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

[00:00] 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 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%. [00:30] the IRS. I don't know anyone who prefers the IRS. QSBS 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. [00:49] across the different trusts. What are the biggest mistakes that people commonly make? The biggest one is... [01:04] Michelle Del Buono. [01:06] Welcome back to Sorcery. So soon. [01:09] I know this was a long awaited, highly anticipated. I had multiple people. [01:14] If not, like... [01:15] on every channel that we put it out. [01:18] a lot of really positive reception to it and requests for more [01:24] knowledge from you. Okay. So I guess there are a lot of people that need pre liquidity advice. [01:29] sure with all the things happening between spacex ipo

[01:34] 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. [01:43] from a trust and estate perspective. But it also has to do, or you can optimize your situation also [01:49] With different investment strategies that can be complementary to that, [01:52] And then finally, philanthropy. So there's kind of three elements [01:56] to preparing yourself for liquidity event, right? Structuring your trust and estate, [02:01] thinking about how to sort of make key investments that help [02:04] 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. [02:15] I feel like philanthropy can be an entirely [02:18] 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 [02:36] 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 DAF if you're not if you're not feeling ready. So it helps you detach a bit. [02:49] the difficulty of tackling the problem. How do I give versus [02:54] 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. It is the wealth management fund of A16Z. So in terms of all of the events coming up,

[03:12] i guess the number one topic that i was asked was on tax optimization [03:19] Can you break down? I know this is a loaded topic, too, because there's so many different things. But OK, let's say you have a liquidity event. Ninety percent of your net worth is in one position. What 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. [03:38] optimization construction. [03:42] There's a lot of nuance and complexity around there, but if you sort of [03:47] step back, it's all about creating trust. And there's, as you probably know, like a whole bunch of different trusts, you can create charitable remainder trusts, [03:55] Spousal Access Trusts [03:58] revocable or irrevocable trusts, grantor, non-grantor trusts. There are all these different things you can do. I'm not an attorney, so I [04:05] I don't know all the details about it, but I know enough to tell you that it's a very complicated... [04:12] situation. In parallel, you can also take some of your proceeds and put them into different strategies to generate [04:18] losses, so-called tax loss harvesting. And there's several flavors of that too that you can do. Um, [04:25] Where I find that people have difficulty is you hire attorneys. [04:30] And they're going to tell you everything about or CPAs about these trusts. [04:35] But they're not going to have the knowledge to compare that and contrast that to the, [04:40] 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 multi-disciplinary kind of background is really important because

[04:52] Each of those silos doesn't know enough about the other one to trade them off. [04:57] Right. And so that's, I think, something that's very much [05:00] overlooked because sometimes just barreling down the i need a bunch of trusts and doing all this stuff [05:06] is not necessarily better than having a tax loss generated investing strategy that doesn't require you to do all those trusts. [05:13] And that trade-off is not obvious to figure on Navigate. [05:16] So I guess... [05:17] to put it a little more directly what would happen if you don't do that [05:22] how much of your capital would be at risk? [05:25] Well, I mean, so if you're a founder of a company, right, your basis, the [05:30] price which your IRS uses to assess your stock is zero. [05:33] So that means 100% of your gain [05:36] is subject to at least long-term capital gain tax which you know depending on the state you're in [05:42] can be up upwards of 35 percent right if you're in a non-tax state then you just have the federal [05:48] 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. [06:04] it's generally speaking [06:06] I don't know anyone who prefers the IRS, right? [06:10] Maybe there is some of it. Right. So as a result, everyone's trying to avoid that. And that's where [06:16] Either these investment strategies come in, these trusts, the trusts are really for your family, or then the charity. [06:21] element, which is a

[06:23] kind of a trust in some ways. It's putting money somewhere else. [06:28] that you can't access personally, but it's still... [06:31] removes it from your taxable base. [06:33] 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 gonna [06:48] put all the money into a trust. All right. How do we then [06:51] Construct the portfolio and what comes off of there. Yeah. Yeah, so you you [06:56] You're probably going to have several trusts. [06:58] Again, full disclosure, I'm not an attorney, right? But you're going to have several trusts. [07:02] 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, you're young and you inherit, or your parents set up for you, [07:14] you know, trust with a lot of stock in it, [07:17] uh [07:19] You have a very long time horizon. [07:20] right because you're young so they're the appropriate investment strategy is different [07:25] than for an individual who's older and has cash needs. [07:29] to fund their life. So 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. [07:44] And that's where it gets complicated. [07:45] 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.

