Due diligence is an investor’s detailed examination of a startup’s potential to become an investment. Although at this stage of seed funding, the evaluation of a potential investment will be less complicated than in a later round, due diligence is still a critical process in establishing the startup’s viability, temporary and long-term sustainability, and financial commitment level. For startup founders, it should be considered an opportunity to demonstrate the level of operational capability they have in operating their startup and creating an opportunity to be trusted by investors. With only a small percentage of all startups receiving seed funding, a well-prepared due diligence package will give the startup a competitive advantage over other similar startups.

Getting Organized Early for a Smoother Process

Beginning early with and remaining organized will allow a startup founder to prepare a due diligence document much faster that will allow quicker closure of any prospective investments.

Start preparing for due diligence as soon as you begin discussions with your investors. Smart startups create a diligence-ready mentality from day one and continuously organize and structure their documentation to omit ambiguity. A legal entity should always be organized correctly in accordance with state and local registration requirements and there should not be ambiguity concerning its existence due to incomplete or missing documentation. A startup should establish a method of having a record and all supporting documentation for its financials and keep them up to date and accurate. A startup should keep documentation on all key areas of operations to demonstrate where the company is positioned successfully at any point in time.

Building a Secure and Accessible Data Room

Establish a secure digital repository (data room) as soon as you can. A data room is where you will store all your startup’s important information in an orderly, secure format that allows you to share it as needed with your investors. Think of your data room as an information library that contains only current and accurate documents that can be easily accessed by our current or future investors.

Key Areas Investors Will Examine During Due Diligence

During seed due diligence, many investors will evaluate several key areas in their decision-making process in determining whether to proceed with a potential investment in a startup. Preparing for and demonstrating these areas in an organized fashion while being readily accessible will help enhance your success.

Team Preparedness: Who’s Behind the Startup

When making an investment in a startup, in addition to evaluating the product offering, many investors will place a significant amount of weight on the people who make up the startup team. Create a complete bio for each founder and key team member. Highlight everyone’s relevant experience and skills that contribute to the team’s success. Execute a signed document (Founder Agreement) that shows the terms governing the founder’s ownership percentage, equity split, and vesting schedule. Create an advisor profile of the persons providing tactical assistance for the startup or strategic ongoing value. Provide evidence that your team members and the overall team have a shared vision, possesses the credibility to execute on it, and have the expertise to carry out their responsibilities associated with the plans and goals of the startup as defined in the Business Model & Market Validation section below.

Business Model & Market Validation: Proving Real-World Demand

It is important to provide sufficient proof that your startup provides a valid solution to a market problem and has a business model that will allow it to be profitable. Along with a regularly updated pitch deck and business plan – which contain your value proposition, target customer, market size, competition, and go-to-market strategy – include any traction that your startup has received to date (pilot programs, customer/user data, letters of intent, early revenues, etc.). Prepare to describe what differentiates you from your competitors and how you are positioned relative to them.

Financial and Legal Documentation: Transparency and Accuracy

Even at the seed stage, companies should conduct financial due diligence. Your Financial and Legal Documentation should include basic financial statements (Income Statements, Balance Sheet, and Cash Flow Reports) with current values and updated information. If you are not generating revenue, include complete financial forecasts, budgets that show how you plan to spend raised capital, and projected milestones beyond the amount of time you expect to have cash on hand. Moreover, you must know your “burn rate” and “cash runway.”

Finally, you will need to build a repository of everything necessary from a legal perspective for your company. You will want to gather your incorporation documents, shareholders agreement, cap table, outstanding convertible notes, contracts, and your company’s tax returns. It must be clear that your company is in good standing and has no hidden liabilities, as any errors or omissions in these documents could result in delays to, or risk to, a deal being struck.

Technology and Intellectual Property: Proving Ownership and Protection

If your startup has any proprietary technology or is dependent on proprietary technology, and if you wish to attract investment, potential investors will require proof that you have instituted safeguards to protect such technology. The documentation that proves ownership of intellectual property (IP), whether a code or design or patent, needs to show that the IP has been assigned to the startup, through signed agreements. The documentation should include a list of all patents or trademarks that have been applied for and will also need to include the status of the development of the startup’s product or any other tech milestones that have been achieved. The potential investor would also want reassurance that the technology being developed has the potential for scalability and will be secure. The investor would want to know that the startup has followed any legal requirements related to data security or compliance.

