The Big Change

It’s the subject of late night ’round the campfire talk or intimate pillow giggles.  What would you do with a few million dollars tax free?  In my case I am coming into a few million (not tax free) and now this idle chatter has taken new meaning.  I feel a sense of responsibility and wonder at the new possibilities not previously available.  I also am yo-yo’ing between thoughts of “this really isn’t THAT much money” and “This a sh*! ton of money”.  Not sure where I land on that spectrum yet, but I do know its quantitatively a step change in net worth for my family.

Exit Event

Our company is selling to a Big Co. soon.  Here is how the deal is coming together and some explanation of what will happen.

The Big Co. is paying all cash for our startup, however myself and my co-founder will be required to work for the Big Co. for 3 years to get all of our own cash out of the exit.  The future cashflows are not an “earn out” as there are no metrics that we need to hit to earn the money.  We do however need to be employed by the Big Co. on the anniversary dates to see our cash.  From what we’re told from expensive Attorney’s, we can still count that income as capital gains instead of ordinary income. However, the IRS could hit us up if they so choose and re-classify it, so there is some risk there.  Here are the cashflows I will personally see from the exit, organized by year (excluding salary/bonus) :

2016 on deal close : $1.93M

2017 1 year anniversary : $830K

2018 2 year anniversary : $600K

2019 3 year anniversary : $800K

In addition I will be paid a salary of $220K/year with a $80K potential bonus depending on metrics.

Overall, its a good deal for both parties.  I’m thinking about some buckets right now to put this money into, but I have some work to do to get more specific.

You can see in the table that we plan to end up moving aggressively into real estate.  My wife has invested a lot of time over the last couple of years in learning our residential local market and we plan to tap that resource to buy two new properties and keep our existing one as a rental.  We also remodeled our first home and sold it after 4 years for a nice gain that paid off all of our student loans, so we have some experience in this area.  The three properties will be

1. Existing home turned rental.  (Current value $460K)
2. New high end home in great neighborhood but needing remodel due to age (probably built in the 1990’s, though we’re also open to the 1930’s and 1940’s… want to avoid 1950’s through 1980’s which are ripe for tear down in the areas we look in).  Value will likely be in the $1.5M range with potential to be $2M+ with remodel work and 5 year appreciation timeline.
3. New rental home in transitioning area. ($500K max budget, could be lower)

I also believe in continued learning and growing in my own field and I’m taking up angel investing to that end.  Of course I will hope for returns on these deals, but they are highly speculative and risky.  I’m fresh out of operating a startup so I feel I am in a good position to invest, but still believe I could lose all of this money.  I do hope to continue to build my reputation as a startup expert through these activities and importantly learn a lot by seeing 10-20 startup stories over time as opposed to just one (my own).

The last row is tracking money saved towards my next startup project.  I can’t do anything until 2019, but the plan is to start working towards the next venture.  Of course my new employer may provide such great opportunities I choose to stay, but this is the plan based on data available presently.

Buckets like “kids college funds” and “emergency” still need further definition around where exactly that cash sits… not sure about that yet.

Cash Allocation Plan