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As Twitter insiders prepare to cash in, investment firm vies to help

·Michael Santoli

FILE - In this Thursday, Nov. 7, 2013 file photo, a banner with the Twitter logo hangs on the facade of the New York Stock Exchange in New York the day after the company went public. Stocks are down for many technology companies, including Twitter, which is down 35 percent since early March 2014. Biotechnology companies have also been hit hard. (AP Photo/Mark Lennihan, File)

When Adam Nash mentions that he twice hit the Silicon Valley IPO jackpot as a tech-startup employee before age 40, he doesn’t expect anyone to feel sorry for him.

Still, the experience of being enriched as a senior executive of LinkedIn Corp. (LNKD) in 2011, and before that as a project manager at e-commerce software maker Preview Systems Inc. in 1999, presented its own unfamiliar challenges.

Like thousands of other young members of fast-growing companies, he suddenly found himself with a block of an employer’s stock representing a large portion of his net worth and facing a variety of questions about whether, how, when and how much to sell, what to do about taxes and where to put the proceeds.

Now, as CEO of the fast-growing software-driven investment firm Wealthfront, Nash is helping create a product to handle this process for the current generation of IPO beneficiaries, beginning with a large group of Twitter Inc. (TWTR) insiders who will be able to sell an aggregate $20 billion worth of shares come May 6.

The company is unveiling a single-stock diversification service, initially for Twitter employees only but eventually for all clients, which automates the process of selling shares, covering taxes and reallocating the proceeds among spending needs and a long-term investment portfolio.

While a limited number of Twitter-insider shares were freed for sale in February, on May 6 the broadest restrictions on selling by current and former employees and early Twitter investors will be lifted.  A total of some 475 million shares, valued at $20 billion based on the stock’s current price of $42.41, will be unlocked for potential sale.

A simple process

The new Wealthfront service simply asks a Twitter employee client to answer a couple of broad questions: How much stock they’d like to sell up front and how quickly to sell any of the remainder. The initial slug will be sold, and the rest will be sold methodically by Wealthfront’s order engine each day over the span of weeks or months (excluding regulatory black-out dates) to achieve dollar-cost averaging, while attempting to minimize tax liability. The trades are commission-free. Wealthfront’s management fee, which is 0.25% of assets a year for accounts above $10,000 (free for smaller ones), would be charged only on any proceeds placed in a Wealthfront portfolio.

(If a Twitter employee wants to use Wealthfront software just to run the numbers, he or she can do so at no charge and walk away with the plan in hand.)

The cash that’s raised from stock sales will then be set aside in three buckets: short-term spending needs, anticipated taxes and a diversified investment portfolio. Like many investment advisors, Wealthfront uses low-cost index funds in proportions built for individuals’ risk tolerance.

As detailed in a feature last November, Wealthfront is among an emerging group of low-cost, high-tech investment firms seeking to take the place of traditional brokers and investment advisors among younger and more plugged-in consumers. The firm has zeroed in on pools of younger employees at tech companies such as Facebook Inc. (FB) and LinkedIn, along with Twitter – where some 10% of insiders signed on with Wealthfront before its IPO.

Millennials, founders of these firms insist, are comfortable with software-based services, prefer simple solutions and aren’t as interested in trading or trying to beat the market. The firm, which just raised an additional $35 million in a financing round, has doubled its assets under management since November to $800 million today.

Other competitors in this slice of financial services include Betterment.com, which has a clever service for creating portfolios and encouraging disciplined saving; LearnVest, focused more on holistic financial planning; and Personal Capital, a tech-enabled wealth advisor.

The emerging affluent

While each competitor touts its particular twist on the formula of offering virtual financial management, the entire category seems to have the wind at its back in taking on entrenched higher-cost advisory firms, which have increasingly focused on the already wealthy with high-touch services rather than the younger emerging affluent. In some ways they are reminiscent of the generation of online discount brokers that began growing fast in the ‘90s as baby boomers embraced the markets and technology allowed for cheaper investing.

Now the likes of Charles Schwab Corp. (SCHW) and E*Trade Financial Corp. (ETFC) are among the big powers the Wealthfronts of the world are going after.

Nash says in an interview that a Twitter employee certainly could open an account at one of these firms and use their online calculators to figure out how much to sell, but the process is not automated from start to finish and would charge commissions on each trade.

Research suggests that “if you don’t automate a solution, it’s very unlikely that someone will execute and stick to a plan,” Nash says.

The way Twitter’s employees and other insiders react to the wild surge-and-slump ride the stock has taken since the IPO will be intriguing to watch. The shares were priced by underwriters on Nov. 6 at $26, first traded at $45.10 and closed that day at $44.90. The shares began shooting higher in December, reaching a peak above $70, then knocked around between $55 and $65 early this year until the recent downdraft in social-media and other anointed growth stocks dragged them to their recent price below $43 – almost exactly where a first-day public investor could’ve bought them.

Does the experience of watching one’s net worth get jerked dramatically up and down for six months leave more employees eager to unload their stake quickly to lock in a level? Does the fact that the stock is $30 below its high mean insiders will be more reluctant to part with it?

Wall Street is eager to watch how this plays out as it tries to handicap the prospects for a deeply controversial, undoubtedly expensive but also enticing new-media name. For employees, at least they have a neat and tidy way of following through on whatever decision they make as they reap their windfall.