Startup founders face many challenges. One of the biggest startup challenges is securing enough funds to meet cash flow needs. Cash flow issues can inhibit your company’s early-stage growth. These issues could be delays in strategic implementation, not hiring enough employees, and product readiness.
Entrepreneurs bootstrapping new ventures typically rely on friends and family for initial funding rounds, especially when their financial needs are less than $100,000 (angel and institutional investors typically step in with much larger stakes as founders move their businesses along the growth curve.) Rocket Dollar can help founders raise more money more quickly during the friends and family round by providing those crucial investors with access to retirement dollars they’ve already accumulated in their company-sponsored retirement plans.
How it Works
Investors who open a Rocket Dollar account can rollover funds they’ve accumulated through company-sponsored retirement accounts into either a Self-Directed Individual Retirement Account or a Self-Directed Solo 401(k). These accounts provide investors with complete control over their retirement dollars so they can pursue a whole new world of investment possibilities, including early-stage businesses. Investment options through company-sponsored IRAs are typically limited to publicly traded stocks, bonds, and mutual funds. Rocket Dollar investors, however, are using their self-directed accounts to make tax-advantaged investments in private equity, real estate, cryptocurrencies, precious metals, peer-to-peer lending, and many other alternative asset classes that provide portfolio diversification and a critical hedge against market downturns.
Rocket Dollar’s premium Gold Self-Directed IRA or Solo 401(k) provides investors with expedited white glove customer service, one free wire transfer per month, financial reporting assistance, and a Rocket Dollar-branded checkbook and debit card that further simplifies the investment process.
3 Reasons Why Friends and Family Should Use Retirement Funds to Invest in Startups
Although just 1 percent of startups ever make it to unicorn status ($1 billion in revenue), private equity remains an important asset class for both yield and diversification for sophisticated and retail investors alike. Institutional investors have long sought out private equity placements as part of their overall asset allocation, and the changes brought about by the JOBS Act have placed this important investment class in the grasp of retail investors as well.
There are many reasons why using retirement dollars to fund a startup can be beneficial:
- Hold time. Hold time is a key aspect of investing in startups—it can take years for a startup to become profitable. Taking a long position allows the company—and your investment—to grow.
- Liquidity. Long-term illiquid investments can inhibit cash flow. Using tax-advantaged retirement funds preserves liquidity for other uses.
Tax-advantaged income. When investments in early-stage companies do pay off, the tax treatment is far more favorable if they are made through tax-advantaged retirement accounts. Investors can defer capital gains taxes until distribution with a traditional IRA, or pay no taxes at all if they invest with a Rocket Dollar Roth IRA.
A Win-Win for Both Sides
Startup founders often prefer investors who use retirement funds. These investors seek equity positions in a startup and can hold their investment for a long term strategy. Entrepreneurs are then able to raise more money faster from retirement investors. Investors using retirement accounts will also have a greater pool of tax-advantaged dollars at their disposal than cash.
Both investors and founders benefit when retirement funds are used to make early-stage startup investments.