Structuring a Complete and Professional Data Room

An organised data room will have a logical structure with organised folders for:

• Corporate Documents: Articles of Incorporation, Capitalisation Table, Board Resolutions
  Financial Information: Current and Projected Financial Statements, Budgets/Forecasts
  Legal Documents: (Contracts), Intellectual Property Documents, Employment Agreements and Regulatory Filings
  Product/Market Related Information: Decks, Metrics, Market Research Prepared
  Compliance/Tax Documents: Tax Returns, Permits and Licenses
• Ensure that everything is up to date and labelled as such. Do not wait for investors to request it – the presence of a fully developed data room conveys a significantly more professional impression and enables you to save time.

Being Proactive and Transparent About Business Risks

Many founders feel the necessity to hide a weakness in their operation/structure; however, transparency is far more powerful. If the business has risks, such as a key position yet to be filled, early technology problems or potential legal liabilities, it is essential that these be acknowledged and identified. There must be an accompanying action plan for these risk factors. Acknowledge your current challenges and then act responsibly to address them. Surprises discovered during due diligence can damage your reputation. However, being honest with your disclosures creates trust between you and your investors. When possible, prior to formal due diligence, resolve anything that you can, including, inconsistent documents, missing signatures, and anything else that might be questioned. For anything else, be prepared with a well-thought-out explanation for the investor during the formal due diligence process.

Leveraging Professional Support: Why ERB Is a Trusted Partner

The preparation for due diligence can be time-consuming and intricate, particularly for early-stage founders. This is where a knowledgeable partner can help; ERB has provided outsourced CFO services to startups for over 30 years as a complete solution for startup financial management, providing bookkeeping, payroll, tax compliance, and investor-ready reporting for startup founders.

ERB understands investor expectations for financial reporting and provides clear financial statements, realistic forecasts, and legal entities for compliance. ERB also assists with the formation of US corporations and partnerships, federal and state tax filings, and maintaining your company’s cap table; all these items are essential components of the due diligence process.

Partnering with ERB allows you to devote your time to business development, while ERB prepares your financial records and assures you have a compliant enterprise. The credibility associated with ERB demonstrates to an investor that you have all the necessary financial components in place and are in position to move forward with the additional growth that will be provided by the funding.

הפוסט How to prepare for seed funding due diligence הופיע לראשונה ב-ERB.

What Is a 409A Valuation?

A 409A Valuation is the valuation of a private company’s common stock that is done independently to determine the fair market value of that company. In simple terms, it provides the value of one share of a startup when establishing strike prices for stock options.

The key reason a 409A Valuation is necessary for startups is that it creates the strike price for an employee’s stock options; thus, when the employee eventually buys shares of stock from the company. By law, the company must set the strike price for stock options at or above the fair market value of that stock at that time; so if the option is being sold with a strike price below the true value of that stock, then the employee is being sold stock for less than its true value and the company is violating tax laws which may subject it to significant penalties from the IRS. A properly prepared 409A Valuation establishes a reasonable market-based value for the company’s common stock.

Why Do Startups Need a 409A Valuation?

Legal Compliance (to Avoid Penalties) – If your startup is offering stock options to employees, you are required by U.S. tax law to complete a 409A Valuation. If you do not complete the valuation or use a value that is so low that it is not a reasonable approximation of the company’s common stock, the company could be penalized by the IRS for undervaluing its common stock. Worse still, employees may owe federal income tax on any “discount” they received immediately, plus be penalized 20% – which is not good news for anyone! In summary, if you fail to get an accurate 409A valuation, stock options which should be a wonderful reward for employees may instead turn into a financial disaster.

When you obtain an accurate 409A valuation, you are also protecting your employees from the possibility of having to pay additional taxes in the future due to a change to their stock option pricing. Stock option programs should be a benefit to employees rather than an added burden. By having the proper price established at the time of the grant, employees will not receive a “surprise” tax bill when exercising their options.

When Should You Update a 409A Valuation?

A 409A valuation is valid for a maximum of one year or until the occurrence of a “major” company event (e.g., funding). You should plan to perform a new 409A valuation after each time you obtain additional funding, at least once every 12 months and after any “major” events.

