When you invest in your company, your goal is to probably someday make a return that can change your life in a big way.
However, when you start your own business, you’re taking one of the greatest risks you can take.
According to research by LendingTree, about 23.2% of private sector businesses in the U.S. fail in just their first year. By 10 years, that number jumps to 65.3%.
What can go so wrong?
A survey of 150 startup founders discovered that the most common reason startups failed was due to running out of money.
Sure, your startup has the potential to be worth millions, but depending on hundreds of factors both in and out of your control, one day it might not be worth anything at all.
As a startup founder, you need to prepare for either eventuality by future-proofing your personal finances.
Why Startup Founders Should Think About Personal Finance
As a startup founder, business is personal. As soon as you start your company, your personal finances come into the mix.
That’s because you’ve likely put some (or all!) of your personal capital into this venture.
This comes with tax implications as well as considerations of personal liquidy should it take a while for things to get off the ground. In this phase, you may want to start thinking in terms of a personal burn rate to make sure you can cover your own costs (home, living expenses, etc.) month to month.
Eventually (hopefully), the question will arise of when it’s time to pay yourself, and how much. Even now, your salary shouldn’t be the only part of your personal finances. As you grow, you’ll want to make sure your money works for you through worthwhile investments.
And as that investment pool grows, you’ll also need to protect it, not just for you but for those you love. That raises the question of how you plan to secure your estate for future generations.
As you can see, at every phase of beginning and running a startup, there are personal financial decisions that must be made to build a stable foothold from which to grow your empire.
5 Strategies Founders Can Use to Future Proof Their Finances
Here’s the thing, when you began your business, you probably focused heavily on gaining investors simply to keep your company’s cash flow out of the red.
But in your determination to secure your company’s future funding, chances are you overlooked your own financial stability.
Now that you have a chance to breathe, here are some tips to consider to make sure your own head stays above water.
Starting your own company rarely translates to immediate income.
Of course, you deserve to pay yourself for your work, but many startup founders operate with low or no salaries to start. According to Pilot’s annual Founder Salary Report, 40% of founders get paid under $100,000 a year — when they pay themselves at all.
Gaining liquidity can help you navigate those early years with low salaries. You could consult your board about selling secondary shares while your company is on an upward trajectory to keep yourself (and other early employees) afloat.
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Diversify investments
Investing is always a risk, but diversifying those investments helps mitigate the effects of market ebbs and flows.
Luckily, today you can invest in all different kinds of assets beyond the typical stocks and bonds. From natural resources to digital currencies and real estate, alternative assets help you create a more future-proof portfolio that capitalizes on every peak and rides out most valleys.
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Don’t over-invest
Say you’re garnering investor interest, your cash flow is positive, and you’re already comfortable giving yourself a reasonable salary.
If you’re not used to having this type of money at your disposal, you might find yourself trying to “protect” it all by socking away so much that you don’t actually have enough liquid cash to cover ongoing or surprise expenses.
So before building that beefy investment portfolio, track your average spending and expenses. Think about what you need to save for, including taxes for the upcoming year and a hefty emergency fund for yourself and possibly for your business. From there, you can then work with the remainder of your salary to start your investment portfolio.
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Ensure all the financial reports you rely on are accurate
Startup founders rely on their business’s financial health to inform their own, so those business financial reports must be accurate.
Capitalizing development costs may improve the accuracy of business financial reporting, as it provides a pretty precise representation of a company’s actual financial standing. Capitalization spreads the cost of development over the lifespan of your offering instead of representing it as a huge, one-time spike.
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Consider estate planning
Bankruptcy is a potentiality that’s worth planning for early, especially because of how it can drag down your personal finances if you’re not protected.
Trusts can protect your personal assets. Although there are many different types of trusts, overall, they can minimize estate taxes, secure your assets from creditors, and separate your business assets from your personal assets. Consult with a financial professional to choose the right solution for your circumstances.
Future-Proofing Your Finances as a Startup Founder
As a startup founder, your personal finances are intertwined with the success of your company, which can be a massive risk.
To mitigate the pitfalls, you should be well-informed about the state of your company’s financials, diversified without being over-invested, and separated and protected with the help of a trust.
Starting your own business can be a wise investment in yourself. Even if you never become a major enterprise, you can keep your personal finances safe, secure, and flowing.
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Bio: Jacqueline Gualtieri is a writer and editor whose work has appeared in The Huffington Post, Insider, and The Slowdown. In addition to writing, she works as a digital media consultant and content marketer, driving online traffic for her clients. She’s always looking to advance her skillset and believes strongly in the early adoption of new technology.