How to Build Generational Wealth as a Tech Employee or Founder

A guide to recognizing a single wealth-accelerating opportunity that can help you — and your heirs — achieve financial freedom.

Almost every movie ends with a triumphant scene that goes something like this: The hero takes a moment to realize their victories and relish in the afterglow of their achievements.

It’s a classic trope.

This victorious moment marks a monumental win and defines the end of a journey, but real life doesn’t usually work that way.

Normal people like us don’t have the luxury of a concrete finish line. For instance, when you’re building generational wealth, there’s no obvious point at which you can look around and know for a fact that you’ve accomplished what you set out to do.

After years of helping busy professionals achieve financial freedom and build generational wealth, I’ve learned that financial milestones are easier to spot in retrospect.

These defining moments are best described as inflection points that dramatically accelerate your financial growth and help you make a lot of progress in a short amount of time.

This post outlines the wealth-accelerating opportunities you may encounter as a tech employee and how to take full advantage of them to not only achieve financial freedom but build generational wealth.

Generational wealth definition: What is it?

Becoming financially independent, or financially free, is one thing. Creating wealth that lasts and passing it down to your heirs takes things a step further. The latter is known as generational wealth.

You can think of generational wealth as an extension of financial independence. Being financially independent, or financially free, describes reaching the point at which your job becomes optional rather than necessary. This typically comes as a result of having an investment portfolio that reliably provides income for your living expenses.

While based on a similar principle, generational wealth takes things a step further by focusing on building lasting financial freedom that you can pass down to your heirs. It’s the point at which your assets and investments continue providing sufficient income beyond your generation.

Though it seems like achieving financial independence goes hand in hand with generational wealth, reaching the latter isn’t a given for every financially free person (some financially free individuals deplete their savings by the time they pass). Whether you can successfully build generational wealth largely comes down to how you execute your financial plan.

Mainstream financial advice generally limits its focus on financial freedom, not generational wealth. This type of advice is based on the idea that your career should help you save just enough money to avoid running out of funds in retirement. You see evidence of this approach in age-based allocations that become increasingly conservative as you age. On the other hand, those who create generational wealth shift their money mindset from being income and career focused to being balance sheet — think assets and investments — oriented.

Don’t get me wrong, reaching financial independence is a massive feat that’s worth celebrating. But if you’re doing all that planning and work, you might as well make a simple strategy shift to also give your heirs the same type of freedom down the road. Generational wealth can be the greatest legacy you leave behind.

How to spot a turning point in your wealth’s growth

As I mentioned, milestones aren’t always obvious on your journey to generational wealth.

At KB Financial Advisors, we work with tech employees whose financial plans move at varying speeds. But the common thread tying these clients together is that we help each of them max out their retirement plan and save money, little by little.

Though our general approach focuses on gradual progress, our clients also experience big, sudden jumps in wealth. It’s these big jumps that usually propel them to new, unprecedented heights.

Being a slow and steady tortoise can certainly win the race, but being a hare — even if it’s just for a moment — can be all you need to see your wealth increase by leaps and bounds.

One way we help clients recognize these turning points in real time is by tracking a set of key financial metrics, including their net worth and income. A pattern I’ve recognized over the years with our clients is that their “big moment” tends to be a spike in their income — sometimes upward of 50% — and this jump can occur over a three-to-five-year period. However, increased income doesn’t always look like higher pay; it can be as drastic as cashing out your shares amid an IPO.

Once you recognize that your income is in the midst of a growth spurt, it’s time to take advantage of the moment. The goal is to turn your increased income into increased net worth instead of blowing it all.

The path to generational wealth that tilts the odds of success in your favor

Though we’ve all seen stories of early Tesla investors eventually cashing in their shares for millions of dollars, their situation is the exception, not the rule.

It’s tempting to pick an individual stock and hope it ends up making you a millionaire one day but that’s a high-risk, high-reward endeavor that’s far too dependent on luck to rely on.

When you’re building generational wealth, the best way to tilt the odds of success in your favor is by focusing your risk taking on areas you’re experienced in. Using your expertise to start a business or choose a promising startup to join is less risky. Even though luck plays a role in a young venture’s success, your effort and skills give you some control over the outcome.