As soon as you close on an investment, obtain a brand new 409A valuation since the presence of new investor capital and the investment price for your shares directly impacts your overall company valuation. The fair market value of your common stock must reflect all these changes.

At least once per year, you should refresh your 409A valuation to ensure it is a valid representation of your company’s fair market value. Many different things can happen for one year and by having an up-to-date valuation, you will remain in compliance with the IRS safe harbor provision.

Also, whenever your company experiences a significant milestone (e.g., acquisitions, mergers, etc.), you should obtain a new 409A valuation. If you want to have a firm understanding of the valuation process after obtaining first revenue or a major partnership, you will need to obtain a 409A valuation.

How to Obtain a 409A Valuation

To obtain your 409A valuation, you should consult with an independent professional appraiser or appraisal firm that specializes in providing valuations for 409A purposes. An independent appraisal will help you establish a presumption of “Safe Harbor” and therefore be viewed as credible by the IRS, making it less likely that the IRS would contest your valuation. If you conduct your own valuation using the DIY methodology, this approach will be viewed as less credible than using a third-party professional appraiser, and as such, the IRS could easily contest that value.

What Does a Professional Appraiser Evaluate?

The independent professional appraiser will evaluate several factors when determining the value of your shares. The appraiser will assess the information found on your cap table (the record of who owns what of the company, including any preferred stock rights), the company’s ongoing financial performance and financial forecast, the prices that others pay in recent transactions, and the valuations of the independent professionals who evaluate similar startups to determine the value of comparable companies (comparable companies may consist of publicly traded companies or private companies). Additionally, the appraiser might consider other significant liabilities or obligations that could affect the value of the company. The independent appraiser will use the above referenced input to determine the fair market value of a common share.

Timeline and Report: What to Expect

The 409A valuation process will typically be completed within a few weeks of your providing the required documents (e.g., company cap table), and the independent valuation professional completing the review/analysis of the information and documents provided. Within approximately 2 to 4 weeks of your providing the required documents to the independent professional appraiser, you will receive a written report indicating what the professional believes the fair market value of your company’s common stock is per share. You can use this report to establish a basis for pricing your employees’ stock options.

Why ERB Is an Ideal Partner for Your 409A Valuation

The 409A valuation can be a simple process if you have an experienced partner like ERB by your side. ERB’s professionals understand the startup financing process and can assist you with every phase of the 409A valuation:

Tax Knowledge and Experience: ERB has provided advice to startups for over 30 years. Our team in New York and California is comprised of Certifying Public Accountants (CPAs) who are familiar with IRS regulations. We have assisted many startups to execute their taxable 409A valuations and we have a comprehensive knowledge of IRS tax rules and regulations, so our work in completing your company’s 409A valuation will be accurate and in compliance.

Comprehensive Support and Compliance: ERB offers a complete, one-stop shop that handles all your financial needs associated with 409A compliance. Everything will be completed by ERB: Collection of necessary documentation; communication with third-party independent appraisers; and negotiations and filing of all associated ERB documentation with the IRS. You will eliminate the uncertainty and stress that can come from handling your 409A compliance in-house.

הפוסט A Guide to Startup 409A Valuation הופיע לראשונה ב-ERB.

The structure of venture debt differs significantly from that of traditional bank funding. Specifically, venture debt is generally based on many different metrics (potential for future growth, backing by venture capitalists, and the company’s long-term strategy) rather than current profitability or the amount of tangible assets owned by the business. Therefore, the maximum amount of venture debt that a start-up can bear will typically be lower than would be the case with traditional bank financing. In addition, venture debt can be used in combination with equity financing to ensure that the start-up has an adequate runway to grow without the need for additional equity investments in the immediate term.

Venture Debt Loan Amounts

Venture debt is typically determined as a percentage of the equity raised in a funding round and generally ranges from 20% to 35% of the amount invested in equity. Using the above example, if a startup had raised 10 million dollars during its Series A round, the startup would be eligible to raise 2 to $3.5 million in venture debt. This allows startups to maximize their equity capital use and encourages startup growth while still having the flexibility to use their capital.

Flexibility for Borrowers

Venture debt also has a large amount of flexibility. In fact, many venture debt agreements will allow the borrower to defer both principal and interest for some period. This provides the borrower with a buffer while the startup is investing heavily or experiencing fluctuating cash flow, so the management team can focus on growing the business instead of worrying about short-term repayments.

