You’ve probably watched it happen to someone else’s company. A business worth tens or maybe even hundreds of millions, a great story, a strong management team — and a few years later, it’s worth nothing.
You’ve probably told yourself that’s not going to be you. Maybe you’re right. But “probably right” is not a valid risk management strategy.
Right now, the overwhelming majority of your net worth is very likely concentrated in one place: your company. It’s illiquid. It has no daily price. You can’t hedge it the way you’d hedge a public stock position, and you can’t sell a slice of it tomorrow afternoon if you suddenly need to.
That’s not to say the business is a bad bet. But let’s call a spade a spade: it’s absolutely a concentrated, high-stakes bet. The good news is that diversifying doesn’t mean you have to wait for a traditional business sale. There are real, established strategies to reduce risk years before you sell.
Why Founders Stay Concentrated Longer Than They Should
Part of it is structural — most of your net worth is simply untouchable without a liquidity event. But part of it is psychological.
A business is typically a founder’s life’s work, so selling even a small piece can feel strangely similar to betting against yourself. You know the company better than anyone. You may believe its best years are still ahead. And you don’t necessarily want your team, board, or investors interpreting personal liquidity as a lack of conviction.
Still, concentration risk is a risk nonetheless. You’d probably think carefully about a single customer representing 60% of revenue. The same logic applies if one private company represents 80%, 90%, or 95% of your family’s net worth.
How Much Should You Take Off the Table?
I’d encourage you to frame this question a little differently: How much liquidity would protect your family’s downside without giving up more upside than you need to?
Start with what you’d want protected even if the company never produces another dollar of personal wealth.
That might include:
- Paying off or materially reducing personal debt.
- Establishing several years of lifestyle liquidity.
- Funding major known expenses, like a home purchase or education.
- Creating a diversified taxable investment portfolio outside the company.
- Making sure your spouse and children remain financially secure even if the business outcome is dramatically worse than expected.
Imagine, for example, that $4 million of diversified liquid assets would fund your family’s baseline lifestyle and major goals regardless of what happens to the company. Reaching that number may fundamentally change your risk tolerance.
By contrast, selling $15 million simply because an investor is willing to buy it might sacrifice upside needlessly. The point is not to maximize liquidity. It is to create enough independent liquidity that your family’s financial plan no longer depends on one result.
Once you know that number, you can evaluate the tools available to get there.
Don’t Overlook the Simplest Option: Take Some Profits Home
Diversification does not always translate to selling shares.
If your business is mature and generating substantial free cash flow, one of the simplest ways to diversify may be to stop reinvesting every available dollar back into the company.
Depending on your entity structure, ownership agreements, debt covenants, taxes, and capital needs, regular distributions can gradually build a personal balance sheet outside the business without changing your ownership percentage.
Secondary Sales: Taking Chips Off the Table Pre-Exit
One exit planning tool is the secondary sale: selling a portion of your personal shares to new or existing investors, often alongside a later funding round, without waiting for a full acquisition or IPO.
Here’s how it typically works: if investors buy new shares directly from the company during a funding round, they’ll sometimes also purchase existing shares directly from founders or early employees as part of the same transaction. This gives you a path to some liquidity — enough to buy a home, build a cash reserve outside the business, or simply sleep better at night — without the company needing to be sold.
The tradeoffs are worth understanding going in. Secondary sales may happen at some discount to what a future full exit might yield, since the buyer is taking on illiquidity and uncertainty of their own. The amount and timing are often negotiated as part of the broader round rather than fully within your control, which means you need to raise the topic proactively instead of waiting for someone to offer it to you.
Structured Liquidity Programs
Some companies go a step further and formalize this process through a structured tender offer — a company-sponsored liquidity event that allows founders and employees to sell a capped percentage of their shares to interested investors, usually on a set schedule tied to funding rounds or an annual cadence.
This differs from an ad hoc secondary sale in a few important ways. It’s a more formal process, generally with broader eligibility across the cap table instead of being limited to whoever happens to negotiate a deal. Pricing and terms are likely company-negotiated instead of individually hashed out, which can mean less flexibility but also less friction.
Not every company offers a program like this, and it may require board support to establish. If you have influence at the board level and your company doesn’t currently offer structured liquidity, it’s worth raising as a benefit to the broader employee base, not just yourself — a well-structured program can also function as a retention tool, since it gives long-tenured employees a shorter path to liquidity.