[07:55] How do you approach QSBS? [07:57] I mean, QSBS is an incredible benefit for small businesses. And so for founders who start early in the [08:04] 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 [08:12] their tax or 15 million of proceeds from their stock sale would be not taxed. So it's a huge benefit, it's a huge motivator for people to actually go into startups. [08:24] I was recently speaking to some people abroad in Asia who wanted to sort of create [08:28] you know, an entrepreneurial community. And they said, what's so special about America? And one of the things I think is, [08:35] the tax code, the environment, [08:38] The culture of trying to start something is very important, including this QSBS benefit. It's a very important motivator. [08:44] to think that, hey, you know, if I work like crazy and dedicate myself to something, [08:49] I get to keep some of the proceeds in an advantaged way. So a lot of these strategies of having multiple trusts are to try to multiply these QSBS benefits across the different trusts. [09:00] And people. [09:01] say... [09:03] Well, they talk about stacking them. So how does stacking them? That's what stacking means. Oh, okay. So you can have several trusts. [09:09] for your kids, your parents, whatever. And each of those, depending on how you structure them, and it's complicated, [09:18] and probably above my legal knowledge, but [09:21] each of those can get if it's structured right its own [09:24] QSBS exemption.

[09:26] Is there any more to that? Like what? [09:28] What, like, I'm just curious. Okay, so coming from someone who doesn't know all the nuances between all of this, like, [09:35] 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. Right. So 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. [10:01] 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, [10:12] 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. [10:22] How you distribute money out to the recipients, when, [10:27] Do you give the money to people when they're 30? Do you give the 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? [10:36] that they're running or not. So all that becomes really personal. And that's why this exercise is [10:42] 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... [10:55] fall down a lot is that when they start realizing you make these decisions that have

[10:59] you know, long ranging implications, they don't really know they haven't decided yet. [11:04] Do I leave all my wealth to my child or half my wealth? [11:07] And then they get stuck on that and they never progress forward and then miss the boat on getting the tax benefits. [11:15] Right. So I think a lot of the preparation is actually sort of [11:18] psychology, philosophy, family values, whatever you want to call it, have all that [11:23] Far out. [11:25] 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 it when she's 40. 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. It's, it's these. [11:45] things you define inside it are a difficult bit. [11:48] What are the biggest mistakes that people commonly make? [11:52] 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. [12:11] So, I mean, this sounds really trivial, but at the end of the day, be prepared. [12:15] And so some people come and are very prepared and they have this sort of family values, [12:19] document they wrote out that they all agreed on. [12:23] about, you know, how the inheritance is going to work and who gets what and what the inheritance is for. Some of you are very prepared and that makes life a lot easier. Right. The last conversation we had, you mentioned

[12:35] you don't and not I don't know if I'm allowed to say advise, but you've seen and you may not suggest [12:42] 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 [12:51] 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 can't. [13:04] they're not going to charge you fees on your [13:07] your your concentrate position it'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 right so it's self-serving for them to say to you oh liquidate everything because you should diversify [13:21] and get out now i think the statement you should diversify [13:24] I mean, to some degree, you probably should for a rainy day, but the degree to which you do that, [13:29] becomes a personal preference. I can't. [13:32] 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, [13:39] you know, really want to ride the wave of the company. History has shown that hanging on to your stock [13:45] Generally speaking, not always. There are counterexamples, of course, to everything. Generally, you know, [13:51] That... [13:52] stock that got you to the liquidity point. It will probably continue to do [13:56] pretty well. And if anything, you're the most informed person in the world about that stock. [14:02] So for me to come in and sort of tell you that you should sell it or not sell it, it's silly.

[14:07] Right. I don't know more than you do. So you're the one who needs to sort of assess. [14:11] whether you truly think that stock will continue to run and how much therefore should you keep it or not right but i'd say the vast majority of people [14:20] should keep it for a while. [14:22] uh 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 you know alumni have gone after but another [14:41] 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 open ai i don't know andrel 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 [15:11] Thank you. [15:11] very active right now. Everyone wants to get [15:16] you know, a piece of the brand name companies, right? And so this whole industry has sprung up around that. [15:25] brokers, friends of founders that happen to have a position. [15:30] But the challenge always with these things is that the companies generally are structured, they're sort of [15:37] bylaws or structures so that the employees

[15:42] cannot necessarily transfer the stock to outsiders. [15:45] Right. So what ends up happening is the employee creates a company. [15:50] 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 herself. And then she sells shares in that company and others. Right. So in these others, [16:03] 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 Mali Company. [16:10] And that's called the level one or L1. [16:13] type structure and then what's happened is there's so much demand that [16:17] Let's say I bought shares in Mali Corp, right? I now go create Michelle Corp. [16:22] and sell shares in that to other people. And that's now a level two or L2. [16:26] uh type structure so you see things l1 l2 you can see l3 [16:30] nested structures each time you're further and further away from the stock. [16:35] And so there's more and more risk that you don't get. [16:38] you know, what you thought you would, right? Because who's to say that the original person that started the very first company [16:46] doesn't borrow money against the shares or sell them outright [16:50] because there's no real sort of controls on that necessarily. 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. So it's not unusual to see 1 in 10, 2 in 20.

