Tax compliance and planning for a new enterprise that has received capital through investors (venture capitalists) will not only be an administrative function but will also become a strategic initiative that can influence cash flow and valuation, as well as impact investor confidence. As these ventures grow and expand their businesses internationally and prepare for future rounds of financing or liquidity events (such as becoming a public company), it is critical to choose the appropriate tax partner to help founders focus on business growth while also helping them avoid the potential negative impact of costly errors.
The Unique Tax Environment of Venture-Backed Startups
Venture-backed startups operate within a distinct financial environment compared to a typical small business, owing to their existence as new and rapidly growing organizations. These entities tend to have characteristics such as high-growth rates, continual operating losses during the early stages of development, stock compensation programs, multi-national operations, and multiple investors who have competing financial goals.
This often creates a complicated tax environment, and starting any type of business or new venture will require consideration of a multitude of factors pertaining to taxes, including, but not limited to corporate structuring, R&D tax credits, transfer pricing, compliance with both federal and state tax laws, and the advent of new or changing regulations. Typically, a generalist tax provider will not be adequately prepared to effectively assist new venture-backed businesses in achieving success, reiterating the importance of selecting a provider that specializes in servicing the business requirements and tax obligations of venture-capital funded businesses.
Startup-Specific Tax Expertise Across the Company Lifecycle
The ideal tax service provider for a new venture will possess the relevant experience of dealing with a new enterprise that has received risk capital (venture capital), and preferably, has an established culture within their firm that is focused on servicing the entire life cycle of a startup/enterprise – from the initial stages of incorporation through the first stage of funding and continuing on through one or more Series A rounds of funding. Tax advisors that have developed a practice that is focused on providing tax services to startups have the foresight and experience needed to accurately assess and predict the potential tax effects of transactions that a startup is likely to undertake, as opposed to simply reacting after issues have arisen. A qualified startup tax advisor will help you understand what investors and auditors expect, and how the company’s tax positions relate to financial reporting and the long-term business strategy.
Review Tax Advisory Experience Specific to U.S. and Cross-Border Taxation
For many venture-funded startups, operating outside the U.S. is an early consideration in the business lifecycle. In many cases, the founder will be located outside the U.S. while incorporating in Delaware or may have operations in multiple jurisdictions. This creates numerous complexities for the tax position of the company, including the potential for withholding taxes, permanent establishment exposure, VAT implications, and transfer pricing ramifications.
A tax service provider with experience in U.S. federal, and state tax legislation and in cross-border tax planning will help you remain compliant while avoiding unneeded tax burdens that can hinder runway and growth opportunities.
Greater than Filing Tax Returns
The services we provide our venture-funded startup clients go beyond completing the annual tax filings. Strategic tax planning will help our clients to better evaluate hiring, compensation models, global expansion, and who owns the intellectual property. Our best clients are likely able to identify proactive opportunities to minimize tax burdens, maximize cash flow, and grow on a sustainable level over the long term.
The tax adviser should ask forward-looking questions and aid in the alignment of their guidance with the company’s business model and growth plan, rather than focusing exclusively on historical tax data.
We communicate Clearly and, in a Founder-Friendly Manner
The early-stage startup founder often has little-to-no tax knowledge. We do not expect the founder to have tax knowledge. A good tax service provider will be able to effectively communicate tax complexities to startup founders so that they can make informed decisions on taxes (both risks and opportunities) in a straightforward way. The provider should be able to use straightforward language without unnecessary jargon.
A good tax partner should have a close working relationship with the startup’s management team; the tax partner should provide guidance and support through the tax process as decisions are made. Establishing such a positive working relationship will enhance the level of trust in the tax partner and reduce uncertainty during critical stages of growth.
Scalability and Long-Term Partnership
The scalability of a tax partner should also be a major consideration when selecting a tax services provider. As the company grows, and as funding is secured, the company’s tax requirements may change. A tax services provider should have the capacity to grow and support the company through its evolving tax requirements.
It will also provide continuity to support the startup through the growth stage (i.e., they will not have to go through the tax process multiple times) and reduce potential risks as the company evolves. A long-term tax partner will understand the startup’s history, structure, and desired objectives.
Why ERB Is an Ideal Choice for Venture-Funded Startups
ERB is an ideal choice for venture capital backed startups due to its significant background in providing tax solutions to venture capital backed startups, particularly near the U.S. and internationally. ERB understands the specific tax issues that high growth businesses face and provides personalized solutions that incorporate compliance and planning together. ERB takes a founder-based approach and has a thorough understanding of the investor backed environment and aids startups at all stages of growth while assisting them in navigating through an extensive tax landscape.
Making the Right Decision
When selecting a tax services provider, the startup should consider not only the cost of services, but also the experience and expertise of the tax provider and the tax provider’s ability to complement the startup’s vision. Companies that receive venture capital find that the best advisors understand their pressures, pace, and long-term objectives. Founders should select a tax services partner that has startup experience, international expertise, strategic insight, and communicates clearly, not just as an expense service, but as an asset to establish a strong financial future and investor trust through sustainable growth through their tax service.