Inside Marc Andreessen & Ben Horowitz's Multi-Family Office (Part II)

0:00With all the things happening between SpaceX IPO, a lot of secondary transactions, tender offers and things like that, people are really focused on what to do with how you structure yourself from a trust and estate perspective. So if you're a founder of a company, your basis, the price which your IRS uses to assess your stock is zero. That means 100 % of your gain is subject to at least long-term capital gain tax, which depending on the state you're in, can be upwards of 35%. There's really only three places your money can go. It's your family, it's charity, and it's the IRS. I don't know anyone who prefers the IRS.

0:32QSBS is an incredible benefit for small businesses. And so for founders who start early in the life of the company, they get up to 15 million of proceeds from their stock sale would be not taxed. So it's a huge benefit. A lot of these strategies of having multiple trusts are to try to multiply these QSBS benefits across the different trusts. What are the biggest mistakes that people commonly make? The biggest one is...

1:04Michelle Del Buono welcome back to Sorcery so soon I know this was a long-awaited highly anticipated I had multiple people if not like on every channel that we put it out a lot of really positive reception to it and requests for more knowledge from you. Okay. So I guess there are a lot of people that need pre-liquidity advice. Sure. With all the things happening between SpaceX IPO, a lot of secondary transactions, tender offers, and things like that, people are really focused on what to do. And a lot of that, of course, has to do with how you structure yourself from a trust and estate perspective, but also has to do, or you can optimize your situation also with different investment strategies that can be complementary to that.

1:53And then finally, philanthropy. So there's kind of three elements to preparing yourself for a liquidity event, right? Structuring your trust in estate, thinking about how to sort of make key investments that help offset taxes to some degree, and then donating into a donor advised fund or some other charity. Those three are kind of the nexus of how to optimize yourself prior to a liquidity event. I feel like philanthropy can be an entirely another episode that's a big one it can be the beauty of the donor advised fund is that you can sort of detach your decision when to give with your decision of when to sort of tax optimize right so you can donate things into a daff and immediately get a tax benefit but if you're young and still working people aren't necessarily ready to dedicate their lives to how to spend that money and donate it but you can defer that decision for a while in a daff if you're not, if you're not feeling ready.

2:46So it helps you detach a bit the difficulty of tackling the problem. How do I give versus should I give for optimization of my balance sheet right now? So to bring it back to center, so you are the CIO of A16Z Perennial. I like to call this Mark and Ben's multifamily office is the wealth management fund of A16Z. So in terms of all of the events coming up, I guess the number one topic that I was asked was on tax optimization. Can you break down? I know this is a loaded topic too, because there's so many different things, but okay, let's say you have a liquidity event, 90 % of your net worth is in one position.

3:30What do you do? What is step one? So again, if you remember, I talked about three sort of components, but step one is absolutely your trust and estate optimization construction. So there's a lot of nuance and complexity around there, but if you sort of step back, it's all about creating trusts. And there is, as you probably know, like a whole bunch of different trusts. You can create charitable remainder trusts, spousal access trusts, revocable or irrevocable trusts, grantor, non-grantor trusts. There are all these different things you can do. I'm not an attorney, so I don't know all the details about them, but I know enough to tell you that it's a very complicated situation.

4:13In parallel, you can also take some of your proceeds and put them into different strategies that generate losses, so-called tax loss harvesting. And there's several flavors of that, too, that you can do. Where I find that people have difficulty is you hire attorneys, right? And they're going to tell you everything about or CPAs about these trusts. But they're not going to have the knowledge to compare that and contrast that to an investment strategy that generates loss. The real challenge, I think, for people is how do I trade these things off? And that's where having a multidisciplinary kind of background is really important because each of those silos doesn't know enough about the other one to trade them off.

4:57And so that's, I think, something that's very much overlooked because sometimes just barreling down the I need a bunch of trusts and doing all this stuff is not necessarily better than having a tax loss generated investing strategy that doesn't require you to do all those trusts. And that tradeoff is not obvious to figure out and navigate. So I guess to put it a little more directly, what would happen if you don't do that? How much of your capital would be at risk? Well, I mean, so if you're a founder of a company, right, your basis, the price which your IRS uses to assess your stock is zero, right?