[17:17] type structures or a 5% transaction fee. [17:21] 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... [17:34] hairy complicated topic why do you think so many people are doing secondaries right before large liquidity events [17:42] Wouldn't it logically make sense to hold on to it until after? You mean the person selling? Yeah. [17:48] I think a lot of people have been working at these companies a very long time. [17:52] and have been accumulating this equity and just want to get some equity. [17:57] 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. [18:06] Um... [18:08] Yeah, I mean, there are many personal reasons, but if 100% of your worth is in there, you can understand how people... [18:14] even if it might make mathematical sense to [18:17] you know hold on to the stock [18:19] might want to sell before because all their wealth is there. [18:23] You mentioned the structure of these, whether it's SPVs and that kind of thing, being carry and fees. What is a good structure? What should people try to optimize for? And when are they getting fleeced? [18:38] So really try to be in a structure where you're only one step removed from the shares. [18:44] Ideally, you're straight on the cap table. That's really hard to do.

[18:48] Uh, but whenever I advise clients, I try really hard to get them straight on the cap table. [18:53] If you are going to go through a vehicle and it's just L1 to use the [18:58] industry term, make sure that [19:02] You diligence who that is that's giving the shares. Is it a reputable law firm that set the thing up? [19:09] You know, are there safeguards in the documents? [19:13] around how the shares are going to be, are 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. [19:23] Because each one of these contracts is 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, [19:34] People take loans out against their private stocks. [19:37] Just because you put it into a vehicle doesn't mean you don't have the right to take a loan out against it. [19:42] right so there are things like that you have to sort of think of all these eventualities but in order to think about them you need to know [19:48] what options these people have to start with. So it's a very difficult [19:52] I'm still discovering things as I look at it, and I look at this stuff daily. So it's tricky. [19:57] and then walk through the carry portion some people don't understand the difference in carry weight [20:02] Um, [20:03] So let's say you buy the stock at $100.00. [20:07] 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 SPV. [20:17] So that's the carry, right? And in some spaces, like in private equity, carry usually has a minimum return before the carry.

[20:25] accrues to the person so you might have a six seven eight percent [20:29] return to the investor before the SPV owner gets the carry. But in these situations, I've never seen that. [20:36] 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. [20:46] uh to understand what net net amount you'll receive afterwards [20:50] So should they take a 5% fee and 10% carry or should they take 30% carry? [20:57] That all depends on how much you think the stock will go up. [21:00] So if you don't think the stock will go up a lot, [21:04] Hand out lots of carry. [21:05] If you think stocks are gonna go up a lot, [21:08] 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. [21:17] to understand, you know, that crossover point. [21:21] Yeah, it's interesting. [21:23] 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. Nearly 40% of startups fail because they run out of cash. Brex is literally built to help founders avoid that. Unlike traditional banks that let your money sit idle, chipping away at it with fees, Brex is designed to help you spend smarter and move faster.

[21:53] powerful account. You can send and receive money globally at lightning speeds, get 20 times the standard FDIC coverage through their partner banks, and even high yield from day one. With same day and even same hour liquidity, access your funds anytime. Companies like Scale AI, DoorDash, Service Titan, HIMSS, Anthropic, Flexport, Robinhood, and Plaid trust and use Brex. [22:23] 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. [22:53] Thank you. [22:53] we talked about this last time with spvs and you mentioned this a bit but even just doing simple background checks and understanding who's the underlying person behind the [23:04] the vehicle. [23:06] making sure that [23:08] It's credible and it's not some person that [23:11] you know, kind of like put together something. And there was a tweet not too long ago where someone put together a vehicle and then like fled the country and then never came back. - Oh really? - Yeah.

[23:23] They just took the money for themselves. But remember, right, whenever you're doing a private investment, the contract, you know, you're sort of excluded from the regulatory contract. [23:34] oversight by saying that it's a special contract only for qualified [23:38] people that, [23:39] don't meet certain income thresholds so those those contracts are custom there's no it might strike you as unfair or or not right in the way it's structured but that's irrelevant because these are private contracts whatever you signed and agreed to [23:53] that's it and your notion of what's fair or right uh doesn't really matter you know what i mean you've you've raised your hand you said look i'm a qualified [24:03] purchase, I'm a qualified person to do this. Therefore, I don't need regulatory support, right? [24:10] because these things happen, you know, with specialized [24:13] exceptions to the regulation, right? But only available to people who self-certify that they are okay with that, right? [24:21] So you can't say I'm, you know, [24:24] a big person. [24:25] a big boy, big girl. [24:27] I understand what I'm doing and then turn around and be upset at the outcome. You have to do your legal and operational diligence. [24:33] 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 the volume liquidity happening in secondaries impending IPOs um 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

