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Recode
Silicon Valley is used to minting millionaires. But this many?
When tech’s highest-valued companies finally go public next year, they will unleash billions of liquid dollars into the market and make 2019 a year of incredible wealth creation.
And that’ll shape the world in which we live, even if you’re not making a single penny in a banner year of IPOs. An early employee might use the $20 million he makes to buy a new home and price you out of a neighborhood. Or a startup co-founder might set up a charitable foundation that makes a difference in your life.
Startup darlings like Uber, Pinterest and Slack are expected to headline the best IPO year in recent memory, allowing investors and rank-and-file employees to eventually sell their shares and turn stock into real money. The companies will likely together be worth over $100 billion — and it’s got to go somewhere.
There’s a lot of focus on the Travis Kalanicks of the world, but much of the real wealth next year will be bestowed upon people who are decamillionaires but not centimillionaires — people with at least $10 million, but not $100 million, in stock.
That’s why the wealth advisory world is anticipating next year — and the non-wealthy should be, too. Because the decisions that the rich make in 2019 will shape the real estate, philanthropy and startup worlds for years to come.
The first to bend: The Bay Area housing market.
“For people who have suddenly jumped into megawealth — however they define it — it’s a pretty big thing to go, ‘This two-bedroom has been fine for me and my wife for the last two years, but we’ve got $40 million now,’” said Patrick Carlisle, a longtime analyst of the San Francisco real estate market. “They’ve never even owned a property before and go, ‘Yeah, we’ll take this. And we’ll pay all cash.’”
Carlisle said he’s been getting a steady stream of calls over the last few weeks from other real estate agents who read the news about upcoming IPOs and want to know what happened following previous seminal moments like the public offerings of Facebook and Google. Though it’s hard to pinpoint causation, Carlisle’s research shows that in the 12 months before Google’s 2004 IPO, San Francisco’s median real estate price in areas popular with tech workers increased by 12 percent. But in the twelve months after, that median price rose by 23 percent.
“The new wealth from tech poured into housing, which made housing values soar, which created trillions of dollars in additional new wealth,” he said. “It’s all been piling onto each other.”
So it’s a safe prediction, wealth managers say, that the high-end real estate market is going to be inundated with curious buyers. Upgrading the home is basically the first thing that Silicon Valley’s people with money do — and those already with homes will buy second spots in places like Tahoe.
The people making money here typically fall into three categories: Venture capitalists, who can keep their shares and ride their horse through the public markets. Founders, who try not to sell shares too early lest it be read as a vote of no confidence in their company. And employees, who are subject to often six-month lockups that keep them from selling their shares. And none of those folks are required, of course, to sell any stock.
But still, if you’re one of the first 100 employees at a place like Uber, for instance, you’ve likely been hounded by the Morgan Stanleys and Goldman Sachses of the world. Top wealth advisers tell Recode that they track stock-rich-to-be millionaires starting as far back as three years before a so-called liquidity event like an IPO and as close to 18 months before. So this bonanza does not begin when the largest shareholders are revealed on an S-1 filing just a few weeks before the actual IPO.
Wealth managers might have helped some of those people cash in already, too. Some institutions have been willing to treat startup stock as collateral and extend credit to tech workers, giving them money for a home before they have actually sold their stock.
And who says they can’t sell their stock yet? Employees can sometimes do that before the company goes public in private stock sales. Those so-called “secondary deals” have served as a pressure valve for Silicon Valley’s soon-to-be loaded in a way that was not true during the lead-up to Facebook’s $100 billion IPO six years ago, for instance.
So real estate is the first priority for the fortunate. Those who still have money after purchasing the new place? Welcome to the world of big-dollar philanthropy.
The newly rich generally try to make their charitable gifts in the year when they book a big gain in income — like when they sell their shares in a public company — to avoid paying a big tax on that gain. That’s why people expect that next year will be a big year in the world of giving — with new millionaires and billionaires shoveling money into controversial vehicles like donor-advised funds, for instance, which are pools of cash that provide immediate tax benefits but aren’t required to be disbursed to charities ASAP.
“We see IPOs generally as a good opportunity for donors to make contributions,” said Keita Matsumoto, who advises high-net-worth clients at Fidelity Charitable.
Millionaires have grown more sophisticated about how to find tax breaks, said Matsumoto, as the explosion in donor-advised fund accounts should make clear. The same is true for Opportunity Zones, quasi-philanthropic projects that offer tax breaks for investing in undeveloped parts of the U.S. and remain a new fascination in the world of the megarich.
Lastly, there’s the money that wealth and philanthropy advisers expect to go back into the market.
Most of that is standard fare in Silicon Valley — building out a personal investment portfolio, and perhaps starting a private foundation if they’re a billionaire. But given where the money was made — in startups — there’s a sense that some of that money will flow back into the tech ecosystem, funding the next generation of entrepreneurs and IPOs.
If you think everyone already moonlights as an angel investor, wait till next year.
This will make an especially big impact for any newfound wealthy people who today live outside the Bay Area. One of the biggest ways to fund a new tech hub in Middle America? Turn a former coder into a billionaire — think Omniture founder Josh James of Utah — and let him or her loose in a place that’s not Silicon Valley.
Plus, a good chunk of the money untapped next year will be made by venture capitalists and their investors or limited partners (like Lance Armstrong). Some of the money made by professional investors should stay invested broadly in tech.
So if you’re a startup looking for more investors, a nonprofit looking for more donors or a wealth adviser looking for more clients, you’re a winner next year. If you’re a middle-class renter looking to buy a home, you’re likely out of luck.