Startup Finance

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Startup FinanceStartup Finance


Overview

MetaCorp TypesEquityInvestmentEmployees, SalariesTaxesBusiness PlanBusiness Forecasting

MetaCorp TypesEquityInvestmentEmployees, SalariesTaxesBusiness PlanBusiness Forecasting


Meta: Don’t start a business to make money

Very few businesses make money Even fewer make profit in the first year(s)

Those that do make profit, first focus on making a valued product or service for a focused market

Be prepared to lose money

Have a revenue model Freemium (BKM) Recurring Revenue (holy grail)

No more than 10% of your energy should be spent on managing financesDon’t worry about “Champagne Problems”

Very few businesses make money Even fewer make profit in the first year(s)

Those that do make profit, first focus on making a valued product or service for a focused market

Be prepared to lose money

Have a revenue model Freemium (BKM) Recurring Revenue (holy grail)

No more than 10% of your energy should be spent on managing financesDon’t worry about “Champagne Problems”


Corp TypesSole Proprietorship:

No other investors/owners/equityEasiest setupOwner is liable

LLCEquity can be shared among managers, investorsAll profits/losses pass through each year for tax purposes.

(Early losses can help married couples.)Liability is limited, but in practice, you often still have to

personally sign for credit.C-Corp

Most burdensome to setup & manageOffers best protection & benefit

***YOU CAN CHANGE***

Sole Proprietorship:No other investors/owners/equityEasiest setupOwner is liable

LLCEquity can be shared among managers, investorsAll profits/losses pass through each year for tax purposes.

(Early losses can help married couples.)Liability is limited, but in practice, you often still have to

personally sign for credit.C-Corp

Most burdensome to setup & manageOffers best protection & benefit

***YOU CAN CHANGE***


“Grow the pie” vs. “Worry about slice size”50/50 = Deadlocks & lack of accountabilityKeep it clean

At minimum: master spreadsheet for capital alloc.Look a few moves ahead

Next investors view of your previous investorsDilutionReverse Vesting for founders

Changes in SEC rules:Crowdsource! Pitfalls

Crowdsource is better for early adopter discovery & engagement vs. investors

Angels need to reveal more data to you (pain)

“Grow the pie” vs. “Worry about slice size”50/50 = Deadlocks & lack of accountabilityKeep it clean

At minimum: master spreadsheet for capital alloc.Look a few moves ahead

Next investors view of your previous investorsDilutionReverse Vesting for founders

Changes in SEC rules:Crowdsource! Pitfalls

Crowdsource is better for early adopter discovery & engagement vs. investors

Angels need to reveal more data to you (pain)

Equity


InvestmentUnless you are lucky, most investment comes from:

Pre-product: Bootstrap, family & friends

Post-Alpha: Maybe a few angels in your network

Fantastic User Growth or “Disruption”: VC’s, strangers

Your investors often tell you how to (re)incorporateLike “Dating”:

RelationshipWhat’s in it for them (not just return/exit)Confidence: Be in demand, fake it till you make it

Don’t beg. Don’t go to them. Make them come to you.

#’s game. Winners hear “no” 90%. Go fishing

Unless you are lucky, most investment comes from: Pre-product:

Bootstrap, family & friends Post-Alpha:

Maybe a few angels in your network Fantastic User Growth or “Disruption”:

VC’s, strangers

Your investors often tell you how to (re)incorporateLike “Dating”:

RelationshipWhat’s in it for them (not just return/exit)Confidence: Be in demand, fake it till you make it

Don’t beg. Don’t go to them. Make them come to you.

#’s game. Winners hear “no” 90%. Go fishing


Employees / SalaryPay founders zero or “Ramen” salaries

If founders need stable income, they shouldn’t start a new business.

They are paid in equity & are highly incentivized to make that equity worth something.

