Waking up a billionaire - Sanity checklist
“Whatever structures you put in place and however passionate you are about your business, make sure your children have the freedom to choose their future and are not burdened by their legacy”.
This February, Whitney Wolfe Herd, a mother aged 31, woke up $1.5 billion richer after Bumble, her dating app business, floated its shares on Nasdaq. She had built the business in less than six years. On her journey she won a sexual harassment case against Tinder, a company she co-founded, dealt with hate mail and brought up a young child. And now she is the latest in a growing number of young entrepreneurs making serious money fast.
While success and personal wealth are always a goal for entrepreneurs, this scale of success is stratospherically different. We have been talking to several multi-millionaires and billionaires, many of whom had more time to prepare for such a windfall.
It pays to develop a plan, and a checklist, to retain your billionaire status and leverage it.
What next?
On waking up a billionaire you need to decide what to do next – should you set about preserving your wealth or expanding it? The drive that got them this far means billionaires are unlikely to put their feet up and retire. Some entrepreneurs will choose to start again, either on their own or by backing someone else. Others will turn to personal passions outside the business arena. But they will need to realise that their liquidity event will almost never result in a clean break. Many billionaires remain actively involved in their original business or shackled to corporate managements who never quite seem to live up to expectations ….
It is important not to get distracted by all this. Just as it has taken years and masses of effort to get to this point, it is going to take a while to get accustomed to your wealth. The biggest gift which new financial security gives is time; time to get the next steps right. Billionaires needs to pause, relax and work out what they need to live, what they want to save, what they would like to invest and what they want to give away. Slowing down is never going to be easy. As Elon Musk once said: “patience is virtue, and I am learning patience. It’s a tough lesson”.
But it repays to study. As Warren Buffett said “No matter how great the talents or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant”
Anxiety about making the right decisions becomes less when decisions are made with those closest to you, whether they are business partners or family. It is a sad fact is that many billionaires wished they had involved their children earlier. This is when they need a trusted adviser who can produce investment and lifestyle options, discuss their performance targets, plus set up a family office, if they so desire.
And you don’t need Bumble to know the importance of the right network: great lawyers, sound accountants, helpful peers and a team of outstanding investors to develop new, and tailored structures. Remember, before the IPO or sale, your wealth was locked into the business. Suddenly, it is at your disposal almost overnight.
Risk factors - a ten-point checklist:
The stress of not being in control. Having been in charge of every aspect of your business, suddenly investment decisions are delegated to others. You will own financial assets which are new to you. This is intensely stressful when a financial crisis hits, and your paper net worth collapses 25 per cent.
Investing money sensibly can make you cash poor. You may well lack the cash flow to spend on yachts, planes and residences, all of which guzzle cash. You may also discover that the money you make on the stock market may not compare with the returns from your business.
We all know that we should never sign anything we do not understand. This is doubly important for the ‘uber rich’ who have so much at stake. Have an adviser check the small print of everything.
It is too easy to overlook details, starting with your will. The chaos and stress it creates for your loved ones should you die intestate is massive.
A family office, like any business, needs managing. This can cause frustration as your new team learns what matters to you. Unless you come from the financial world, it will take time for you to get up to speed on investment markets.
Big mistakes happen when people believe their success makes them infallible. They need their trusted advisers and specialists to complement their own skillset. You need specialists to advise on investment decisions that lie outside your area of expertise.
The corrosive impact of inflation is easy to underestimate. $1 billion under the mattress would be worth $544 million after 24 years assuming a (modest) 3 per cent inflation rate. And don’t assume that CPI is the right measure of inflation – the underlying rate can be much higher.
The toxic effect of fees. A $1 billion portfolio incurring fees of 0.75%, growing at 6 per cent annually after fees would, in 20 years, be worth $3.2 billion. If the fees were reduced to 0.25% the portfolio would end up $300 million larger, at $3.5 billion.
FOMO can creep in. Every banker and private equity specialist in town will be pitching to manage the newly acquired cash and invest it in the latest hot tech, biotech, cyber, data mining Amazon/Apple/Googles of tomorrow. Until there is an investment strategy and the resources to do the due diligence, say no. There will never be a shortage of investment opportunities down the line.
