The Exchanges

Q of liquidity over the last year and will continue to be is secondaries, whether it's Anthropic, OpenAI, I don't know, Anduril, 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?

A The secondary market is, um, you know, very, um, uh, active right now. Everyone wants to get, you know, a piece of the brand name, um, companies, right? And so this whole industry has sprung up around that. Um, brokers, um, 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, uh, 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 technically a transfer just to herself. And then she sells shares in that company and others. Right. So in these others, you know, people are trying to get into, 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 L one type structure. And then what's happened is there's so much demand that let's say I bought shares in Molly Corp, right? I now go create Michelle Corp and sell shares in that to other people. And that's now a level two or L two, uh, type structure. So you see things L one, L two, you even see L three nested structures each time you're further and further away from the stock. And so there's more and more risks that…

AI assessment note: “each time you're further and further away from the stock. And so there's more and more risks”

Q And then on the family offices point, family offices are taking off. They're becoming a new hype wave. They're, they're all over the place, but you're saying single family offices are very difficult. Why is that? And why should people avoid doing that as a first step?

A Um, I mean, the allure is cool. I have my own family office, but you know, what are you trying to accomplish? So if, if what you're trying to accomplish is have someone help you a little bit with your sort of financial reporting and all that's, you can call that a family office. I guess the definition of family office is very broad, so it could include all sorts of things. But if you're trying to build a multi-asset class portfolio, global multi-asset class portfolio, you're going to hire a bunch of these sort of professional investors I mentioned. I don't know, you need five, six, seven of them, different asset classes. You've got, you know, you've got fixed income, obviously, stocks, which are, you know, more straightforward, I'd say, but then you've got venture capital, private equity, real estate and real assets, credit, and all these things are specialties that require people. So how are you going to do that and pay these people, uh, if your balance sheet isn't very big? And I mean, billions, right? Otherwise, the compensation you're paying to this team is eating up Whatever benefit you might be getting, right? The other challenge I found is that family offices have real trouble retaining the talent because, you know, you hire someone, they're ambitious, they have a career path. The, the principle of the family is signing up really to be a manager of an asset management co…

AI assessment note: “compensation you're paying to this team is eating up Whatever benefit you might be getting”

Q A-sixteen Z. 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. What do you do? What is step one?

A So again, if you remember, I talked about three sort of components, but step one is absolutely your trust and estate optimization construction. So, um, 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, uh, revocable or irrevocable trusts, grantor, non-grantor trusts, there are all these different things you can do. I'm not an attorney, so I, I don't know all the details about them, but I know enough to tell you that it's a very, um, complicated Situation. In parallel, you can also take some of your proceeds and put them in a different strategy to generate losses, so-called tax loss harvesting, and there, there's several flavors of that too that you can do. Um, uh, 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. Ri…

AI assessment note: “step one is absolutely your trust and estate optimization construction.”

Q agent tooling, and model orchestration, so your teams ship product, not plumbing. Mistral, Dropbox, and Drada already trust Merge in production. Start building at merge.dev. Founders scale faster on Deal. Set up payroll for any country in minutes, hire anyone, anywhere, get visas handled fast, and get back to building. Visit deal.com slash sorcery. That's D E L dot com slash sorcery. Is there anything we're missing out on taxes?

A Yeah, I think there's one, again, one element which I think is really important to me. Super interesting thing happens, happen when, um, you, you bring two different disciplines and examine sort of the multidisciplinary aspect to it. So I kind of touched on this before, but it's like, again, you, you hire attorneys. They're going to talk to you all about trust. You hire sort of liquid asset managers. All they're going to talk to you about is tax loss harvesting. No one, Is spending the time to look at the two and know enough about the two. Very few people know enough about the two to help you trade the two off. Uh, you know, we've done some work on that, and it turns out that there are many situations where the trusts Are not necessarily the right answer. They save you tax, but you can achieve the same or even better outcomes using these tax loss harvesting strategies. So I think that's where, um, I would caution people to not just jump into one of the silos and look at all of them and be sure they're advised properly on all the different components. Charity, liquid strategies, and trusts, and trade them all off appropriately.

AI assessment note: “Very few people know enough about the two to help you trade the two off.”