[24:59] causing little sasspocalypse is here and there like what are you most looking out for [25:04] I think for every space, there's so many like... [25:08] arcane [25:09] idiosyncratic details to think about. [25:12] there's a potential 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 [25:24] by people I feel sometimes have not done their homework. [25:29] If you have not done your homework, you may be unpleasantly surprised at the outcome. So whether it's private credit where people sort of didn't realize that [25:38] you know, these BDCs of Gates. [25:40] 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 [25:49] - Explain that more. [25:51] So BDC, so... [25:54] 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. [26:06] And along the way, you have no right to redeem, right? You just get your money back towards the end date. [26:12] In these evergreen structures, there are some of them, not all evergreen structures are like this, by the way, I've noticed that people conflate. [26:20] But, [26:21] semi-liquid structures with evergreen structures. But anyway, some evergreen structures have what's called this sort of semi-liquid [26:28] character so that every quarter

[26:32] The company that's running this structure will say, hey... [26:35] 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 5% is subject to our ability to do that. We're not going to [26:45] jeopardize the fund because 5% 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 5% is not always guaranteed. But [26:56] but and so people start suddenly started asking for the redemption the things hit the limits [27:01] And the manager said, well, sorry, you know, and this surprised people, even though it was very clearly written out in the documents. And that's what I'm telling you when I say worries. People sort of rushed into these things without realizing. [27:13] you know, all these details. [27:15] 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. [27:31] uh what's the word a narrative around it that i don't know actually maps to the underlying at all [27:37] And so people just want out now because they're worried that they didn't understand what they were getting into. Right. So 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. [27:51] 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. [27:57] So you can't just sort of make a general statement about BDCs because everyone is going to be different. They're 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 this or the semi liquid nature of things, you've clearly not.

[28:20] 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 going to sound very um [28:28] trite and self-serving, but like, [28:31] Expertise matters, especially in these niche strange markets. [28:36] right you mentioned this in our last conversation but on portfolio construction um how you weight them out whether it's credit [28:48] venture [28:49] which is a small portion, real estate, so on and so forth, cash, all these kinds of things. How has that [28:57] strategy evolved over time, especially with these super volatile markets. [29:04] Um, you know, it's interesting to see that there's been, of course, over the last several years, more and more [29:09] exposure to private assets by more and more people. I 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. [29:34] The problem again with alternative assets is that unlike stocks and bonds, [29:38] they're very, very difficult to understand, right? As my BDC example, just, 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. And so BDCs are

[29:52] you know, they're a type of credit. So they're more risky than treasuries. They're less risky than stocks. [29:58] so you you put some amount in there but not a huge amount right and and how much you put in there you can run optimizations [30:07] And it also depends on the goal of your portfolio. Back to our trust discussion a second ago, [30:12] Right. If it's for a very young person, [30:14] It's okay to have. [30:16] 80, 90, 100% alternatives because they don't need [30:19] the cash immediately. So let the stuff grow, you know, at the highest risk possible. [30:24] And then if it's for a different purpose, maybe you're running a charity or a foundation, [30:30] pay 5% a year, obviously you can't lock everything up in private. So all this stuff kind of [30:36] comes back together at some point when you're building a comprehensive plan. It's not just pure math. [30:41] And it's not just pure... [30:43] "Oh, I'm picking this because it's better than that." Right? It's also, "What is the goal of my portfolio? What does it need to generate over time?" [30:50] that comes into play. Don't you find it curious that [30:54] you know, [30:55] endowments and institutions were leaving the venture asset class. I think it was Yale even to like they've been a big supporter of venture capital for a while. But, you know, they're lowering their allocations to it. However, private [31:11] market demand is like off the hook and it's becoming democratized. All of these different vehicles are popping up too. [31:19] I think for the endowments in particular, you know, they run a very specific strategy with a certain weight for each asset class and they try to really stay on top of those weights.

[31:30] And those weights are determined by long term expected returns. I think what's happened for them in particular is I think they got just too [31:38] too private. Remember, they have to pay to operate the university. So there comes a point, you start worrying about being overweight, these things. And many of these private vehicles have not distributed money. That's been the big problem, right? Historically, you know, you'd look at [31:54] sort of [31:54] patterns of how long it takes to distribute. In the last few years, the distributors have been [31:59] pretty weak from all private asset class not it's not specific to venture and so that if you sort of project that forward you might start worrying that your portfolio is too illiquid and i think that's what's led some people to sort of reduce a bit of their allocation but i wouldn't say at all that people are [32:15] abandoning these asset classes not even by a long stretch right yeah yeah it is interesting to see i think angel list just came out with their private market fund that you can buy into for just 500 today and then there's some other ones that have popped up the uh closed end fund going public trend is still going strong vcx who is a sponsor of sorcery i will disclose um they went [32:45] big names like OpenAI, SpaceX, Anthropic, and so on and so forth, and Roll even. And then Robinhood also came out with theirs. I think they actually just added OpenAI to theirs. So how do you feel about like [32:59] would you take the same advice that you have for the other like don't rush into it kinds of asset classes with this or is this different how do you view i mean these different types of vehicles it's the same thing like how did these vehicles acquire that position are they straight on the cap table are they going through spv if they're going through an spv what's the characteristics of that spv why are you paying for that you know if the stock shot up 15x

