Tomorrow is Thanksgiving, which it seems is one of the few days of the year that anyone not affiliated with public service, the NFL, or the Macy’s parade is not working. Maybe I should include retail in there because of the unfortunate trend of stores open on this holiday.
A few notes on holidays in the build-stage company world. This is especially relevant now as many of my clients are setting up their 2019 Holiday Calendars.
First, which ones? Although I’m a CFO, I am in favor of giving employees off for the day after Thanksgiving. This is a holiday about being together with family, which for many of us, means travel (or that people have traveled to spend time with us). Because I’m in the Boston area, where you can count the number of nice-weather months on one hand, I also believe in either the day before or after July 4th, depending on how the calendar falls. This is not a day when a lot of productive work gets done, and it’s early both in the month and the quarter.
The same goes for January 2nd, although not necessarily for December 31st, which often is the mad dash to close the quarter and year. It can be a stressful and fun day to have everyone together driving to a common goal. Better still if you’ve hit your numbers for the year and can give this day off as a bonus.
Then there are the holidays which are commonly considered optional: MLK Day, President’s Day and Veteran’s Day. I’ve seen companies decide different things about them. The markets are closed, as are schools, but I think many companies tend to be open and functioning fully on these days. Good Friday is another example of this.
Again, I am in favor of having these as days off. I think it’s important to recognize MLK, our democracy, and our men and women in uniform. Easter is an important day for many people, and a time for family.
A related question relates to the Jewish holidays in the fall, or Passover. When I was young, I always found it a little unfair that my holidays (especially Yom Kippur, which I dreaded for the fasting part anyway) required me to take vacation days, but Christians had off for Good Friday and Christmas. I got over that though. This is what float days are for, and besides, when I was young I didn’t need to take days off to take care of sick relatives or children. Now I appreciate more how important that was.
Another reason I favor more holidays is that many people work on their days off, and/or don’t take all of their vacation. Time off is very important. I know that is not a common utterance from many CFOs. But it’s true – if you don’t a recharge a battery, it not only runs down, it loses the ability to be recharged.
So, even highly motivated build-stage startup employees have to take time off. And sometimes, you have to force it. The holiday calendar is one way to do this – and by the way, set yourself apart from other startups competing for the same talent you are.
Have a Happy Thanksgiving.
Someone smart once told me that in business, there are 2 kinds of people in the world: those who have the money, and those who need the money. I have a lot of “2 kinds of people” sayings in my life, but this one pops up for me all the time.
I don’t mean this in an Ayn Rand kind of way. It’s more of a practical saying to think about what’s going on in a transaction, a term I use loosely.
Example: you’ve just raised financing and “have the money”. Now is when the non-formula lenders of the world will offer you options for having more. When you “need the money”, and they have it, you often can’t get it.
The corollary is that you shouldn’t try to raise financing when you have your back all the way to the wall. This is something that seemingly every startup knows, and yet the number of close calls I’ve seen suggests that it’s an axiom often unheeded.
Example 2: you have sold to a customer but haven’t collected on your invoice yet. They ask for changes to your product, or a little more help installing it. They have the money. You need it. It’s difficult to extricate yourself from this, especially if it’s an enterprise B2B sale. If you are in a B2B world selling with real COGS and lead times, always try to get 50% up front. Extend credit reluctantly. It seems tempting and almost always comes back to bite build-stage startups. To use a phrase – you don’t “have the money”.
Example 3: you have a consultant who is performing poorly in all areas except sending invoices. We’ve all had consultants like this. I’m not suggesting that you don’t pay someone for services rendered under a contract you’ve both signed. I am suggesting that because you have the money, and they need the money, you have the ability to force timing on a much-needed conversation. At some point, even if they have been very difficult to get in touch with, which happens, they will contact you.
Example 4 (last one): you are running a company that is shutting down. I have personal experience with this unpleasant experience. However, once you have fulfilled your legal obligations to your employees and the taxation authorities, you actually are in the unique position of having the money while your vendors need the money. The axiom holds true even if “the money” you have isn’t sufficient to meet your obligations.
Which is why — while it’s natural to be in a position to need the money (that’s business after all), ideally your CFO can keep you in a position where you don’t need all of it.
Recently I got a call from a CEO who asked me a question about options for a Board member. This got me thinking about some of my build-stage company experiences in the world of Board compensation.
Generally, build stage companies do not compensate their Board members who represent the early investors. These directors usually represent their general partnership’s interest on the Board so their compensation comes indirectly that way. Or, if they are Board observers, they had to negotiate for that right and so winning the right also to be compensated for it would have been pretty challenging.