Q A-sixteen Z. 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. What do you do? What is step one?

A So again, if you remember, I talked about three sort of components, but step one is absolutely your trust and estate optimization construction. So, um, 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, uh, revocable or irrevocable trusts, grantor, non-grantor trusts, there are all these different things you can do. I'm not an attorney, so I, I don't know all the details about them, but I know enough to tell you that it's a very, um, complicated Situation. In parallel, you can also take some of your proceeds and put them in a different strategy to generate losses, so-called tax loss harvesting, and there, there's several flavors of that too that you can do. Um, uh, 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. Ri…

AI assessment note: “step one is absolutely your trust and estate optimization construction.”

Q I want to get more into the perennial strategy and structure, but I think before that it would be great to just dive even deeper into the state of wealth management today. What have been the biggest problems drilling down further into the issues that you've seen, how wealth is managed, maybe the different types of wealth over time, but structurally, like, what are the biggest problems there?

A It's very interesting. So they're basically, there are two approaches, um, you can use to have your wealth managed, uh, if you're a wealthy individual. One is you can go To the traditional RIA or wealth management channel. And I'll talk about that in a second. The other one is you can go to traditional asset managers. Think, you know, large asset management firms, you know, of hedge funds, PE shops, things like that. And both those, uh, approaches I think have their own, uh, sort of problems when you're dealing with an individual that has an institutional amount of wealth, uh, or will, and are taxable, right? These two, these two The, the confluence of these two effects, uh, means that the sort of the two standard approaches I just described aren't really great. So wealth management, traditional wealth management, most of these firms, the independent firms have spun out of banks and the banks themselves, uh, don't train people to be professional investors, right? These people are trained to be service providers. They're trained to be responsive. They're trained to be helpful, but the actual investment acumen when you're at a large bank sits in a separate group. And you're rewarded as a wealth manager by how much you grow your book of business. So you're never trained to be an investment person per se. And then when you spin out, therefore, when you create your own large indepen…

AI assessment note: “the banks themselves, uh, don't train people to be professional investors”

Q Is that the main difference between A-sixteen Z perennial and let's say an iconic? How does it fit within the broader theme of these Silicon Valley oriented firms?

A Um, I think the Silicon Valley oriented firms, for the most part, again, are trying to be a full stack offering of all the services. Um, and so, you know, with a certain amount of revenue, there's only so much you can build in house, right? So a lot of these firms do not have professional investors. So I, I often ask people as a quiz, um, how many professional investors do you think are in, you know, RIA XYZ? And, uh, and people will answer, I mean, percent, right? People answer me, 20%, 50%, 30%, but, uh, the number often is zero or one or two people, um, and so that's the big difference between us and many of these other firms.

AI assessment note: “and so that's the big difference between us and many of these other firms.”

Q were a huge trend. Secondaries have taken storm. And so with secondaries, we're seeing not only lots of volume in secondary transactions, which is good, I guess, for growth investors, because that was really quiet for a while, but we're also seeing these multi-layered SPVs pull Proliferate and cause sometimes scams, but in terms of secondaries, what are you seeing and what are you advising your clients on with these?

A So it's a fascinating space to your point. Um, it's a little bit like the comment I made before where if you don't have professional investors on your team, uh, you have to build a fund of funds to invest. It's the same idea with these, these, uh, secondary vehicles. I'd say be very, very careful what you're doing. Um, attorneys love to use this term, perfect your ownership interest. So let's say we're going to use SpaceX again since we've been on SpaceX. Let's say you've been working at SpaceX years, and you create your own Molly Corp, and you put your SpaceX stock in that. SpaceX doesn't want you, or most companies, I don't know the pictures of SpaceX, don't want you to transfer your stock to an external person, right? So what you do is you transfer it to your own entity, And then you sell shares in that entity to other people, right? And it's not very clear, and, and you often charge fees, right? So a lot, I mean, it's sometimes quite egregious to your point. You've been paying two, three, five percent for the right to buy something. Um, but the problem is the, the stocks are sitting in that entity, and you are the manager of the entity, the employee is the manager of the entity. Um, and so they're the ones who ultimately, even though they've written the promise saying when there's a liquidity event, we'll sell the shares and hand you the, The money. Uh, I've seen personally…

AI assessment note: “I'd say be very, very careful what you're doing.”