[33:24] What is the implied valuation of your OpenAI position inside of that? [33:30] trillions and trillions. So these are all the questions that you need to sort of, you know, there's been a lot of momentum to your point, these things sort of jump up in price. [33:39] and you wonder, you know, the implied return that's required inside, can those things actually meet, [33:46] the implied return inside to actually make the stock a good price. So it becomes like any other stock investment at that point. You just have to look at the underlying pieces and understand them, except that there's the additional complexity. How did they get this thing? Is it through an SPV? Is it through an L2 SPV? [34:03] What did they pay for that? How much of the sort of return is going to be taken away along the way from the carries and the fees before you get it? I just don't know the details of these different things, but these would be the questions I would ask. Yeah. I do know that VCX is direct on the cap table and it did wait back down to a normal price. It did come back down to normal price. It did. And but like the crazy part was, I think, more so the validation of like how much people wanted that. I don't think the float was quite high, but like people wanted that. [34:33] all these SPVs to start with. And this is another manifestation of that demand, right? I think a lot of people, you know, [34:39] they have a fear of missing out on this um and to truth be told right i mean [34:44] AI is an incredible transformation of the economy in a way that I don't think it's hard to fathom. And so I can understand how people are feeling.

[34:56] you know, the urgency to take part in this, but [35:00] But if you pay so much for these things that [35:03] There's no way you make your money back. That's... [35:06] you know, that becomes complicated. [35:08] Has the race to AI reoriented portfolios, like has that struck a lot? [35:15] wealth management of [35:17] orienting towards 100 different types of managers different types of private credit all that kind of stuff people that are utilizing it be more and more people want access to these directs they're clamoring for it and they'll come and they'll say oh i've got these [35:31] you know these six different things i'm looking at what do you have let me compare across this it's a complete [35:39] uh fever around that right now so it's it's very interesting to watch and [35:44] you know, when, when, um, [35:46] One structures these things, you know, again, [35:49] be really, I mean, I'm sounding very repetitive here, but do your operational diligence, do your legal diligence. And just saying, this is such a big thing that the return is so great that I don't need to worry about that stuff is not true. Yeah. Right. Yeah. Right. Yeah. Right. [36:04] I think that's the shortcut people make in their hand. Like, well, it doesn't matter. Those are details. I need to get onto this bandwagon. But if you're paying 15 times or whatever you said it was, [36:14] the underlying value, [36:15] you may not benefit from that, right? So that's the problem. Yeah, I'm thinking like a little bit more specifically, whether it's like private equity, AI powered roll ups, whether they're applying AI to their roll up strategy and their companies and then their portfolios, whether it's real estate and some real estate funds and managers have shifted their commercial focuses to data centers like entirely and just going after data centers.

[36:45] non-hoppy from Exowatt on. And he was really clear because he's right on the ground. He's providing, I think Exowatt is an A16C portfolio company, separate, 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 [37:15] your portfolios? Like I know that there could be a blanket statement there, but I'm just really curious. No, no. So I think it's really early days. [37:24] 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. [37:34] 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 private equity. [37:50] backed company that's trying to get more efficient. But I'd say [37:55] and I'm making gross generalizations, I'm sure there are exceptions, but most PE firms have yet to sort of fully [38:02] Well, 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 underlying companies. So it should be a huge benefit.

[38:17] And I think the benefits will accrue to those who really embrace this. But large organizations are slow to move. [38:24] They have their processes, their formulas, their things that they've done successfully in the past. [38:30] And so, you know, people just sort of abandon all that and immediately jump to a new thing. So that's on sort of like improving the performance of your private assets, right? The data center is an entirely sort of different question, which is, [38:45] Can we actually build these things in time? Can we come in on budget? Is there power available for these things? And that's more difficult. And that's, again, look at the details. Some of them happen to have power for whatever reason. They're on a brownfield site that already had power and they just sort of hook up a new building to it. Others don't have the power. Some have contracts with hyperscalers, others don't. [39:10] So it's very difficult again to just say, it's like saying I want a BDC, it's like saying I want a data center. Look at what you're doing. Now the beauty of the recent tax changes is that for a taxable investor, [39:22] you have accelerated depreciation on data centers. So you can depreciate 100% of your CapEx immediately, and get a huge tax benefit. [39:31] So there's some tailwinds to the sector because of the sort of tax code. [39:36] Speaking of taxes, again, I'm curious, [39:39] Do anyone, like, have you seen anyone... [39:43] go to Portugal or, you know, there's like a lot of little tax havens around the world, whether they like move themselves there or not. They're not little. They're big moves. Yeah. So a lot of people are acquiring second passports.