5:34So that means 100 % of your gain is subject to at least long-term capital gain tax, which, you know, depending on the state you're in, can be upwards of 35%, right? If you're in a non-tax state, then you just have the federal, which is, I think, 23.8. So either way, you're talking about a lot of money. And trust and state attorneys love to say that there's really only three places your money can go, right? It's your family, it's charity, and it's the IRS. It's generally speaking, I don't know anyone who prefers the IRS, right? Maybe there is some of it, right? So as a result, everyone's trying to avoid that.

6:15And that's where either these investment strategies come in, these trusts, the trusts are really for your family, or then the charity element, which is a kind of a trust in some ways. It's putting money somewhere else that you can't access personally, but it still removes it from your taxable base. And then what are the types of instruments and I guess tools that you use when you set them up? if it's like, you know, I don't know. If you set this up, could you just like break down? All right, we're in a liquidity event. We're going to put all the money into a trust. All right, how do we then construct the portfolio and what comes off of there?

6:54Yeah, yeah. So you're probably going to have several trusts. Again, full disclosure, I'm not an attorney, right? But you're going to have several trusts that'll be dedicated to different members of your family or different entities, okay? And each of those should probably have a different investment strategy. So if you're young and you inherit or your parents set up for you, you know, trust with a lot of stock in it, you have a very long time horizon, right? Because you're young. So there, the appropriate investment strategy is different than for, you know, an individual who's older and has cash needs to fund their life.

7:30So it's all about figuring out for each piece of that mosaic of trust that you're creating, what's the optimal strategy, investment strategy to operate inside of them. It's not, you can't just photocopy the same thing for all the different trusts. And that's where it gets complicated. I think that's where people sort of get confused. Right. And it's not unusual to see people with many, many trusts. Right. So that makes the problem that much more complicated. How do you approach QSBS? I mean, QSBS is an incredible benefit for small businesses. And so for founders who start early in the life of the company, you know, they get 10 million now actually starting, I guess, at the beginning of this year, up to 15 million off their tax or 15 million of proceeds from their stock sale would be not taxed.

8:18So it's a huge benefit. It's a huge motivator for people to actually go into startups. um you know i was recently speaking to some people abroad in asia who wanted to sort of create you know an entrepreneurial community and they said what's so special about america and one of the things i think is the tax code the environment the culture of trying to start something is very important including this qsbs benefit it's a very important motivator to think that hey you know if i work like crazy and dedicate myself to something uh you know i get to keep some of the proceeds in in an advantaged way. So, so a lot of these strategies of having multiple trusts are to try to multiply these QSBS benefits across the different trusts.

9:00And people say, well, they talk about stacking them. So how does stacking them? That's what stacking means. Oh, okay. Right. So you can have several trusts for your kids, your parents, whatever. And each of those, depending on how you structure them and it's complicated and probably above my legal knowledge. each of those can get if it's structured right its own qsbs exemption is there any more to that like what what like i'm just curious okay so coming from someone who doesn't know all the nuances between all this like i know i asked you this before like how do you lay it out i know within all of these structures and entities there's like seven more layers and like more nuances and like whether it's strategies portfolios where you like where you domicile it all those sorts of Right.

9:50So, I mean, obviously, if you can multiply your QSBS benefit across several trusts, you're going to get that 10 or 15 million dollars of benefit each time. So it's huge. Right. So the economics of that are very compelling and easy to understand. But to your point, and this is where it kind of delves into sort of people's families and their personal preferences and how they're, you know, some people don't want to leave everything their kids. some people do right and so that then dictates how big those trusts are dictates what kind of strategies are in them it dictates how you distribute money out to the recipients when you give the money to people when they're 30 you give them money when they're 40.

10:31do you allow them to you know if they're younger to invest in you know i don't know a startup that they're running or not so all that becomes really personal and that's why this exercise is it's hard to generalize because it's so personal and it's effectively all these trusts are kind of handmade custom made by attorneys it's a lengthy process because you have to decide all these things and i think where people fall down a lot is that when they start realizing you make these decisions that have you know long-ranging implications they don't really know they haven't decided yet do i leave all my wealth to my child or half my wealth and then they get stuck on that and they never progress forward and then miss the boat on on getting the tax benefits right so i think a lot of the preparation is actually sort of psychology philosophy family values whatever you want to call it have all that thought out so that when it comes time to structure things you already know yeah my my you know my niece molly is going to get x amount and she's going to get when she's 40 and and here's going to be the trustee that controls that and so on and so forth If you don't have those basic things thought out, trying to structure the trust itself is not the difficult bit.