Experience develops your ability to recognize opportunities and gives you the confidence to act on them. That’s why it’s important to have a profession that sits at the intersection of your interests and skill set. Your unique knowledge base and expertise can help you take informed risks that are more likely to lead you to a big wealth-accelerating moment than any random stock investment is.

3 ways to recognize your wealth-accelerating opportunity

As the old adage says, opportunity is when preparation meets luck.

Experience is one part of the puzzle, but before you can have your wealth-accelerating moment, an opportunity needs to present itself to you. To take advantage of an opportunity, you need to recognize it and be ready to act promptly.

Here are three ways to capture a wealth-accelerating opportunity (though the specifics of your moment will be unique to you):

1. Working at a startup

Joining a startup gives you the chance to scale a company and, in turn, scale the value of your equity in the company. If the startup you join grows tenfold, so will the value of your shares.

If you’ve worked at a large tech company, you have experience and talent that startups need. It also means you’re likely to handle the risk that comes with a startup job.

When considering joining a startup, get familiar with their equity offerings and rules around your ability to exercise the stock options you receive, along with tax implications. The ideal position you can have is to be among the first fifty employees and receive incentive stock options with early exercise. While being in this position gives you the greatest potential gain, not having the cash on hand to take advantage of the early exercise can cost you millions in lost gains and increased taxes.

2. Starting your own business

Building a venture from scratch is a more high-risk, high-reward option — and it may just present the biggest wealth-building opportunity.

You don’t have to take a leap into the unknown to start a business; instead, give your idea time to develop during time outside of your day job. Start small by making the business an extension of your experience, and once you’ve tested the market, you can take the plunge to devote all your time and resources to the business.

3. Changing jobs

Some corporate recruiters frown upon what’s less desirably known as job-hopping, but at the end of the day, companies allocate more budget to recruiting than they do retention. So, changing jobs every couple years is a no-brainer for those wanting to increase their pay quicker while having the structure and stability of employment.

The trick to building wealth in a corporate job is saving and investing a portion of every paycheck you earn. When you switch jobs and your paychecks get bigger, you can start saving more of your pay and accelerate your wealth building. The trick to actually building wealth is by spending only 50% of every raise and investing the other half, that way you still enjoy the lifestyle perks of making more money, while simultaneously contributing more to your investment portfolio.

The generational wealth-building journey for tech founders & employees experiencing IPOs

One of the three wealth-building opportunities we outlined above is working at a startup. We see a number of our clients transition from being a founder or early employee to going through an IPO, and then dealing with the aftermath of their company’s exit.

Here’s what each stage typically looks like for those creating generational wealth:

Pre-IPO

Working at a startup requires believing in potential success. It’s a bit of a gamble, considering roughly 90% of startups eventually fail. But with the high risk comes high reward potential. An exit like an IPO can be life-changing for a founder or early employee.

Preparing your company for an IPO is one thing, but preparing your personal finances for the exit is just as important. Founder shares and qualified small business stock are just the tip of the iceberg, so you’ll want to begin planning long before the IPO to make the most of it down the road.

IPO

A successful IPO can take any founder or early employee from a humble lifestyle to millionaire status overnight. Though growing a startup isn’t for those seeking an overnight success story, reaping the all fruits of your labor during an IPO can feel like one.

Whether you have a lockup period or not, cash you make from the early days following your IPO can go toward investments that generate passive income. These investments alone have the potential to give you financial freedom.

Post-IPO

Though an IPO seems like a one-and-done event, it’s realistically a yearslong engagement for many. Once the post-IPO dust settles, it’s time for the long game of building generational wealth to start.

Your long-term savings plan can include vehicles like a 401(k), health savings account, employee stock purchase plan, after-tax 401(k), and deferred compensation plan. Create your plan and make any needed adjustments on an annual basis to optimize it.

Risk capacity: How much risk can you handle?

Different wealth-accelerating opportunities present varying levels of risk. Before you choose your adventure, you want to understand how much risk you’re willing and able to take.

The ability to take risks in pursuit of opportunity is known as risk capacity, which is measured by your risk number. Risk capacity is about having the financial resources to handle losing your money in pursuit of greater gains.

