What to Do With $10 Million

Back in the dotcom days, the hubby and I made a pact. I’d hold a corporate job for stability and benefits, and he’d throw mind, body and soul into what became a series of startups, hoping we’d become IPO-rich.

Lake TahoeAt one point, we held 3% of a company that received a $400 million buyout offer, meaning $12 million for us. Finally, after watching friends and acquaintances get rich and cash out, it’d be our turn for an IPO payday, the holy grail of Silicon Valley.

Much like today’s Snapchat employees, we pondered what to do with all that money.

Our wish list was almost cliché: dream house in Tahoe, new cars, exotic vacation and invest the rest. We weren’t exactly sure how to invest or what to invest in, but surely our name-brand stockbroker/financial advisor would help us figure it out.

Sadly, people who come into large sums of money often lose it.

The story of how Sharon Tirabassi won $10 million in the lottery and subsequently frittered it away is all too common.

But it’s not just lottery winners. Engineers, executives and other smart people do dumb things with money, too. Read Duncan Riach’s raw story about what he went through after becoming suddenly rich, and you’ll see what I mean.

I know people who retired in their thirties and remain so to this day, well into their fifties. I know others who dropped out for years but eventually had to return to work when the money ran out. I even know a guy who burned through $300 million and is now down to less than a twentieth of that, rolling the dice on his next startup.

Looking back, I wonder if we would have made these kinds of mistakes. Because if you’re not born into money, you’re often not taught how to preserve and grow it, and the sea is swimming with sharks looking for noobs to devour.

Now we have another startup on the horizon, one that might go big. So it’s worth revisiting the $10 million question. After many beatings in the school of hard knocks followed by years of financial education, I now have a better idea of what to do.

The first thing I’d do is to call a tax professional.

Uncle Sam gets paid first, always. And the rules are constantly changing, so only a competent tax advisor is qualified to help you through these murky, moneyed waters. I am not a tax expert, but here are some issues to think about.

Once your company goes public, there’s typically a lockout period before you can sell any shares, often six months. If you sell before holding the stock for one year, your proceeds are taxed as income under current federal tax code. If you wait and sell after one year, your proceeds are taxed as capital gains, currently assessed at a much lower rate.

Here’s an example. For simplicity’s sake, we’ll assume you live in a tax-free state, and we’ll use rounded, hypothetical federal tax rates to illustrate the point.

With $10 million in stock to sell during month seven, if the income tax rate was 40%, after paying the federal government, you’d get to keep $6,000,000.

But if you waited until month thirteen, your proceeds would be taxed at the lower capital gains rate. With a hypothetical rate of 20% and no change in stock price, you’d get to keep $8,000,000.

The problem with waiting is that post-IPO stock prices tend to trend down, especially around expiration of the lockup period. So do you sell now when you know the price, or do you sell later to get a better after-tax return, hoping that prices stay strong? The answer is different for everyone, and nobody has a crystal ball that predicts stock prices.

A bird in hand is worth two in the bush.

Personally I’d stagger my selling. I’d sell half as soon as I could to realize $5 million and pay Uncle Sam his larger chunk taxed as income.

Yes, the higher tax rate hurts, but then I’d have the certainty of approximately $3 million in my possession versus the uncertainty of how much I might lose if the stock market takes a dive. Imagine watching your stock lose 50% as you wait for that one-year mark, when everybody else at your company plans to sell, too.

Of that $3 million, my personal choice would be to put $2.5 million to work with a talented portfolio manager, someone I know and trust, with an objective of 7% net income per year, or $175,000.

I’d choose to put the rest into a savings account earmarked for emergencies and use some of that money to purchase gold, which I’d keep in a private, secure location that’s not a bank deposit box. Call me paranoid, but boxes can be seized.

Why gold? Because it has long history as a medium of exchange in human society.

Do not rush out to buy houses, cars and vacations, despite what others do.

Resist the temptation to splurge on short-term, splashy pleasures. Think sustainable. Set up a money machine that pays you every month for the rest of your life to achieve financial freedom. Don’t touch the principal, no matter what.

In fact, I’d speak with an estate attorney about the possibility of putting it into a trust, to further protect the principal in the years ahead.

So if you’re a Snapchat engineer earning $250,000 a year, and you invest $2.5 million with a money manager seeking 7% after fees, you’ve just replaced 70% of your salary with passive income. Keep your job for a while longer, and use the added income from your investments to buy yourself a treat if you must.

In my case, I’d sell the remaining $5 million at the end of my one-year lockup, unless my tax accountant had a better plan. After taxes, I’d have approximately $4 million left using our hypothetical tax rates.

Stocks, bonds and cash are great, but what about things like real estate?

I like property because it’s tangible—you can touch it, walk it and improve it. My personal choice, and this isn’t for everybody, would be to put $2 million into a quality apartment building, looking to net 5% after expenses, including management. Yes, it’s like running a little business, but worth it for the control.

If these returns were achieved, this asset could yield an additional $100K per year, bringing my income up to $275K. Charitable giving to anyone, family included, would come from this flow.

Debt repayment would also come from this flow, though it may make more sense for others to retire debt from the initial proceeds. It just depends on your situation.

For any Snapchat engineers following this strategy, they’ve now surpassed their salaries with passive income. They can quit any time and be financially free. Of course they’d probably need to leave Silicon Valley to live comfortably, because apparently even $10 million doesn’t cut it these days.

I’d place the next million with my portfolio manager on a pay-for-performance basis and take no income from this account. The funds would be allocated for growth as a buffer from future inflation and to increase wealth over the long term.

The last million I’d treat as fun money, because what’s the point of living if you can’t feel alive? I’d spend $800K on a place in Tahoe and blow the other $200K on cars, trips, an Airstream or whatever.

That’s just what I would do. I’m sure it’d be different for you.

So let’s review. After selling $10 million in stock, I kept approximately $7 million after taxes. $3.5 million went under professional money management with an income/growth strategy, and $2 million went toward income-producing real estate with the goal of creating a combined $275K annual cash flow. $500K went to cash and gold, $800K went to a place in Tahoe, and $200K went to doo-dads.

This of course is a simplified example. There are many other considerations as well—insurance needs, estate planning, college planning if you have kids, ongoing tax planning and further retirement considerations as you age.

Basically, if you’re coming into a large sum of money, you need to work with a good financial planner, a fiduciary who can help you avoid costly mistakes.

Sadly for us, our $12 million payday never materialized.

In the final months of dotcom madness, the CEO at my hubby’s startup thought he could do better and declined the $400 million offer, much to our chagrin. A year or two later, he ran the company into the ground in classic Silicon Valley style.

Disillusioned, we stopped putting our dreams in the hands of other people, sold our house and moved to Tahoe anyway. We’ve been hunting opportunities ever since.

Who knows? Maybe this will be the big one.

About Diane Cohn

Diane Cohn runs a mastermind for female breadwinners who want to go from renting to owning with clarity and confidence so that they can build wealth, control their environment, and enjoy the comforts of home. A prior top-producing Realtor, real estate industry marketing executive, and housing market commentator on YouTube, she has profitably bought and sold property in every kind of market over 30+ years.