11:44It's these things you define inside that are a difficult bit. What are the biggest mistakes that people commonly make? Well, I think the biggest one is they don't think about this. And then at the last minute, they try to sort of build all this and run all these roadblocks, which are, again, complicated discussions they have to have as a family, as a broad family to think about these things. And they're not ready to do that. they haven't thought about it and they don't have the time to do that and so then they drop the ball in terms of getting these things done yeah so i mean this sounds really trivial but at the end of the day be prepared and so some people come and are very prepared and they have this sort of family values document they wrote out that they all agreed on about you know how the inheritance is going to work and who gets what and what the inheritance is for some people are very prepared and that makes life a lot easier, right?

12:32The last conversation we had, you mentioned you don't, I don't know if I'm allowed to say advise, but you've seen and you may not suggest that someone liquidates their entire position on day one, but to trickle it out and kind of start putting it in different places, not to put words into your mouth, but so you have the liquidity event coming up. How do you then manage it across the next year or two? So I think, you know, wealth managers, asset managers, it's very self-serving for them to say, hey, you should liquidate everything because obviously they're not going to charge you fees on your concentrated position.

13:09It's your stock. You brought it to the table. But they will charge you fees if they build you a stock or a bond portfolio or private equity portfolio. So it's self-serving for them to say to you, oh, liquidate everything because you should diversify and get out. Now, I think the statement you should diversify, I mean, to some degree, you probably should for a rainy day, but the degree to which you do that becomes a personal preference. I can't put myself in your shoes. Some people are very risk averse, so they want to get out of everything as fast as they can. Others, you know, really want to ride the wave of the company.

13:43History has shown that hanging on to your stock, generally speaking, not always, there are counter examples, of course, to everything. Generally, you know, that stock that got you to the liquidity point will probably continue to do pretty well. And if anything, you're the most informed person in the world about that stock. So for me to come in and sort of tell you that you should sell it or not sell it is, it's silly, right? I don't know more than you do. So you're the one who needs to sort of assess whether you truly think that stock will continue to run and how much therefore should you keep it or not, right?

14:18But I'd say the vast majority of people should keep it for a while, at least as long as they're engaged in the company, right? There comes a point where some people disengage from the company. The last conversation was also anchored on the SpaceX IPO upcoming. That's going to be a very large wealth creation event across California, Texas, wherever alumni have gone after. But another topic that's kind of an undercurrent of a lot of liquidity over the last year and will continue to be is secondaries, whether it's Anthropic, OpenAI, I don't know, and roll spacex people that are doing tenders it could also be stripe and so with those in mind could you just talk through one like the best practices for secondary sales and then going through these events too um and what to look for what to not look out for the secondary market is you know very um active right now everyone wants to get you know a piece of the brand name um companies, right?

15:20And so this whole industry has sprung up around that. Brokers, friends of founders that happen to have a position. But the challenge always with these things is that the companies generally are structured, they're sort of bylaws or structures so that the employees cannot necessarily transfer the stock to outsiders, right? So what ends up happening is the employee creates a company molly corp and then molly then transfers some of her stock into her own company the company allow that because it's a technically a transfer just herself and then she sells shares in that company and others right so in these others you know people are trying to get into these companies don't really have a direct claim on a stock they have a claim on molly company right and that's called the level one or l1 type structure and then what's happened is there's so much demand that let's say I bought shares in Mali Corp, right?

16:20I now go create Michelle Corp and sell shares in that to other people. And that's now a level two or L2 type structure. So you see things L1, L2, you even see L3 nested structures. Each time you're further and further away from the stock. And so there's more and more risk that you don't get, you know, what you thought you would, right? Because who's to say that the original person that started the very first company doesn't borrow money against the shares or sell them outright because there's no real sort of controls on that necessarily right people just say i pledge to you that i'll give you the returns when the company ipos they're not necessarily saying i will hold these stocks in escrow for you so there's a lot of legal complexity in there and i think people are so excited about getting these things that they gloss over these details the other thing of course is that people layer in a lot of fees, carry.