They will all almost always have their travel reimbursed. I have seen this run the gamut, from very successful senior partners at top firms who fly inexpensively and try to split the costs among portfolio companies, to Board observers who appear allergic to any hotel other than the Four Seasons. Ironically, these are often the ones who want startups to remain “scrappy”, meaning cheap.
I’m making a joke, but they are onto something – build stage companies don’t have a lot of resources. This also goes for options, for which there is a fixed pool. Occasionally, I’ve seen a Board member who spends a lot of his or her time actively helping the company receive an options grant. Unfortunately it happens more when the Board tends to be “clubbier”, meaning the investors all know each other. Or, it happens more with first-time CEOs, and/or management doesn’t feel it has clout to push back.
Usually these grants top out around 0.5%, although more often I have seen closer to 0.25%, which is about where many advisory board members’ grants land. Startups have a limited option pool and granting them to a Board member who is there to represent his or her fund’s interests takes those options out of circulation for others.
It is not the end of the world, but once this cycle starts, it is hard to stop. Better not to start it at all. If you do, try to signal that this is going to be rare. I usually recommend a polite, professional and protracted discussion that is not over in an afternoon.
I also recommend that instead of doing one grant for X% that vests over 4 years, do it as a smaller grant of (X/4)% that vests in a year. Continued service is a requirement for continued vesting. The signaling of this is important — plus, it is nearly impossible to shut off vesting for someone on your Board even if that person is missing most meetings and falling asleep in the others.
I’ve seen options grants for Board members that vest in 3 years instead of the more standard 4, so in this case, just divide by 3. Close enough.
One final note: outside Board members, on the other hand, usually do receive some compensation in the form of a monthly stipend. Usually this is on the other of $1,000 per month in the build stage. An options grant on the order of 0.25% usually accompanies this. By the time an independent Board member is added, the company is usually closer to “scale” mode, 0.25% is a more significant grant than it was a short time ago in the company’s life. Which, despite how much this might hurt, is a sign of success. Enjoy the high class problems when you have them.
Because I work in build stage companies, and often early ones at that, the general ledger (G/L) system I encounter the most is Quickbooks Online. Often one of the first questions I get is whether we need to make a change to a more robust system. Always my answer is no.
My philosophy on this is that until a company is much bigger, having an accounting system that knows all isn’t worth the workflow change, the financial investment, and the upfront systems hassle. Quickbooks Online (QBO) is fine. It’s not great — but it’s fine. It does the basics and has the benefit of having tens of thousands of qualified people who know how to use it.
What I would rather do is invest in smart systems around it that do their functions well, and integrate with it. This can be A/P (bill.com), ERP-lite (Fishbowl), payroll systems (any of them), expense management (Expensify), cap table management (eShares, Carta), sales tax (Avalara), and on and on.
If a build-stage company is going to invest in systems, it probably should be in optimizing Salesforce. Or if it’s an e-commerce company, better to get your Shopify instance really singing. Building a sole source of truth about all things customer is way more important than implementing an expensive G/L system.
I’m a believer in keeping the G/L’s functions limited. I use it for management and Board reporting and as a transaction repository. That’s it. For anything else, there is a better system out there and most are not expensive either.
I’ve seen $50M software businesses backed by some of the most sophisticated venture investors in the world run their businesses and do their reporting based on QBO. If they can do it, I figure I can too.
I had lunch yesterday with a COO who I respect at a business that I think has legs. He was telling me that they are within days of closing a large Series A. Almost immediately, I felt a little sorry for him. Not because his investors are problematic or because the dilution is substantial (respectively — they probably aren’t, and yikes), but because the young, scrappy and hungry place he works probably is about to change.
I’ve seen this movie before. I once took over as CFO of a once-bootstrapped software startup that immediately after its large Series A proceeded to (a) dramatically upgrade its office space and furniture, (b) buy brand-new computers for everyone, (c) hire a bunch of engineers in under 30 days and (d) start flying business class. Another company had hired a suite of C-level people despite having only a tiny business to manage (and they all got C-level titles). Still another decided that they’d run a lot of expensive marketing promotions without really knowing how to test them.
Another decided to spend on a tradeshow booth whose one-time cost made me gasp and had no possible ROI justification. But they wanted to show their new investors that they were putting their money to work.
It reminds of what Richard Dreyfuss said about his rocketing to superstardom at a young age after Jaws: “too soon”.
Beware the Series A culture problem, where a sudden influx of money turns the oxygen thin (related problem: “ping-pong” conundrum, where a table is a signal that a startup is very focused on culture, and not so much on work.) It creates a lot of headaches if you’re not aware of it.