Q For those founders that come to you, they're post exit, they're liquid. Do some of them want to start on their second or their third company? And how do you manage their portfolios to do that?

A Many do want to start a second and third company. Um, especially nowadays, you're young. Are you going to retire when you're 35 or 40 and not do anything? I mean, I don't think anyone wants to do that. So a lot of people want to do. And so if, if that's the goal, we try to keep the portfolio actually more liquid because their hope is that they can finance more of it themselves, right? The idea is, well, I did my first company and by IPO I owned 15% of it. The next time I want to own 30% of it, right? And so I'm going to bootstrap it and use my own capital, uh, more. So we try to, yes, is, is a short answer. We change how we would suggest the portfolio based on those, on those desires. A lot of founders, though, um, I think want to stick with their company very, very long term. They're not necessarily thinking, you know, two years out, I'm done. Uh, they want to stay along. I mean, this is their baby. They know it. They've grown it. So it's not necessarily, I'm going to completely detach. It's maybe my, um, level in intensity will decrease. Maybe I won't be CEO anymore. Maybe I'll be chair or something like that, but flat out leaving, I'd say it's kind of the exception. You do see it.

AI assessment note: “we try to keep the portfolio actually more liquid because their hope is that they can finance”

Q of liquidity over the last year and will continue to be is secondaries, whether it's Anthropic, OpenAI, I don't know, Anduril, 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?

A The secondary market is, um, you know, very, um, uh, active right now. Everyone wants to get, you know, a piece of the brand name, um, companies, right? And so this whole industry has sprung up around that. Um, brokers, um, 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, uh, 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 technically a transfer just to herself. And then she sells shares in that company and others. Right. So in these others, you know, people are trying to get into, 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 L one type structure. And then what's happened is there's so much demand that let's say I bought shares in Molly Corp, right? I now go create Michelle Corp and sell shares in that to other people. And that's now a level two or L two, uh, type structure. So you see things L one, L two, you even see L three nested structures each time you're further and further away from the stock. And so there's more and more risks that…

AI assessment note: “nested structures each time you're further and further away from the stock”

Q like, I'm just curious. Okay. So coming from someone who doesn't know all the nuances between all of 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 things.

A Right. So, I mean, obviously if you can multiply your QS BS benefit across several trusts, you're going to get that 10 or fifteen million dollars of benefit each time. So it's huge, right? So the economics of that are very, uh, 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? Do you give the money to people when they're at 30? Do you give them money when they're 40? Do 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 …

AI assessment note: “It's hard to generalize because it's so personal, and it's effectively all these trusts are kind of handmade”

Q something like that. But what is your main stance on taxes and where you live? Because we can also get into this afterwards, but the billionaire tax bill, that definitely, I mean, I don't know if this was based on principle or like a little bit of a protest, but I think it was over a trillion dollars left the state of California. So how do you feel about taxes?

A Well, I mean, no one loves paying taxes unless they feel they're getting value for it, right? And I think when you hear people complain about it, it's, it's, I don't get value, right? You know, my schools aren't great, the roads are in disrepair, whatever, you hear these complaints, right? So I don't think anyone's necessarily averse to paying tax if they feel they're getting value for it, and a lot of people who leave feel they're not getting value for it, right? So that's one. Um, two, there's a sense that the, the revenues are mismanaged, and, you know, I'm not going to get into all the waste and fraud that happens, but we all know a lot of that happens, right? But there's a lot of, and moving is a very draconian move, right? Because your family, your, your friends and all that. So some people can do that and, and want to do that. And by the way, it's not easy. You have to sort of really move. So leaving your house here, your main house and moving to Texas or Florida for, for a year or two with the intent of coming back, it doesn't qualify.

AI assessment note: “no one loves paying taxes unless they feel they're getting value for it”

Q When they essentially onboard, I'm just so curious about this. Like, what products do you show them, and where are their, where are their barriers for, like, for instance, do you go into art? Like, for, like, these typical portfolios, how do you set them up initially? You said it's kind of like a gradual process, but like, what are all the offerings, and how do you balance it?