[39:57] countries or they're moving to countries that have special [40:02] exemptions for foreigners. So the UK used to have this, they've really cut back on it to some degree. Italy has implemented a new one that was almost in response to what's going on in London. [40:14] So a lot of these countries have sort of a flat tax. You pay $100,000 or $200,000 a year, and then that's it. [40:19] for 10 years, 20 years, whatever it might be. So there's that route. And then there's the citizenship route. Like I want to have a second passport just in case. [40:28] And so many countries have these kinds of programs. So you see a lot of people [40:32] taking advantage of that for sure. [40:34] Right. Yeah. Well, we talked about the wealth tax a little bit in the last episode. Something that has happened recently in New York is... [40:44] they are trying to implement the pied-à-terre tax for people that have a second home. And so similar to bringing up Chamath last time, Chamath brought this up on All In, where he was talking about how people purchasing second homes in London, or, you know, they just need to store their wealth somewhere so they buy a piece of property. In London, it's hollowed out certain neighborhoods because no one's actually living there. [41:14] and people around is gone and it's now empty homes. And so now in New York, well, I don't like what that guy's doing. But in terms of New York with the pied-à-terre tax, like what do you think the implications of that are going to be?

[41:31] Boy, there's a lot of things to unpack here. Wealth tax, where people decide to live. Let me throw out a few things. Okay. [41:38] So first, there have been some people that left California, moved to other states. [41:42] and they've come back. [41:43] And this is a personal decision. But when you asked him why you came back, he said, "Yeah, saving [41:48] you know, 10% tax is nice and all, but my community was here. [41:52] right so they're these are very deeply personal [41:55] things. I don't think you can sort of make a blanket statement, "Oh, well, I saved 10%, therefore everyone's going to move here." So the same thing with this Pieter tax or whatever wealth tax you may implement, people have to make a trade off in their head. [42:07] "Do I like living in New York enough to pay some sort of tax or not?" You know, in some places, Vancouver and Canada had this problem too, or problem issue. So they started, if homes were not rented, [42:20] they started taxing them quite heavily to sort of make sure there was a supply of [42:24] So you've seen these responses everywhere, but the fact of the matter is there are a lot of people with wealth, [42:30] They have preferences. [42:31] And when you have wealth, I mean, obviously, you can do what you want. It's just a question, do you want to pay or not? So I don't think that these small things you see are going to massively change. [42:43] You know, it's a different story if it was outright banned. [42:46] But I can't imagine that happening. I mean, not in a democratic country. You can ban people from buying places. [42:53] I suppose anything's possible. [42:54] Yeah. [42:56] So, yeah, I don't think it's going to. In London, though, when they sort of got rid of the expat sort of benefits,

[43:03] and 100% of your wealth [43:06] could come under the 40% inheritance tax they have in the UK. That caused a problem because the entire balance sheet of someone's [43:14] life or worth would be affected. Whereas when you're taxing an individual asset, that's just a piece of your wealth. So it's a different [43:23] discussion. Yeah, a lot of people are moving to Milan or Monaco or Dubai. Mm-hmm. [43:30] So the question is, do you want to live in Dubai? [43:33] to save [43:34] 10% tax. And that's a personal question. [43:37] If you have billions of dollars, 10% is... [43:40] Hundreds of millions. [43:41] right so there's that element too [43:44] So tell me when you moved to Dubai. I'm not going to be moving to Dubai. No, I can't handle the heat. No offense to Dubai. I'm sure it's lovely there and people are great, but I will not be moving there. It's too far. Today's episode is sponsored by VCX by Fundrise, the public ticker for private tech, allowing investors of all sizes to invest in venture capital. [44:07] Learn more at GetVCX.com. [44:11] Some of you may not have heard this yet, but our sponsor Public just launched something called Generated Assets, and it brings AI into investing in a way I've honestly never seen before. Here's how it works. You type in an idea like AI-powered supply chain companies with positive free cash flow or defense tech companies growing revenue over 25% year over year. Public's AI then dispatches a swarm of agents that scan every single US stock, evaluates them, and instantly builds a custom

