Thinking About Thinking

What To Do With Sudden Wealth?

Posted in Philosophy, Pop Culture by larrycheng on December 1, 2011

Your company just went public and the lock-up period is over.  Your company got acquired and your share of the proceeds just hit the bank account.  (Or, you’re wealth managers from Greenwich, CT, and you just won the lottery.)  For some fortunate folks, any one of these events can lead to a sudden influx of sometimes substantial wealth.  What you’ve been thinking of as paper wealth for months and years, is now real.  So, what do you do?  This question was posed to me recently, and I thought I’d share my thoughts as I’ve seen this scenario play out for many individuals through the years.

My general guidance is pretty simple: Try not doing much of anything different for one year.  Stick the money in your bank in some cash-like instrument and forget about it for a year.

Some ideas of things not to do in that first year:

  • Go on a shopping spree and buy new cars, homes, planes, gadgets, clothes, etc.
  • Give the money to any number of money managers calling you offering their assistance to “manage” the money.
  • Get into financial arrangements with family and friends.
  • Quit your job because you’re rich.
  • Hire personal staff.
  • Buy a country club membership.
  • Change how you travel or vacation.
  • Become an angel investor.
  • Go to Vegas.
  • Change your friends or social circle.

The point of raising these items is not to make an implicit value judgment on any of them.  What I do think is valuable, though, is letting there be some breathing room from the time your new found wealth hits your account, and the time you start engaging with it.  Any number of these items you can still pursue just the same one year later if it’s still important to you.

What’s the value of the year “waiting period”?  You remove yourself from the pressures, expectations, and emotions of the moment.  That dynamic can often lead down a road where wealth is lost, relationships are injured, and a positive experience turns into a bad one.  So many bad decisions are made in that first year when you and your wealth are most vulnerable due to the confluence of so many factors.  There’s a reason so many lottery winners end up unhappy.  There’s a reason professional athletes end up bankrupt at alarming rates.  While accruing wealth from a successful start-up is a different process than winning the lottery or being an athlete –  some of the pressures and dynamics of sudden wealth remain the same and unfortunately some of the end results are the same as well.

A few important caveats.  I’m not making a suggestion on whether you should sell your stock if that’s the currency of your wealth.  That’s a personal decision and perhaps a topic for another post.  But, whether you choose to sell your stock or hold on, these suggestions remain largely the same.  Additionally, two things I’d consider doing in that first year, if it didn’t open the floodgates on items listed above, are: (1) pay down debt and (2) give to charity.

Is this incredibly boring advice?  Yes, guilty as charged.  Is it unnecessarily ascetic?  It definitely comes off that way, but I’m hardly an ascetic person.  I just view pursuing such a path as a lot of upside and no downside, while doing the reverse is a lot of downside without much upside.  What you do in that first year of having new wealth may ultimately be the most important investment decision you make.

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  1. Gordon Bowman (@gordonbowman) said, on December 1, 2011 at 4:15 pm

    Great advice Larry. Definitely an important topic.

    Can you expand on why you wouldn’t advise any angel investments? Even a relatively small amount, say 1-2 investments? Seems that it would be a great way to give back and help fellow entrepreneurs.

    • larrycheng said, on December 1, 2011 at 6:23 pm

      Gordon, I think angel investing is a great thing. It’s not that I have an issue with any particular use of proceeds. I just think there’s often a higher benefit of just letting some time pass before making any commitments or expenditures. You can always be an angel investor in a year if that’s what interests you – or perhaps just invest in an angel fund since that’s what they do for a living.

      • Gordon Bowman (@gordonbowman) said, on December 1, 2011 at 8:55 pm

        Makes sense. Agreed a year of no spending provides a great buffer. Once the year is up up you will certainly have a lot better of an idea how to put that money to use.

  2. julespieri said, on December 1, 2011 at 9:55 pm

    Larry, I expected a bunch of “I wish I had this problem!” comments on your post…you have a very respectful readership. But I do wish I had this problem. 🙂

    • larrycheng said, on December 1, 2011 at 10:01 pm

      Jules – If all of my respectful readers did their holiday shopping at Daily Grommet, maybe you will have this problem sooner rather than later!

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  4. Blaine said, on December 13, 2011 at 12:54 am

    Does it make sense to give to charity an amount to lessen the income tax bite that first year?
    Or is the exorbitant windfall not considered gross income for tax purposes.

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