Equity Incentives for Lenders

In addition to providing financing, lenders will also require some sort of equity incentive, either through warrants or conversion rights, to help offset the risk of making the loan. The lender will have the right to purchase stock at a specified price or convert the debt into equity if the company does well. Although many people refer to venture debt as being “non-dilutive”, startup founders should be careful to understand this could potentially result in dilution over time.

Covenants and Borrower Obligations

Almost all ventures include covenants in the venture debt agreements, which include requirements for the startup to achieve certain operational and/or financial metrics such as revenue targets or minimum cash balance requirements. These covenants protect the lender and enforce financial discipline; however, if the startup does not perform at the specified level, they may limit the startup’s flexibility. In general, venture debt offers entrepreneurs rapid access to capital, but it also comes along with the responsibility of making regular payments on all debts and meeting defined covenants with lenders.

Who Can Access Venture Debt?

• Growth-Stage Companies
  Typically, startups will qualify for venture debt only if they are growing and funded by an external investor (usually institutional), have capital requirements of $2 million or more than two years’ back taxes, or have shown potential for significant revenue in future years. Many technology-oriented and scalable companies (software-as-a-service, biopharmaceutical, healthcare, FinTech) raise venture capital funding rounds with either series A or series B investors.

• Funding Timing
  Most startups raise venture debt either at the same time or shortly after they have raised an equity funding round. Series A or B investors typically invest in a startup before the company raises venture debt. Many startups use this financing to provide increased working capital, finance operational costs, and expand into new markets to finance operational expenses without raising additional equity funding and delaying their growth plans until their valuation increases.

Why Use Venture Debt?

Companies that need to increase their cash flow to support hiring new employees, conduct R&D, or expand into new markets often use venture debt. This funding option allows founders to delay their next equity raise for several months until they meet additional milestones and increase their company valuation.

When Venture Debt Is Not Suitable

Founders of new companies without venture capital backing, founders are still searching to determine a viable business model, or companies with limited previous revenues generally cannot obtain venture debt because most lenders require visible signs of market traction (evidence) of adequate financial management and a reasonable plan for company growth. The best candidates for venture debt are firms with a realistic growth strategy and a precise plan for using capital to achieve measurable success.

Benefits of Venture Debt

Longer Timeline for Achieving Goals

Venture debt gives start-up firms additional time to hit key financial and operational milestones which could add to the company’s value prior to the next round of equity financing.

Less Dilution

Because customers do not receive new shares when they obtain venture debt, the company’s founders and other existing shareholders have greater amounts of ownership than they would if they raised equity financing for the same amount as the venture debt.

Faster Access to Funding

Venture debt is typically a quicker transaction than an equity financing transaction because it has fewer steps and shorter durations for due diligence. This enables the start-up company to acquire funding for growth in a timelier manner without having to wait for a protracted negotiation period.

Flexible Loan Terms

Many lenders provide interest-only payment periods or can create repayment plans that adjust based on actual revenue levels. This flexibility is extremely beneficial to start-up companies because their cash flow frequently fluctuates.

Signalling Financial Responsibility to Future Investors

Successful closure of a venture debt financing transaction shows financial responsibility and stability to future investors since the company has undergone a thorough review by lenders before being awarded the capital.

Tax/Debt Benefits

Interest payments on venture debt are usually deductible by the start-up as a business expense, and making the regular payments establishes a credit record for the start-up to use in financing future growth.

Risks and Limitations of Venture Debt

When a startup is sold or liquidated, debt is paid before equity. Therefore, when founders take on venture debt, they accept more risk than if they were using equity.

• Higher Interest Rates: The risk to banks when they lend to a startup is greater than when they lend to an established business, therefore, they will charge the startup a higher interest rate for the use of their money.

• Potential for Dilution from Warrants: While initially perceived as non-dilutive, most venture debt consists of warrants or conversion rights that can lead to significant equity dilution.

• Restrictive Covenants: A common feature of venture debt is performance covenants; if the company doesn’t meet certain performance levels, they may trigger an event of default and/or subject themselves to penalties.

• Cash Flow Pressure: With regular principal/interest payments, a startup needs a predictable source of revenue to make those payments.