[44:41] why each stock is included. And before you invest, you can even backtest your idea against the S&P 500, [44:47] So you're making decisions with real context, not just guessing. And beyond generated assets, public lets you invest in stocks [44:54] bonds, options, crypto, all in one place. They'll even give you an uncapped 1% match when you transfer your investments over from another platform. If you want to build a portfolio that actually reflects your thesis, visit public.com slash sorcery. [45:07] paid for by public investing. Full disclosures in the description. Enterprise AI runs on Merge, the AI infra platform for integrations, agent tooling, and model orchestration, so your teams ship product, not plumbing. [45:20] Mistral, Dropbox, and Drada already trust Merge in production. Start building at merge.dev. [45:27] 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-E-L dot com slash sorcery. [45:42] Is there anything we're missing out on taxes? [45:46] Yeah, I think there's one again, one element which I think is really important to me. Super interesting thing happens happen when you bring two different disciplines. [45:56] and examine sort of the [45:58] multidisciplinary aspect to it. So I kind of touched on this before, but it's like, again, you hire attorneys, they're going to talk to you all about trust. [46:05] You hire liquid asset managers, all they're going to talk to you about is tax-loss harvesting. [46:10] No one...

[46:11] 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 [46:17] trade the two off. [46:19] You know, we've done some work on that. And it turns out that there are many situations where the trusts, [46:25] are not necessarily the right answer. [46:26] 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 I would caution people. [46:38] 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. [46:45] charity, liquid strategies, and trusts. [46:49] and trade them all off appropriately. [46:51] Okay, so what do you do? How do you test a manager on that? You're going to have to find an advisor that knows all these things enough to be able to trade them off. So that's the thing. It's quite rare to find people that have that multidisciplinary. [47:05] backing background. You look disappointed. I just it's overwhelming. I can't imagine coming into this [47:14] completely blind and trying to drum up like an entire life's wealth plan in i don't know a couple of months [47:22] if [47:25] That's why there's so many people who are unsatisfied with the outcomes that they have. [47:29] but they only realize it years later. [47:31] Yeah. [47:32] It's tough. [47:34] Because there's there's residential strategies, but there's also commercial strategies. And then there's also commercial strategies for where you put your money in. So if you want to like invest in a small business or own a small business and get dividends off of that, like those kinds of things. But I guess to go into real estate more, how do you see this shape out whether it's residential, commercial, those different components? Well, if you're it's very different, you're taxable or not. If you're non taxable.

[48:03] um you just look at sort of the raw returns but if you're taxable real estate and real assets more [48:10] assets that have cash flow like on oil wells that's another type of real asset that's similar to real estate can buy an oil well oh yeah oh yeah many strategies you can buy uh the output from oil you can hedge it there's all these very interesting strategies but what's [48:24] What all these real assets have in common, real estate, oil wells, patent portfolios, anything that has a cash flow generally has a depreciation tax credit against it. [48:33] And so you can shield your tax to some degree from that, provided it's structured properly. And that's, I think, where, again, the difficulty is, is a lot of the standard funds out there don't do the structuring because most of their clients are not taxable. [48:50] So if you structure things, and here's the real problem. Like, let's say you personally invest in real estate, but you're a [48:56] podcaster. [48:57] So real estate is not your principal occupation. So you can't necessarily leverage all those depreciation credits yourself. It's not your main occupation. The IRS limits how much... [49:08] you can do from passive activities. [49:10] So you have to structure properly, you have to create a company effectively, that inside the company uses all those tax credits and gives you something net of that. [49:19] What is the most tax incentivized active thing to own? If structured properly, you can offset almost all the income from the property. And then because of something called the step up in basis, a death, when you sell that asset after you pass away, you don't owe tax on that either.

[49:37] So along the way, all the income you get from the asset [49:41] doesn't pay tax because you got the depreciation credit. And then normally if you sell it at the end, you pay a ton of tax, right? But if you pass away and hand it to your heirs, they get [49:50] a new basis, a new price for the asset that's gone up, so they can sell it with no tax. So that is [49:56] But it's a very long term and the liquid strategy, you have to hold these things for a long time. In the liquid space, you know, it's all these tax loss harvesting strategies, levered tax loss strategies, strategies that utilize swaps and other derivatives to generate ordinary income losses. There's so many strategies out there. Again, you got to understand the detail, you got to understand the leverage, how you turn it up and down. [50:19] So again, you've got to know what you're doing. You have to find the right advisors can advise you on all these things. I know this is a totally personal question, but like what percentage for new wealth do you recommend on spending? I feel like people will want [50:34] to just go... Spending. Yeah. [50:37] boy that's an immensely personal one some people live very modest lifestyles and therefore [50:43] any windfall they get can go into a very aggressive growth-oriented portfolio [50:48] and they're thinking about long-term wealth accumulation. Other people spend a lot, and so their portfolio has to be more liquid. [50:55] less alternatives and therefore most likely lower returns. [51:00] um and so these things feed on themselves right so uh [51:03] To the degree you can avoid spending, you're going to increase your end period value. I can't.

