Secfi, a San Francisco-based firm that provides education to startup employees around equity-based compensation packages and runs a digital portal that helps them monetize their illiquid stock options, launched an SEC-registered investment advisory firm earlier this month, bringing on John Morrison, a Dimensional Fund Advisors portfolio manager, to run it.
The RIA, Secfi Wealth, hopes to sign on Secfi clients to advise on their overall financial plans, as well as offer them investments that, executives said, will compliment and diversify a client’s often cash-poor investment portfolio. It’s designed to assist employees at startup technology companies who often have complex financial and tax planning needs but are frozen out by traditional wealth managers.
While their wealth—trapped in stock options—may be substantial on paper, they are usually subsisting on a start-up salary. Many RIAs turn away these prospects because they don’t have the minimum investable assets that many wealth managers require. Secfi doesn’t require a minimum amount of investable assets to work with an advisor.
“We are seeing new generational wealth being born in front of our eyes,” said Frederik Mijnhardt, CEO and co-founder of Secfi, referring to a class of clients who are the first in their families to control significant wealth and are sharply unprepared for the consequential financial complexities they face. “Startup equity is an important gateway to future wealth, which is why it’s key that it be incorporated into financial planning.”
For startup employees, the transition from illiquid wealth to liquid fortune can happen in the blink of an eye. “This timing puts people in the position of having to make some very tough and complex decisions very quickly,” Mijnhardt said. “We kept getting the same questions around options, valuations, taxes, and driving performance on their new investments.”
Equity can be the most alluring, but daunting, aspect of a startup employee’s financial life. Secfi Wealth's affiliated financing business, in operation since 2017, can advance the cash startup employees frequently need to exercise stock options and pay taxes.
Startup employees often face the crushing requirement of owing the IRS taxes on phantom income triggered by the exercise of options that usually cannot be sold and add nothing to the employee’s bank account.
Purchased options are taxed as income under the alternative minimum tax (AMT), a special tax structure that’s almost always triggered when startup employees exercise options. The tax is assessed on the difference between the strike price and the current market valuation. Many employees simply can’t afford to pay it because, in all likelihood, their startup salary didn’t allow for socking away the kind of cash necessary for such a large transaction.
The solution, Secfi executives believe, is in the form of non-recourse financing, which means that the personal assets of a startup employee are never at risk. The financing comes due when the options become unrestricted, usually as result of an IPOs or acquisition. If the startup does not exit for any reason, there is no obligation to repay the cash advance, executives said.
Secfi Wealth charges investment advisory clients a fee of up to 1% on assets managed, sometimes in affiliated funds, and financial planning fees of $400 to $800 a month, according to its Form ADV.
The RIA is entering a space that is getting increasingly crowded. Many traditional RIAs and banks are launching initiatives for startup employees.
Secfi said its approach, digitally focused from the first customer contact to the last, gives it an advantage as their prospects expect a digital-first solution set that legacy RIAs and banks struggle to deliver.
The market for startup employees is difficult to measure. Secfi says that it has 30,000 employees on its platform, representing over $48 billion in total equity in just its own ecosystem.
Editor's note: This article has been updated to clarify that loans made to clients originate from a financing affiliate of Secfi Wealth and corrects the total equity reflected on the Secfi platform.