ESOPs as a Diversification and Succession Strategy
An Employee Stock Ownership Plan takes the idea in a different direction.
Instead of selling shares to outside investors, an ESOP creates a trust that acquires company stock for the benefit of employees. The transaction may be financed with company contributions, debt, or a combination of the two.
For founders, that can open the door to liquidity while also addressing a second question: Who should own the business after me?
For qualifying transactions, Section 1042 of the tax code can allow certain owners of C corporation stock to defer capital gains by reinvesting sale proceeds into qualified replacement property — generally stocks or bonds issued by US operating companies. Among other requirements, the seller generally must have held the stock for at least three years, the ESOP must own at least 30% of the company after the transaction, and the replacement property must be acquired within a prescribed period.
That can create significant tax advantages, but (and it probably goes without saying) ESOP planning is far more specialized than a conventional secondary sale.
- The plan must pay no more than adequate consideration for the shares, which makes independent valuation central to the transaction.
- Establishing an ESOP also introduces ongoing fiduciary, administrative, valuation, and compliance obligations.
- If the company borrows to finance the purchase, that leverage can affect cash flow for years.
If you’re interested in gradual succession and rewarding employees, an ESOP is worth exploring. It is not, however, a simple liquidity hack.
Partial Recapitalizations
A partial recapitalization, such as bringing on a private equity partner, offers a middle ground, so to speak. You sell a minority or majority stake to a PE firm while retaining an ongoing ownership position and continued operational involvement. That provides significant liquidity at the time of the recap and preserves upside in the business’s future growth potential.
Founders frequently “roll” a portion of their equity into the post-transaction company. If the next phase goes well, that retained stake can produce a second liquidity event later — the so-called second bite of the apple. But rolled equity is still concentrated equity, so it’s important not to mentally count the entire transaction value as diversification.
Of course, it comes with important considerations. You’ll almost certainly give up some degree of control, even if you’re still involved — new governance structures, board seats, and reporting obligations are standard with a PE partner.
And the fit is imperative: a firm whose growth timeline, risk appetite, and strategic vision don’t align with your own can turn what should be a diversification event into a source of ongoing friction. Moreover, expect the PE firm’s due diligence process to be extensive, perhaps more rigorous than anything you experienced in a venture round.
Liquidity Is Only One Side of the Transaction
A secondary sale, ESOP transaction, or recapitalization can lead to very different tax implications. Before choosing a path, it’s important to at least understand the following:
Capital gains treatment. Selling shares generally triggers a taxable event, with federal and potentially state capital gains taxes reducing the usable proceeds.
QSBS implications. If shares qualify for the Section 1202 exclusion, the timing and deal structure of a sale are imperative. Selling qualifying shares before satisfying the applicable holding requirements can sacrifice a significant tax benefit, while certain rollover provisions may be available in narrower circumstances.
Rollover equity. In a private equity recap, you might have the option to reinvest part of your proceeds into the new ownership structure. That can preserve future upside and, depending on deal structure, potentially defer tax on the rolled portion — but it also means that portion hasn’t really been diversified.
Company and investor restrictions. Private-company shares aren’t freely tradable. Rights of first refusal, board approval requirements, securities-law restrictions, investor agreements, and company policies can all affect whether and how a secondary transaction happens.
Whatever you do, loop your CPA or tax advisor into the conversation early on.
The Psychology of Letting Go
Your business embodies time and incalculable sacrifice. It’s tethered to who you are.
So yes, taking liquidity can be emotionally complicated.
But protecting your family and believing in your company are not opposing ideas.
You can believe that the business will become worth five times what it is today while also recognizing that your spouse, children, home, retirement, and broader finances do not need to ride solely on that prediction.
In fact, taking some personal financial pressure off the table can sometimes make founders better operators. If you no longer need the next round or exit to secure your family’s future, you may find yourself making company decisions with a clearer head.
What Are You Really Protecting by Diversifying?
The purpose of pre-exit diversification is to make sure you don’t need one specific result for the rest of your financial life to work.
The company can still be your largest asset. It can still be the place where you expect most of your future wealth to come from. But if you’ve spent years creating value, there may come a point when some of that value should begin supporting life outside the company too.
That is ultimately what diversification buys you: greater freedom regardless of how the story ends.
If you haven’t had a down-to-earth conversation with a financial advisor about what pre-exit diversification could look like for your specific situation, I’d be happy to help.