• Limited Strategic Support: Most venture debt sources will focus on repayment and not provide the strategic and networking support that is typically provided by venture capitalists.

To maximize the benefits of venture debt, founders need to plan carefully so that they understand how the benefits outweigh the disadvantages.

How to Approach Venture Debt Effectively

To maximize the benefits of venture debt, founders should approach venture debt with the same diligence as any other capital raise. Understanding key components such as interest rates, warrant structure, covenants, and events of default is critical to this process. When approaching multiple lenders, it may give the founders more negotiating leverage and therefore deliver more favorable terms.

Founders should also retain legal counsel who are well-versed in the structures of venture debt, as they tend to be complex. After securing venture debt, founders should communicate openly with their lenders to avoid escalating problems. Startups should also develop realistic financial forecasts and establish validated product market fit. Last, startups should have a clear plan for deploying capital on growth strategies.

While used properly, venture debt can support the growth, not limit, of a startup.

Partner with ERB

As startups evaluate the potential for venture debt, it is important for them to partner with trusted advisors. ERB has developed a comprehensive support system servicing U.S. startup and includes services related to entity formation, accounting, compliance, payroll, and tax compliance.

ERB has years of experience working with startups and venture-backed companies. In terms of venture debt, ERB provides both consulting and structuring options. Our fractional CFOs work alongside founders to develop the financial models and forecasts lenders expect, while ensuring that the terms negotiated for venture debt are sustainable.

With ERB as your trusted partner, venture debt is transformed from a financing burden into a strategic growth tool, allowing your startup to grow confidently and sustainably.

הפוסט Venture Debt: A Guide for Startup Founders הופיע לראשונה ב-ERB.

Bookkeeping Basics for Early-Stage Startups

When you’re an early-stage startup, Bookkeeping is how you track and organize all your startup’s financial transactions (money coming into your business and all money going out of your business). You need to establish bookkeeping best practices to help give you a better idea of your financial cash flow and prepare you for tax season.

As you start your business, you might find these following bookkeeping tips useful:

• Separate Business and Personal Finances
  Make sure to set up a separate business bank account for your startup. Mixing your personal and business finances will only create more issues for you looking back on your income and expenses and for filing your taxes in the future.
• Document Every Transaction
  Document Every Transaction: It is important to document every transaction you enter for your startup. You can use bookkeeping software or an Excel spreadsheet to log all your financial transactions. As you record each transaction, make sure to categorize them (i.e., revenue, rent, advertising, etc.) so that your ledgers stay organized. Keep all receipts and invoices so that you have backup documentation for your accounting records.
• Monthly Reconciliation
  To ensure that your accounting records are accurate, it is good practice to reconcile your records to your bank statements monthly. By reconciling your records with your statements monthly, you will be able to detect any errors or lost transactions, thereby ensuring that both records are accurate and both are reconciled.

Understanding Financial Statements and Reports

What Is in Your Financial Statements & Reports

Start-ups will track the transactions the start-up made to create financial statements. The financial statements show the financial results of a start-up over a designated period. For owners of start-ups to effectively track their start-up’s financial performance, it will be helpful for them to learn about the three major financial statements listed below:

1. Income Statement (Profit and Loss Statement)
   Income Statements provide a detailed view of all the income and expenses associated with the operation of the start-up’s business during a specific period. The Income Statement will summarize the total profit (loss) for the time span included in the Income Statement.
2. Balance Sheet
   The Balance Sheet provides a summary of the company’s assets, liabilities and equity as of the end of a specific period. The Balance Sheet gives a general indication of the company’s net worth at the given point in time.
3. Cash Flow Statement
   Cash Flow Statements provide detailed information on the inflow and outflow of cash from the company as of a specific date. Cash Flow Statements allow start-ups to track their cash to identify the amount of cash available to meet their obligations and inform lenders and investors of the liquidity position of the start-up.

The routine reviews of these three financial statements will allow start-up owners to monitor their company’s financial position and to identify trends or potential problems early enough to provide them with the financial information needed to make the best possible decisions for their start-up’s financial health.

Preparing for Tax Obligations

Every business must file their federal and state income taxes along with remitting taxes. If your start-up has employees, you’ll also be responsible for submitting payroll taxes to the IRS and state government (withheld income taxes and Social Security).