17:14So it's not unusual to see one in 10, two in 20 type structures or a 5 % transaction fee. And often it's not done at the last round. It's done a significant increase the last round. So it's a very complicated space. I would really ask the viewers, be careful. It's a very hairy, complicated topic. Why do you think so many people are doing secondaries right before large liquidity events wouldn't it logically make sense to hold on to until after you mean the person selling yeah i think a lot of people are have been working at these companies a very long time um and have been accumulating this equity and just want to get some liquidity for their lifestyle so i think that's one of the drivers some have left the company and they're working somewhere else so they don't feel that attached to it um yeah i mean there are many personal reasons but from a if 100 of your worth is in there you can understand how people even if it might make mathematical sense to you know hold on to the stock might want to sell before because all their wealth is there you mentioned uh the structure of these whether it's SPVs and that kind of thing, being carry and fees.

18:31What is a good structure? What should people try to optimize for? And when are they getting fleeced? So really try to be in a structure where you're only one step removed from the shares. Ideally, you're straight on the cap table. That's really hard to do. But whenever I advise clients, I try really hard to get them straight on the cap table. If you are going to go through a vehicle and it's just L1 to use the industry term, make sure that you diligence who that is that's giving the shares. Is it a reputable law firm that set the thing up? Are there safeguards in the documents around how the shares are going to be?

19:16Are they going to be placed in escrow or does the original owner have the right to pledge them, to borrow money against them? there are all these things because each one of these contracts, a custom contract, you need to get into the details. So the legal deal is actually very hard. And if you don't know ahead of time, like I'd say, a lot of people don't realize, for example, people take loans out against their private stocks. Just because you put it into a vehicle doesn't mean you don't have the right to take a loan out against it. Right. So there are things like that. You have to sort of think of all these eventualities.

19:45But in order to think about them, you need to know what options these people have to start with. So it's a very difficult. You know, I'm still discovering things as I look at it. And I look at this stuff daily. So it's tricky. And then walk through the carry portion. Some people don't understand the difference in carry weight. So let's say you buy the stock at$100. And then the carry, let's say it's a 10 % carry. Any increase in the value of the stock above$100, 10 % goes to whoever has created this SPD. So that's the carry, right? and in some spaces like in private equity care usually has a minimum return before the carry accrues to the person so you know might have a six seven eight percent return to the investor before the spd owner gets the carry but in these situations i've never seen that so they get from the first dollar of gain they get to keep a portion of the profits there's nothing wrong with that per se just you need to be aware of that and bake that into your calculations to understand what net amount you'll receive afterwards.

20:51So should they take a 5 % fee and 10 % carry or should they take 30 % carry? That all depends on how much you think the stock will go up. So if you don't think the stock will go up a lot, hand out lots of carry. If you think the stock's going to go up a lot, you don't want to hand out as much carry. So that becomes, again, subjective. And when we do these analyses, we sort of map out different scenarios where the stock price might end up to understand, you know, that crossover point. Yeah, it's interesting. Sorcery is brought to you by Brex, the financial stack trusted by more than 30 ,000 companies, including one in three venture-backed startups in the U.S.

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22:16Trust and use Brex. Start today at brex.com slash sorcery. That's B-R-E-X dot com slash sorcery. Turing is training the next generation of AI with tasks that require real expertise and real world judgment. That's why companies like NVIDIA, Anthropic, Salesforce, and Gemini partner with Turing. Turing builds realistic reinforcement learning environments and data systems based on real operational traces. The kind of infrastructure frontier labs need to train superintelligence. Visit Turing.com slash S-O-U-R-C-E-R-Y. We talked about this last time with SPVs and you mentioned this a bit, but even just doing simple background checks and understanding who is the underlying person behind the vehicle.

23:06um making sure that it's credible and it's not some person that you know kind of like put together something and there was a tweet not too long ago where someone put together a uh a vehicle and then like fled the country and that never came back oh really yeah they just took the money themselves but remember right when you whenever you're doing a private investment the contract, you know, you're sort of excluded from the regulatory oversight by saying that it's a special contract only for qualified people that don't meet certain income thresholds. So those contracts are custom. There's no, it might strike you as unfair or not right in the way it's structured, but that's irrelevant because these are private contracts.

23:51Whatever you signed and agreed to that's it and your notion of what's fair or right uh doesn't really matter you know what i mean you you've you've raised your hand you said look i'm a qualified purchase i'm a qualified person to do this therefore i don't need regulatory support right because these things happen you know with specialized uh exceptions to regulation right but only available to people who self-certify that they are okay with that, right? So you can't say I'm, you know, a big person, a big boy, big girl, I understand what I'm doing, and then turn around and be upset at the outcome.

