akin to running a relay race. The family hands the baton to the next generation, giving them their opportunity to define and run the race and take ownership of the legacy.
As you prepare for this unique wealth-triggering event, don’t forget about charitable giving—donating privately held business interests early in your exit planning process may help you minimize the tax burden associated with the influx of income you’ll experience.
No matter where you are in your journey, be sure to get good help.
Fidelity helps private companies scale and grow across their business lifecycle. We offer comprehensive equity compensation solutions, equity compensation plan administration, service, and expertise through a collaboration with Shoobx, Inc. Learn more here.