Failing to file your federal and state income taxes or submitting your payroll taxes may subject you to penalties. You should also maintain a calendar of important filing deadlines, including quarterly estimated tax due dates, to ensure you have no tax compliance issues.

In addition to maintaining accurate business records for tax purposes, you should also maintain accurate tax records to support your federal income tax returns and timely tax filings. Start-ups frequently engage the services of Tax Accountants and/or Tax Consultants to ensure the start-up is claiming all available tax deductions and keeping up to date as changes to tax laws occur. By managing their tax obligations in an organized and proactive manner, start-up owners can minimize their tax compliance issues and increase their focus on growing their businesses.

Payroll Management for Startups

When you are hiring employees or on the job and are paying yourself as a salary, you need an effective payroll management system, including calculating wages, properly withholding taxes/deductions and paying everybody on or before payday. It is also important to send your withheld payroll taxes and employer tax contributions to the relevant government authorities (i.e., IRS, state, local) as scheduled and file required payroll tax forms with the appropriate government authority by the required deadlines. Failure to comply with these requirements could result in substantial penalties. Therefore, accuracy and timeliness are extremely important when managing payroll for employees.

Most startups utilize payroll software or services to automatically calculate pay checks and tax withholdings for employees so that nothing is missed at the time of paying employees. Additionally, you should have complete payroll records for every pay period, including wages paid, taxes withheld, etc. One very important item to consider is whether you classify your employee’s correctly as either employees or independent contractors, because that will have a direct effect on how taxes are withheld and reported. By establishing a sound payroll management process early on, you can ensure that your employees will be paid correctly and your business is compliant with relevant federal and state employment regulations.

Accounting Systems and Tools

Modern accounting starts with smart technology – but it doesn’t end there. While advanced accounting systems and automation tools are essential for managing invoices, expenses, reports, and bank reconciliations, software alone is never enough to build a truly reliable financial operation. At ERB, we combine the power of leading financial technologies with hands-on financial leadership. We don’t just implement systems – we actively manage them, validate the data, and turn numbers into clear business insights. Your financial records aren’t just organized and updated; they are continuously reviewed, analyzed, and transformed into decision-making tools that support growth, fundraising, and strategic planning. This is the difference between using accounting software – and having a CFO-grade financial infrastructure built and managed by ERB.

The Importance of Tracking and Managing Cash Flow

Cash flow is defined as the movement of cash into and out of your business. Cash flow is vital for every startup; cash flow shortfalls are the leading cause of nearly half of all startups failing in less than five years. Monitoring cash flow allows you to ensure that you have sufficient funds to pay your obligations, while also providing you with an opportunity to plan for future cash flow needs. Understanding how quickly you spend cash (your burn rate) and how many months your cash will last (runway), is extremely helpful for tracking cash flow.

In addition to monitoring cash inflows and outflows, business owners should also keep track of accounts receivable (money owed to the business) and accounts payable (money owed by the business) to maximize the timing of cash flow. Business owners should also prepare a monthly cash flow forecast for the next few months so that potential cash flow shortfalls can be identified and addressed as early as possible. Knowing the source of money coming into a business and where it is being spent is critical in avoiding cash flow crises. Where feasible, maintain a cash reserve to provide a buffer against unexpected expenses and/or slow sales periods.

As your business expands, financial tasks become increasingly complex; therefore, utilizing the services of an experienced accounting firm will greatly enhance your ability to operate successfully. ERB has been providing startup accounting services for many years, and its team of certified American CPAs provides a comprehensive suite of financial services from bookkeeping to payroll and compliance with tax regulations, and financial reporting, all specifically designed for young companies that are growing in the United States.

הפוסט Startup Accounting 101 הופיע לראשונה ב-ERB.

An understanding of outsourced CFO service’s pricing and value to startups helps founders to make educated financial decisions without breaking the bank.

What Is an Outsourced CFO?

CFO services are essentially a form of financial leadership provided to startups at various times throughout their growth trajectory. An outsourced CFO typically provides financial services to multiple companies, providing strategic financial guidance that is customized for the startup’s stage of development and specific needs.

Some of the standard duties of an outsourced CFO will include things like financial forecasting and analysis, creation of budgets for the company and projections of its cash flow, tracking of key performance indicators, preparation of financial reports for investors, assistance with fundraising efforts, and providing support when making long-term strategic decisions. For the founder of a startup, outsourced CFO services tend to create a bridge between the basic accountant and the C-level financial leader.