A It is a gradual process. So, you know, I think We're a very open book, and so we'll tell people, frankly, that they don't need to necessarily put all of their assets with us, right, which again is not what most people in the industry will say. Most people in the industry will say, hey, you should put everything with me, because otherwise I won't have an insight on what you're doing elsewhere, and therefore I won't be able to manage your things optimally, but that's not true. You can have the firms communicate with each other, and I do this regularly, right, but, uh, and so, You know, again, if you went to a traditional firm, they would start with more of the stock and bond mix. They might add a little bit of some sort of credit. Um, we sort of tend to work with people more in a linear fashion, acknowledging that their portfolio is going to change over time, right? So we're not focused simply on, you know, exiting that position on day one, the, the concentrate, let's say SpaceX. We're not just simply going to be like, you've got to sell off SpaceX. So, okay, SpaceX, if you hold onto it for 20 years, you know, here's what the outcome might look like. By the way, we built a lot of tools to help forecast these kinds of things, which is again, empowered by the fact we have professional investors who know how to do that. I mean, a lot of it, I'm sorry to be repetitive, a lot of it fa…

AI assessment note: “strange, unusual alternative asset classes are definitely part of the mix. We have some clients”

Q Um, why did all that happen at once though? It was, it was like a huge headline for a week.

A 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. Um, so now I think there's sort of, um, Uh, what's the word? A narrative around it that I don't know actually maps to the underlying at all. Um, and so people just want out now because they're worried that they didn't understand what they were getting into, right? So, uh, is there an opportunity to maybe even buy these things? Um, 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 every one 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, 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. So it's very, very hard to To do these, I guess, you know, this is gonna sound very, um, trite and self-serving, but, like, expertise matters, …

AI assessment note: “people started looking underneath the hood at these things and realizing that”

Q Should you charter a jet or should you buy a jet? And then if you do buy the jet, how do you make money off of it?

A Jets are expensive. The maintenance of an airplane is very expensive. It has rules about how many times it lands before you have to do certain overhauls. You have to have a crew, fuel. It's a very expensive proposition. Um, you know, again, it's a personal decision, but if you're not going to use it a lot, it can be quite costly. Um, if you use it for business purposes, um, now you can sort of depreciate and take advantage of the same tax credits that you do with real estate and oil wells. Right. But you have to be able to prove that you, it was used for business purposes and all that. And so there's, there's certain rules around that that I don't know exactly. So these are the things you have to trade off, right? Uh, but it's very expensive. And if your goal is to accumulate long-term wealth, uh, you know, think twice before you buy one of these things, right? They're very expensive.

AI assessment note: “if you use it for business purposes... you can sort of depreciate and take advantage”

Q but They are providing energy, renewable energy, sustainable solar powered energy to data centers, hyperscalers. And what he's seeing on the ground is a lot of these announced data center projects are not happening. I wouldn't say a lot. I won't be dramatic there. But like, how are you seeing this within your portfolios? Like, I know that there could be a blanket statement there, but I'm just really curious.

A No, no. So I think it's really early days. Um, You know, a lot of private equity companies have operational teams that go in and help companies. I think they're only starting to use AI at this point, so I think it's very early still. Uh, the hope is obviously that you can, you know, AI, what it really allows you to do is develop sort of customized software very cheaply, effectively, right? Simplify processes, automate them, turn them in a natural language. All those things should have huge benefits for a private equity backed company that's trying to get more efficient. Um, but I, I'd say, and I'm making gross generalizations, I'm sure there are exceptions, but most PE firms have yet to sort of fully Well, and it's a new technology, right? So have yet to fully build that into all their operational improvements. And so I think the firms that are successful at that will really be able to improve the profitability of their, of their underlying companies. So it should be a huge benefit. Uh, and, and I think the benefits will accrue to those who really embrace this, you know, but large organizations are slow to move. Uh, they have their processes, their formulas, their, their, their things that they, that they've done successfully in the past. Um, and so, you know, people just sort of abandon all that and immediately jump to a new thing. So I, but I, so that's on sort of like improv…

AI assessment note: “The data center is an entirely sort of different question, which is, can we actually build”