My advice: run for at least 30 days as if there had been no Series A. By all means, clear some payables, and make the job offers you’ve been hanging onto just in case the round doesn’t come together, and if you need to true up people who are below market, go ahead. Other than that, try to hang on. Run the business. And, make sure everyone is aligned on the fact that it’s still a startup where the demands on the company’s resources still greatly outstrips the supply.
This is a picture from the inside of a new South Boston development called “The BEAT”. It’s significant for what it will be, which is a multi-use commercial, retail and shopping hub on the Red Line, 2 stops south of downtown Boston. From my work in the co-working world, and some other ventures in the past, I know that this is where the world is going.
People, many of them millennials, will be able to work, eat and play without having to leave the complex. Of course, an IPA-centric brewery is in the plans as well.
What is also significant is that this gap is where the printing press for the Boston Globe used to be. It is a symbol of a by-gone era.
I don’t know if replacing the printing press of a venerable journalistic institution with a wonderful place to work and a big improvement in the neighborhood is good or bad. It just is. Now we get our news differently and develop our sites differently. But I do know that this picture captures what is going on in ways that most of my pictures don’t.
Often I am asked what a CFO does. Usually this happens with a smaller (build stage) company that doesn’t have one, or has hired a part-time CFO who mostly focuses on being an excellent controller. There is nothing wrong with this – but it’s different from what a CFO does.
In build stage companies, CFOs first and foremost help predict and manage cash. This means some level of forecasting of the future (finance) which controllers can but don’t often do.
Side note; CFOs are not credentialed, unlike (say) licensed service providers like plumbers or electricians, so it’s not surprising that many controllers hang a shingle and call themselves CFOs. Some are excellent. Some manage that transition less well.
CFOs also help drive understanding and optimization of unit economics. In retail, this is almost always on a square foot basis. In staffing, it’s on a per hour basis. Getting to this point requires some insight and continual honing. CFOs should be good at constant, incremental improvement and knowing how to fine-tune what comes out of the accounting function. The result is that they should be helpful on the top line, in addition to managing costs.
Finally, a CFO needs to be able to build a team. I use the term ‘team’ expansively as this includes not only employees and contractors, but also insurance brokers, lenders, auditors and outside accountants, systems gurus, benefits experts…. on and on. Litmus rest: If you are taking to one of the top growth company lenders in town, a CFO probably will have them on speed dial already. This is part of what you are paying for.
“Build stage” companies are the adolescents of the growth company world: not cute infants whose mistakes are still sources of joy and amusement, and not quite fully grown adults in full command of their faculties and their identities. They’re somewhere in between, like teenagers. It’s a phase that is exciting and a little dangerous.
These companies, by and large, have found product-market fit, meaning that they have made sales and have some idea of who their early customers are. Their product exists, it works, and they’ve sold it for money. In the world of high growth startups, they likely have some institutional backing: seed financing, or a modest Series A of about $5M or less. And they are starting to professionalize; there is a great Medium post on this phenomenon from earlier this year. One sure sign is that in “prove” mode, there are no swim lanes. Everyone does everything because that is the nature of things at that stage. In “build” mode, you want to start to establish swim lanes, while making sure that the entrepreneurial mindset of the prior phase is accessible.
I tend to focus on the G&A stack for these types of businesses. Usually when a CFO arrives on the scene in a company just maturing into build phase, he or she finds some combination of the below:
- Bookkeeping is done by a relative of one of the founders, or a local accounting firm
- Benefits are scarce – until now it hasn’t affected the ability to attract talent, but in the back of everyone’s mind, they know it will soon
- The financial forecast is either (a) numbingly complicated or (b) comically simple, and almost always lacks a cash flow forecast so that everyone can carefully track when the money might run out
- “Sales ops” capabilities are limited – spreadsheets, not Salesforce
- There is minimal understanding of the company’s “unit economics”, and how to really track this effectively
- The economics of acquiring customers is not yet well-understood (see above on sales ops).
- Very expensive lawyers from the company’s top-tier law firm are doing everything for the company
- There might be some insurance, or there might not
- HR hygiene (signed handbooks, travel policies, etc.) are minimal.
- Board meetings, if they happen, likely lack cohesion. Decks are distributed less than 10 minutes before the session begins
- The cap table is kept in Excel, and/or by the aforementioned very expensive lawyers
- The company uses Google Drive (great), but there is no structure to it (not great)
This is a natural phase of a company’s evolution. This blog is about how that evolution progresses, how CFOs in these companies can add value and thrive, and some of the particulars of the industries in which I’ve seen companies in this phase. Put another way: adolescence is exciting, but no one wants to stay there long.