24:30You have to do your legal and operational diligence. What are you most concerned about? Like in the overall macro, I guess this is like a complete wide-ranging macro question. Every category that you're seeing, whether it's the volume liquidity happening in secondaries, impending IPOs. We're going to talk about credit in a second, but there are all these different markets that are doing funny things, whether it's because of the war, whether it's because of, I don't know, AI causing little SaaSpocalypse here and there. What are you most looking out for? I think for every space, there's so many arcane, idiosyncratic details to think about.

25:11it's there's a potential uh for making a mistake in any asset class right it's just about really being informed and knowing what you're doing so what worries me is the rush into all these different things uh by people i feel sometimes have not done their homework uh and then if you have not done your homework you may be unpleasantly surprised at the outcome right so whether it's you know private credit where people sort of didn't realize that you know these bdcs of gates right i'm surprised to see that because it's very clear in the documents that they will you know redeem up to x percent of the fund and after that they don't have to explain that more so bdc so there's a whole concept of an evergreen vehicle right an evergreen vehicle so traditional venture private equity is in something called a closed end vehicle so it's got a specific start date and a specific end date and along the way you have no right to redeem right you just get your money back towards the end date.

26:12In these evergreen structures, there are some of them, not all evergreen structures are like this, by the way. I've noticed that people conflate semi-liquid structures with evergreen structures. But anyway, some evergreen structures have what's called this sort of semi-liquid character. So that every quarter, the company that's running this structure will say, hey, if 5 % of the total investors redeem, we'll meet that. But if it's more than that we won't and often even the five percent is subject to our ability to do that we're not going to jeopardize the fund because five percent of the people want to get out and we have to fire sale things and hurt everyone that's in the fund right so even the five percent is not always guaranteed but but and so people start suddenly started asking for the redemption the things hit the limits and the manager said well sorry you know and this surprised people even though it was very clearly written out in the documents.

27:08And that's what I'm telling you when I say worries, people sort of rushed into these things without realizing, you know, all these details. Right. Why did all that happen at once, though? It was it was like a huge headline for a week. I think people started looking underneath the hood at these things and realizing that, hey, it's actually more complicated than I thought. Maybe I should get my money out. So now I think there's sort of a what's the word? A narrative around it that I don't know. actually maps to the underlying at all. And so people just want out now because they're worried that they didn't understand what they were getting into, right?

27:42So is there an opportunity to maybe even buy these things? That's a good question. You have to sort of look at how much they've sold off and try to understand what's inside of them. Every one of these, because these are custom pools, every one of them have different mixes of assets in them. So you can't just sort of make a general statement about BDCs because everyone is going to be different in their underwriting, the types of loans, you know, do they accept a PIC loan or not? All these things are in there. And so you need to really, you can't sort of brush everything with one stroke. And if you've gone in there not even understanding the sort of the semi-liquid nature of things, you've clearly not done all your homework on the underlying underwriting and structure of the different BDCs.

28:24So it's very, very hard to do these. I guess, you know, this is going to sound very trite and self-serving, but like expertise matters, especially in these niche strange markets. Right. You mentioned this in our last conversation, but on portfolio construction, how you wait them out, whether it's credit, venture, which is a small portion, real estate, so on and so forth, cash, all these kinds of things. How has that strategy evolved over time, especially with these super volatile markets? It's interesting to see that there's been, of course, over the last several years, more and more exposure to private assets by more and more people.

29:13I think part of it has to do with the wave of increasing wealth in the country. Part of it, this feeling that I think more sort of normal retail investors feel like they're being left out. So that's bringing pressure to these things. And so I'd say in general, portfolios have gotten more weighted towards these alternative assets, which is not a bad thing. The problem, again, with alternative assets is that unlike stocks and bonds, they're very, very difficult to understand, right? As my BDC example, you can't just say, well, I want to put some BDC in there. You need to analyze each BDC and understand, and you have to pick a weighting.

29:50And so BDCs are, you know, they're a type of credit. So they're more risky than treasuries. They're less risky than stocks. So you put some amount in there, but not a huge amount, right? And how much you put in there, you can run optimizations. And it also depends on the goal of your portfolio. Back to our trust discussion a second ago, right? If it's for a very young person, it's okay to have 80, 90, 100 % alternatives because they don't need the cash immediately. So let the stuff grow, you know, at the highest risk possible. And then if it's for a different purpose, maybe you're running a charity or a foundation, you need to pay 5 % a year.