[51:09] tell you i mean everyone's got their own preference so i can't is there any way to manage someone who is just spending all their money away [51:18] they're it manage you mean manage their assets yeah i mean if they're spending like if they're dipping into everything and liquidating if they can like is there any way [51:27] To help them or do they, you just, you just have to like, let them do it. [51:32] I mean, it's their money. My job, though, is to sort of just point out what the ultimate outcome is and make sure they're aware of it. [51:39] And if they're aware of it, you know, I'm sure you've heard of this book. I think it's called Die with Zero. [51:44] Right? So some people want to live their life such that when they're done, they've spent everything. That's a personal decision. [51:51] Where it's interesting is sometimes people spend very aggressively and are expecting to have a huge legacy. And so that's where my job is to point out that depending on that, you may not have that. So just so they're aware. My job is to inform, shine lights in corners so people know and they make a decision armed with data. [52:11] Yeah. Right. [52:12] So Sam Parr had a tweet that went pretty viral where he was trying to share. He had talked to many different levels of wealth and he was trying to share a [52:22] and educate people on the difference between someone with $10 million in wealth, $100 million in wealth, and $1 billion in wealth. Okay. [52:31] Whether these are psychological or it's like how you manage the money, if it manages you, like what are the differences upon those different wealth marks?

[52:41] It's all over the map. It's really hard to generalize. Again, some people live very, very modest lives and never touch this windfall they have. [52:53] and have plans for, you know, either a very big charity, they give it all away to a foundation. You know, and other people spend it again with the hope of not leaving much behind. [53:02] Some people really want their children to have a lot. Some people are worried that giving too much of your children is a problem, so they limit what they give their children to. [53:10] a surprisingly small amount. I find there are cultural differences across the US and even the world. [53:16] I find on the West Coast, people tend to give away a lot, and not necessarily give to their kids. I find on the East Coast or Europe, [53:23] In fact, in Europe, I believe it's illegal to quote unquote disinherit your children. [53:28] Wow. Right. To some degree. So you can't say I'm not leaving anything to my kids. So it's just very... [53:36] It's all over the map. There's no real good generalization to me. Should you charter a jet or should you buy a jet? [53:42] And then if you do buy the jet, [53:44] How do you make money off of it? [53:46] 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. [53:57] 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 [54:09] now you can sort of depreciate and take advantage of the same tax credits that you do with real estate and oil wells.

[54:16] right but you have to be able to prove that you it was used for business purposes and all that and there's there's certain rules around that that i don't [54:23] No, exactly. So these are the things you have to trade off, right? But it's very expensive and if your goal is to accumulate long-term wealth, [54:31] think twice before you buy one of these things. They're very expensive. [54:35] Super mega yacht or just a mega yacht? [54:37] Don't know. You don't know? Don't know. Should you get a house in Malibu or should you get three islands in the Caribbean? [54:45] That's a personal one. I would get three islands, but that's a personal one. That's a personal one. Will you save the penguins or the rainforests? [54:58] You tell me. I don't know. I think the rainforest saves the penguins, so that might come before it. [55:06] Okay. [55:07] What are the craziest questions that people ask you? Some of these. Really? Do they actually? Yeah. How should I spend? How should I? And again, my job is not to tell you [55:19] what's right or wrong. My job is simply to illustrate [55:22] the outcome on your life with different spending patterns. That's it. [55:26] I have no [55:28] I'm not trying to judge. It's not my place to do that. Right. Well, what do you think about all of these people putting money into these NGOs that are now just totally scams and frauds? Is it the same advice as do your research? Like, how do you do research on those? [55:41] very, very difficult. I've personally tried to do some of that myself. And it's just very hard to know

[55:48] There are forms that these [55:50] uh charities file so you can go read in the form 990 i think it's called [55:55] There are websites. [55:57] that let you compare and they rate these different charities based on how fish, you know, one of the metrics they use out of $100, they raise how much actually goes to the end and, [56:07] cause, [56:08] But yeah, it's the same thing as anything else. Donating money is very difficult to do it properly. [56:15] in a way that you won't regret later. [56:18] Which is why I think you correctly said at some point we need to have another session on philanthropy. Yeah. So we covered a lot. We covered portfolio strategy, tax optimization, secondaries. [56:30] private credit, [56:32] uh houses real estate is there anything that we missed boats planes kids um [56:41] I can't think of anything right now. No? Okay. Well, thank you so much, Michelle. Appreciate it. Thank you. [56:46] Cool. Appreciate it. Hey, it's Molly. If you enjoy our interviews, check out our newsletter, sorcery.vc, where we deliver a once a week top deals and tech headlines email, and also go deeper on our podcast interviews. Subscribe to Sorcery today. And don't forget to subscribe to the podcast on YouTube, Spotify, Apple, or wherever you listen. Link in description to sign up.