Advisers help Twitter's new millionaires navigate bumpy seas

One recommendation: 'plan for the worst and hope for the best'

Nov 7, 2013 @ 8:46 am (Updated 9:47 am) EST

A banner with the Twitter logo hangs outside the New York Stock Exchange Bloomberg News

Twitter Inc.'s $1.82 billion initial public offering Thursday is the start of the big payoff many of the technology company's 2,300 employees have dreamed of since they joined the 7-year-old firm. But advisers recommend that these ecstatic souls prepare for a wild ride.

“If you are a Twitter employee, get ready for anything,” said Aaron Rubin, a senior wealth manager for Werba Rubin Wealth Management in San Jose, Calif. “Your wealth is going to be on a roller coaster ride for the next six months and there's very little you can do about it.”

He points to what happened with the $16 billion Facebook Inc. (FB) IPO in May 2012. In that case, “there was too much hysteria” and the price fell from its $38 initial price to as low as $17.73 four months later. The stock took more than a year to recover and today trades at around $50.

Among other recent high-profile tech IPOs, Groupon Inc. (GRPN) is off 50% from its 2011 IPO price, while Zynga Inc. (ZNGA) is down about 63%.

On the other hand, there are “quiet” issuances like FireEye Inc. (FEYE), which closed up 80% at $36 on its first day of trading Sept. 20 and is now almost double its $20 initial price, Mr. Rubin said.

“It's magical,” said Sandi Bragar, director of planning at Aspiriant, a San Francisco-based independent advisory firm whose clients include Twitter employees and other Silicon Valley types whose companies have gone public. “There's nothing more gratifying from our end than helping a client through this whole process.”

Twitter's new millionaires should “plan for the worst and hope for the best,” regarding share price, which already has been driven up by interest from venture capitalists, said Robert Cheney, chief executive of Westridge Wealth Strategies in San Francisco, pointing out that the economy is “not that strong.”

Employees should diversify their wealth holdings by selling some shares when they can and investing those amounts in other assets, he said. They should have a systematic approach to moving some net worth into broader assets.

“These young people have a substantial net worth on paper, but their income and net worth are tied to the value of a young tech company,” said Mr. Cheney, whose firm is affiliated with First Allied Securities.

Bruce E. Brugler, managing director of the Presidio Group in San Francisco, said many times, individuals who are part of a company that goes public do not know how to handle the “sudden escalation” in their wealth and make poor decisions.

These investors also can be overly passionate about their company investment and may resist suggestions to diversify their holdings.

“Typically, people who are very closely involved with a relatively young company believe that it's the greatest investment in the world,” Mr. Brugler said. “You often have what's effectively a naive buyer with a lot of money in their hands, and a lot of salespeople, and that doesn't always work out for the investor.”

Mr. Cheney has had some initial discussions with Twitter employees and expects more prospects will pursue advice as the end of the 180-day lockup period nears and employees can sell their shares on the public market. According to Twitter's prospectus, some non-executive employees will be eligible to sell almost 10 million shares as soon as Feb. 15, Bloomberg News reported Thursday.

Bloomberg also said Twitter chief executive Dick Costolo has been talking to employees about managing their personal finances at the company's weekly meetings, according to a person with knowledge of the matter, who asked not to be identified because the discussions are private.

In Thursday's offering, 70 million Twitter shares priced at $26 would raise $1.82 billion for the San Francisco-based Internet messaging service. Twitter initially intended to price shares at $17 to $20 each, but revised its estimate up to $26 on Monday.

Drew Nordlicht, managing director and partner at HighTower Advisors in San Diego, said Twitter's new millionaires need to desensitize themselves to the laws of large numbers.

“They are probably going to see their net worth fluctuate by more than what their annual salary is, based on market movement,” said Mr. Nordlicht, whose firm works with venture capital and private-equity-backed firms that typically pursue IPOs.

Importantly, Twitter's new millionaires also need to recognize that this money is real.

“It's no longer a fictitious sum that might be worth something at some point,” and it needs to be carefully managed for the future, he said. “You need to look at it like a responsibility.”

Don Martin, adviser and founder of Mayflower Capital in Los Altos, Calif., said he has a prospect whose wife works for Twitter. If the couple becomes a client, Mr. Martin's first piece of advice to them will be to exercise all options as soon as possible and get out of Twitter stock.

“Tech stocks are highly risky compared to other types of stocks,” Mr. Martin said. “Tech stocks are usually overpriced — especially with IPOs.”

He said they already have their human capital invested with the firm and he recommends Twitter employees buy a classic, “boring,” diversified stock-and-bond portfolio.

Mr. Rubin recommends employees think carefully about how much they want invested in Twitter. His firm typically recommends selling a good bulk of the shares to diversify assets.

“We ask people, if someone is going to hand you a check today for $2 million, are you going to put it all in Twitter?” he said.

For some newly enriched employees in the San Francisco Bay area, diversification can mean moving into an even more volatile asset class for the first time: real estate.

“Because these people live in Silicon Valley and real estate is very expensive, especially for ones who are seeing liquidity for the first time, you may find that a lot of these people want to own their own house for the first time,” said Sanjeev Sardana, CEO of BluePointe Capital Management in San Mateo, Calif. “They're not as sensitive to paying a premium or overbidding on a property when they have a hyper-growth stock like that, so investing in real estate does become a big concern.”

For these clients, Mr. Sardana recommends a variety of strategies, including grantor retained annuity trusts, which can minimize the tax liability for growth investments that are passed on to children, or exchange funds, which allow clients to diversify without selling their stocks.

In either case, the individual client's circumstances, including the rules of the firm they work for, dictate the strategy Mr. Sardana said.

In addition, taxes are certainly a danger point for Twitter's new millionaires.

Include a tax professional before exercising incentive stock options, because such transactions can generate “a tremendous tax bill,” Mr. Rubin said. The situation could get extremely ugly if the share price plummets.

“You could owe a ton of cash in taxes and have little to pay it with,” he said. “Do very careful tax planning.”

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