You can increase your risk capacity — that is, the amount of risk you can take on — by lowering your living expenses and increasing your net worth, savings rate, and cash on hand. Conversely, low savings and high debt and living expenses hamper your ability to take on risk.

Take working at a startup, for instance. You give up the higher salary at a large company in exchange for more equity and a potentially greater opportunity. Debt and high living expenses would prevent you from making this tradeoff, regardless of the opportunity at hand.

Set yourself up to take risks by developing good saving habits early, avoiding debt, and building up cash reserves — all things that solidify your financial plan.

6 steps to build generational wealth

Once you’re working toward your wealth-building opportunity it’s time to hunker down and take six micro steps to stay on track.

1. Focus on your career

Your career is your number one asset. It’s where you convert human capital (i.e. your experience and talent) into financial capital — and if you’re like most people, it’s where your wealth building begins. Find ways to combine your interests and unique abilities into a profitable career and focus on becoming exceptional at it.

2. Wade in

Every summer, I went camping with my grandparents. The park we camped in was full of rivers that I loved swimming in, but the only problem was how cold the water was. There were two ways to conquer the cold: wade in or jump in. As a kid, I opted to jump. As an adult taking risks, I opt for wading in.

The point is, you should find ways to take incremental risks instead of immediately going all in. Stretch yourself into new areas and build toward experiences piece by piece. Gradually develop your ability to gauge opportunities and recognize your wealth-building moment.

3. Overcome your fear and regret

That being said, there’s no such thing as a risk-free opportunity. So don’t let fear stand in your way of taking action. Regret can paralyze you too, so even if you try and fail at something or miss an opportunity, you shouldn’t dwell on it. Let go of fear and regret by building the confidence you need through experience. Embrace failing forward by learning your lessons and moving on.

When my wife, Melissa, and I discuss our goals, I usually tell her, “I’m not talking about going to Mars.” Though a goal of yours may be big and intimidating, that doesn’t mean it’s “too good” for you or out of reach. There are others who’ve accomplished what you want to do, why not you?

4. Have cash on hand

Cash is the fuel that your opportunity engine runs on. As such, it’s important to have some liquid assets on hand.

How much cash should you have immediate access to? Keep ten percent of your annual income as cash in the bank and 20 percent of your income as an emergency reserve.

Your cash needs may be a product of your stock options. So — on top of the cash comprising 30% of your income above — know how much it costs to exercise and keep that amount in cash ready to go.

5. Avoid debt

Debt has the opposite impact of cash; it keeps you from being able to act on opportunity and kills your risk capacity.

Avoid debt, especially bad debt, which is debt you use for unproductive purposes like credit cards. The less bad debt you accumulate, the more capacity you have for risk.

6. Consistently contribute to your savings

Your big wealth-accelerating opportunity is an important part of your financial plan. But, your overall success shouldn’t depend on the realization of one large event.

Saving money helps you control your fate instead of leaving some of it to luck. Save money while you wait for an inflection point, and continue to save after that moment comes, too. The best way to do so is by maxing out your 401(k) and capturing 50% of every pay raise as savings. These methods help you leverage the power of compound interest, which lets you be hands off while your money works for you.

Investing for generational wealth: creating vs. managing wealth

Recognizing your opportunity to accelerate your wealth-building journey is one thing; leveraging that opportunity to actually build lasting wealth takes a different skill set.

A common mistake I see individuals make is trying to recreate a wealth-accelerating moment by taking increasingly larger risks. The problem with that is inflection points in your wealth don’t happen on demand. If anything, trying to force one can be a fast way to lose your shot at building generational wealth altogether.

The key is to instead focus on taking the inflection point you’ve already had and turning it into lasting generational wealth through sound investing and wealth management. This, for instance, can look like pairing your stock options with other investment vehicles.

Recognize & leverage your big moment

Building generational wealth may be a yearslong endeavor, but it really only takes one pivotal moment to go from being a humble employee or founder to a financially free retiree who’s set their heirs up for the same type of freedom.

Helping tech professionals build generational wealth is what we do at KB Financial Advisors. Book a call today to talk to myself or another expert on our team about how you can set yourself up for success.

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