Delay having any employeesUse contractors, who work remotelyYou can’t make commitments

If you do have employees:Use Quickbooks (online) to handle payroll taxes &

processes to stay focused.Follow all laws (annoying, but audits & lawsuits

are moreso)

Pay founders zero or “Ramen” salariesIf founders need stable income, they shouldn’t

start a new business.They are paid in equity & are highly incentivized to

make that equity worth something.Delay having any employees

Use contractors, who work remotelyYou can’t make commitments

If you do have employees:Use Quickbooks (online) to handle payroll taxes &

processes to stay focused.Follow all laws (annoying, but audits & lawsuits

are moreso)


TaxesEmployee / Payroll taxesSales TaxLLC / Corp “min tax”Tax prep time/services

Biggest decision: Corp TypeBiggest reason to choose corp type:

Founder personal tax situationMost common startup scenario in SV:

Founder’s family has income/buffer LLC allows founder’s family to use the initial

business losses to reduce personal taxes

Employee / Payroll taxesSales TaxLLC / Corp “min tax”Tax prep time/services

Biggest decision: Corp TypeBiggest reason to choose corp type:

Founder personal tax situationMost common startup scenario in SV:

Founder’s family has income/buffer LLC allows founder’s family to use the initial

business losses to reduce personal taxes


Business PlanMarket / Competition / DifferentiationValue

What product are you delivering, to what market/segment? And, what value do they place on it?

Market size limits (TAM)Revenue

What methods can you extract the money for the value you deliver? (Premium/Freemium, upsells, recurring revenue, service fees, products, Ads)

Costs (Fixed & Variable)Salaries, Rent, EquipementMarketing / Sales (** the killer **)SupportOrder fulfillment (Material, assembly, shipping)

All of the above, over time periods

Market / Competition / DifferentiationValue

What product are you delivering, to what market/segment? And, what value do they place on it?

Market size limits (TAM)Revenue

What methods can you extract the money for the value you deliver? (Premium/Freemium, upsells, recurring revenue, service fees, products, Ads)

Costs (Fixed & Variable)Salaries, Rent, EquipementMarketing / Sales (** the killer **)SupportOrder fulfillment (Material, assembly, shipping)

All of the above, over time periods


Paid Advertising PitfallPaid advertising channels quickly approach zero margin.

Example: Company A figures they can sell a widget for $100, and it costs them $60, so they have $40 margin.Company A then buys ads, bidding $10/conversion, giving them $30 net margin.Company B makes a competing widget, same price/cost. They bid $11/conversion to claim the market.Company A bids $12….etc.They both stop at a point near zero margin.Worse: If one player is overpaying (VC-funded “grow at any cost”), the price of ads is above any chance of margin.Focus on Non-paid channels (above & beyond service, word of mouth, online social FB/twitter/blog)

Paid advertising channels quickly approach zero margin.

Example: Company A figures they can sell a widget for $100, and it costs them $60, so they have $40 margin.Company A then buys ads, bidding $10/conversion, giving them $30 net margin.Company B makes a competing widget, same price/cost. They bid $11/conversion to claim the market.Company A bids $12….etc.They both stop at a point near zero margin.Worse: If one player is overpaying (VC-funded “grow at any cost”), the price of ads is above any chance of margin.Focus on Non-paid channels (above & beyond service, word of mouth, online social FB/twitter/blog)


Financial ForecastMost investors want to see the same kind of forecasting that you need to do anyway to run a business well.Current 18 months split month-to-month 5 year forecast, split yearlyUse spreadsheets. Separately save & present:

“Optimistic+Aggressive Case” What you’d do if given huge investment

“Pessimistic Case”“Realistic Case” = “Plan of internal record”

ALWAYS KNOW YOUR RUNWAYIf things keep going as they are, we’ll run out of

cash (not just position) in X months.Every future prediction is imperfect

There is no “right” answer to valuation, etc.

Most investors want to see the same kind of forecasting that you need to do anyway to run a business well.Current 18 months split month-to-month 5 year forecast, split yearlyUse spreadsheets. Separately save & present:

“Optimistic+Aggressive Case” What you’d do if given huge investment

“Pessimistic Case”“Realistic Case” = “Plan of internal record”

ALWAYS KNOW YOUR RUNWAYIf things keep going as they are, we’ll run out of

cash (not just position) in X months.Every future prediction is imperfect

There is no “right” answer to valuation, etc.


Financial ForecastDig into example worksheet…Dig into example worksheet…

Startup Finance

Business

common startup

market size

separately

choose corp

online social

fewer make

businesses

make profit