Paralysis. You will feel you face far too many decisions. It is all too easy to be overwhelmed. You need to delegate. And do not automatically default to reckless conservatism. You may feel safe with cash in your coffers, but it has offered a poor return to investors over the years.
The family fits in
One of the nicest benefits of wealth at a young age is the ability to lay the foundations of a healthy and prosperous family, and to learn from the mistakes of others who built their wealth at the expense of their families.
Too many have learned the hard way the damage wealth can have on the next generation. A big challenge parents face is how to make sure that their money does not mess up their children by the feeling of entitlement and believing that money is the answer to all their troubles.
“I wanted my kids to be better than me and I thought that would happen if I gave them everything and saved them from the struggles and suffering I experienced; I didn’t want them to know that pain, but that was a mistake”. These words were spoken by Sidney Frank, who sold Grey Goose to Bacardi for $2.5 billion in 2004, to his lawyer a few months before he died.
Do not to give too much money to children when they are too young. Wait until their 30’s, make them work for a living, be a good role model, exercise tough love and spend time rather than money with them.
Adjusting to newfound wealth is a lengthy process and involving the wider family as early as possible is best. Being open and transparent about plans and expectations reduces friction between siblings and builds trust with parents. We have come across situations where well-meaning parents wanted to protect their children from knowing the extent of their wealth so they would not be burdened by it, teased at a school, or attract the ‘wrong’ friends. This is great in theory but in the digital age your wealth is impossible to hide.
We have experienced offspring of the super-rich feeling insecure and judged for not being as ‘successful’ as their parents and valued for themselves. As the family and wealth grows, each successive generation must work harder to become their own person and not to be defined by the family business or the family wealth.
As one billionaire wisely told us, “Whatever structures you put in place and however passionate you are about your business, make sure your children have the freedom to choose their future and are not burdened by their legacy”.
Giving it away
This next generation of billionaires is bringing with it a very different approach to philanthropy. They’re committing big sums earlier and looking for more focus, commitment and collaboration. Mackenzie Scott became a multi-billionaire overnight as a result of her divorce from Amazon founder Jeff Bezos. In a very short time, she has raised the bar for fellow billionaires, donating around 10 per cent of her fortune of $55bn, mainly through unrestricted donations.
Whether you want to be the next generation’s Bill or Melinda Gates, or whether you delegate the implementation of your giving, the key is to take a business-like approach, with a strategy, objectives, and performance metrics. And accept that not everything will work.
Just as important is to involve the family. Having different generations around the table contributing their ideas and monitoring the impact, results in shared values being reflected in the strategy and deeper engagement of everyone involved. Many families use the investment management of their foundations for teaching family members about investments and inviting family members to join investment meetings from an early age.
One reason to set up philanthropic objectives and appoint a gatekeeper early is to deal with all the charitable donation requests that will come pouring in. It will make it much easier to say ‘no’. What some billionaires underestimate is that not only do you have the freedom to give, and give substantially, but that the gift can be amplified. Great wealth provides access to power and influence so it can be used to increase the impact of the giving. Giving anonymously can be simpler but not necessarily as effective.
The person you are
Many hard-working, focused, and successful entrepreneurs are quite unprepared for the impact their newly publicised wealth and lack of privacy has on both professional and personal relationships. You need to rethink your public profile and get used to the fact you will be judged no matter what.
As one young multimillionaire told us “I was expecting to be approached by ‘fake friends’ and advisers but was unprepared for how isolated I felt at first”.
Even within close circles people can become envious, expecting the tab to be picked up and yet uncomfortable around increased luxury spending. It can take time and effort for close friends and family to feel they belong in your new billionaire world. All of this means it can be lonely at the top and hard for the newly super rich to know who to trust.
In spite of billionaires and multi-millionaires being advised by first class lawyers, accountants, trustees, investment specialists, as well as philanthropic and reputation management consultants, the responsibility of living with significant wealth cannot be underestimated. Best not to cut corners, your advisers are needed to ensure that the family wealth is preserved, enhanced, and is impactful.
The most forward-thinking billionaires put the greatest value on the adviser that helps them keep a sense of perspective. They know that, more than ever before, they are surrounded by ‘yes men’ fearful of losing their jobs and fearful of challenging. They value the trusted friend, the independent adviser who is prepared to hold up a mirror to keep them grounded.
An abridged version of this article was published here.
