Financial planning for founders: Preparing for growth, uncertainity and exit

Personal financial planning for a founder can be difficult because the line between the individual and the business, often gets blurred. Often times it feels as though you are doing far more for the company than for yourself. That is the nature of entrepreneurship. A founder has to be willing to give more—time, capital, comfort and sometimes years of certainty—in the belief that the business will eventually pay that sacrifice back through profits and wealth creation. The nature of being businessman is that you build something first and benefit from it later.

But there is an important distinction between taking entrepreneurial risk and allowing your entire personal financial life to depend on one outcome.

My first rule is - never build a business for an exit. Build a business to create an impact and make profits. A company that can generate sustainable cash flows, reinvest for growth and eventually distribute profits to its owners has intrinsic value. Valuation, external funding and an eventual acquisition or IPO should be by-products of building a strong business, not the reason for its existence. When founders begin planning around the next funding round or a future buyer rather than customers and profitability, their personal finances can also become dangerously tied to assumptions that may never materialise. This unfortunately is main MO for many these days.

Every founder naturally has a Plan A: the business scales and profits grow. There is nothing wrong with chasing that outcome aggressively. But alongside it, there should always be a financial Plan B.

Even while building the business, try to extract something from current income and invest it systematically. A monthly SIP, retirement portfolio or other diversified investment may appear insignificant compared with the potential value of your company equity. That is sometime precisely why founders often neglect it. But the future cash-flows are on paper till it happens. And over ten years, a disciplined portfolio built outside the company can become meaningful wealth in its own right. It also gives the founder something extremely valuable: the ability to make business decisions without every personal financial need depending on the next round.

In the bootstrapped years, founders frequently underpay themselves because every rupee retained by the company matters. Once the company has institutional capital, stronger cash flows or can afford professional management compensation, the founder should consider moving toward a sensible market-linked salary that covers core household expenses. The objective is not lifestyle inflation. It is to stop personal financial stress from becoming a hidden business risk.

Founders should also maintain a substantial personal emergency reserve—ideally 12 to 24 months of essential expenditure—outside the company. Business cash is not personal liquidity. During a difficult year, a founder may simultaneously face falling income, an inability to sell equity and pressure to put more capital into the business. That is when a personal reserve matters most. Adequate health and life insurance, and avoiding unnecessary personal leverage, are equally important.

As the company matures, partial liquidity is something founders must look at. During later funding rounds, when investors and the board permit, a founder may consider selling a small portion of his or her holding rather than waiting for an all-or-nothing exit. This should not become aggressive cashing out as excessive selling can give out the wrong signals. However, converting a modest part of concentrated company wealth into diversified personal assets can reduce risk without reducing commitment to the business.

Tax planning should begin well before a liquidity event, not after the sale papers arrive. In India, the structure and timing of founder equity can materially affect the eventual post-tax outcome. For example, unlisted shares generally qualify as long-term capital assets after being held for 24 months. Long-term capital gains are currently taxed at 12.5%. Eligible startups also receive certain concessions, including deferred taxation of qualifying ESOPs, while the timing of secondary sales, ownership structures and succession planning can all have significant tax implications. Founders expecting a major funding round, secondary sale or exit should therefore involve their tax and legal advisers early, while there is still time to structure their holdings efficiently.

Finally, an exit creates a new financial planning matter: concentration suddenly becomes liquidity. A founder who has spent years owning one high-risk, high-growth asset should not automatically carry that mindset into the next phase. Post-exit wealth should generally move toward a diversified allocation across equities, fixed income, cash, real assets and other investments suited to the founder’s needs. The goal changes from creating wealth to risk adjusted compounding.

The biggest opportunity for founders is rightly in their own company. Their biggest financial mistake, however, can be assuming that this makes every other form of planning irrelevant. Chase Plan A with conviction—but quietly build Plan B every month. If Plan A succeeds spectacularly, the diversified savings will still be useful. If it takes longer than expected, they may prove invaluable.

Ankit Patel – Co-founder and Partner at Arunasset Investment Services