Discussion about "Free advice for the newly rich (on paper) - San Francisco Chronicle"

LinkedIn's
enormously successful initial public offering on Thursday may well come
to represent the "Netscape moment" of the social-networking era. That
IPO, on Aug. 9, 1995, famously touched off the Internet boom.

The parallels so far are striking. Both companies repriced their
shares several times in the days leading up to the offering, yet still
saw the stock more than double on the first day. Both delivered
nine-figure paydays to top executives and minted millionaires throughout
the ranks. And both sharply raised expectations for the companies that
would come next.

No doubt employees and investors at Facebook, Twitter and Zynga were
licking their lips over their own financial prospects as they watched
LinkedIn's valuation pass $8 billion, then $9 billion, then $10 billion
on Thursday.

But (killjoy alert) what's less often recalled than Netscape's
defining moment is what happened in the years that followed. Less than
three years later - mind you, while the dot-com craze was still in full
swing - shares had dropped from a peak of $171 to below $15.

This was before stock options had fully vested for even early
employees, meaning they couldn't sell all their shares if they wanted
to. The company ended up repricing options just to hang onto talent.

For Bay Area tech workers counting chickens before the IPO has
hatched (or the option lock-up period has ended), it's worth recalling
how things actually worked out for many dot-commers. Because, regardless
of whether the investor frenzy is already a bubble or not, at some
point, this too will end.

We talked to a handful of people who watched the last Internet mania
up close, and dug into our own clips, to share some hard-learned lessons
that the current generation of techies might want to bear in mind.

Lesson 1: The basics of financial planning still apply.
Dave Shore, founder of Marin Financial Advisors, worked with many newly
rich clients during the dot-com days. Or so they thought.

To make any actual money, employees have to exercise their stock
options, meaning buy shares at the price their company set, and then
sell them at the current market value. They owe taxes for the gains
realized at both stages.

The worst mistake that Shore saw during the late 1990s was people
holding off on liquidating shares because they wanted to avoid the
capital gains tax that applies for the first 12 months. If the share
value rapidly dropped during that period, people were left with a
whopping tax bill for exercising options that they no longer had the
stock wealth to cover.

Some financial advisers say that no single asset should represent
more than 5 percent of your wealth - 10 percent if you're particularly
risk tolerant. For tech workers recently out of college, stock options
can make up more than 99 percent of their portfolio.

Shore says they need to lay out and diligently follow a plan for
selling some shares as their options vest, which typically occurs over a
four-year period. If not, they face double jeopardy when both the
shares and company take a dive.

"At a time when you can't sell the stock for much, you might have also lost your job," Shore said.

That might be difficult to fathom in the current go-go environment, but recall that ...

Lesson 2: Things can change remarkably fast. In
2001, The Chronicle wrote about an early Yahoo employee, whose stake in
the company soared to $25 million when the stock hit its 2000 peak. But
he hung onto his shares through the disastrous year that followed,
driving his net worth down to $500,000. He was forced to sell a
multimillion-dollar home in Los Altos Hills at a $100,000 loss.

The then-29-year-old, who asked that his name be withheld, said he
fell into a deep depression and considered suicide, a stark reminder
that ...