Why Startups Choose an Outsourced CFO

As a startup grows, the need for financial expertise increases as does the speed with which the business environment changes. Hiring a full-time CFO in the U.S. can be a very large financial commitment for a business and an expensive salary and benefit offer to a prospective employee.

By hiring an outsourced CFO for their startup, founders can receive the expertise of a senior level CFO without the commitment of a full-time salary. Additionally, hiring an outsourced CFO provides a level of flexibility, allowing founders the ability to adjust or increase financial support as their company grows, while ensuring they are staying within a reasonable cost structure.

How Outsourced CFO Pricing Is Structured

There are many ways to set the price of an outsourced CFO, but typically there is a pricing model for each of the following method(s):

Monthly Retainer

The monthly retainer is the most common way startups to engage an outsourced CFO. This method provides continued access to financial expertise at a fixed monthly price. The scope of the work is typically established up front, but adjustments can be made to the scope as the company changes.

Hourly or Project Fees

Some startups choose to work with their CFO on an hourly or project basis. This structure works well for short-term relationships with their CFO. Examples of this type of work include preparing to raise capital and developing financial models or performing due diligence for a planned acquisition.

Tiered Package of Services

A tiered package of services typically gives startups an option to select the level of service that best fits their growth phase. This service level is determined by several factors, including the amount of involvement being requested, and whether a start-up has begun to scale in size. Therefore, earlier stage companies can select a level of involvement that is smaller scale than other companies that are further along in their growth phase.

Typical Cost Considerations in the U.S. Market

The pricing structure for outsourced CFO services in the U.S. market can vary greatly. Pricing ranges and total dollars quoted for outsourcing CFO services will be based upon several different factors, including a startup’s size, a company’s planning processes, the nature of the startup company’s business, and the terms of the startup company’s financial agreements with its investors.

Although there are different variables that will affect the total time and dollars required per month for outsourced CFO services, the average monthly fee for outsourced CFO services for startup companies varies based upon:

1. The average number of total hours of service required per month
2. The average depth of strategic involvement needed
3. A startup company’s revenue level and operational capacity
4. Its investor and reporting relationships

Even though all these fees should be considered an investment for the company, an excellent CFO will usually help the startup company miss or avoid costly errors, will enable the startup to generate more revenue than what will be lost during operation, and will increase the company’s overall value.

Key Factors That Influence Outsourced CFO Costs

There are several factors to consider when looking for an external CFO for a start-up company. For example, the stage of development of your company is critical when looking for an external CFO service. An early-stage start-up will typically have minimal financial foundations (i.e. budgeting, tracking burn rates and basic reporting). Conversely, later stage companies will often require more complex high-level forecasts, investor relations and strategic planning. Thus, depending on the stage of a company’s development, the level of complexity will determine the required CFO time and expertise which can increase the cost of external CFO services.

Outsourced CFO vs. Full-Time CFO

Complex operations will also require an increased amount of time, expertise and higher-priced services provided by an outsourced CFO. This is due to the increased amount of time spent managing more than one revenue stream or being international in nature. Many start-ups will have complex operations and will therefore need a higher level of service and therefore will incur a higher price for external CFO services.

Outsourced CFO services for start-ups in the United States represent a lower overall cost, to some extent, when compared to hiring a full-time CFO to manage the company’s finances. For most start-ups in the U.S. market, the size of their investment into hiring a full-time CFO is not warranted by the level of revenue they currently have. An external CFO can provide similar and often better strategic advice at a lower price and thus be a better value to the start-up. The value of the external CFO can be maximized by only using the level of service required for the stage of development of the company and by there being a lower cost to the company during the start-up and growth stages of the company.

Additional Benefits of Outsourced CFO Services

In addition to providing financial leadership, outsourced CFO services can provide additional benefits that can often outweigh the cost of these services to start-ups. The advantages of an external CFO include:

• Improved cash flow visibility and runway planning
• Increased confidence from investors
• Improved financial control internally
• Increased ability for founders to concentrate on product and growth rather than financial issues

When Should Startups Engage an Outsourced CFO?

Start-ups should consider engaging an outsourced CFO at the following points:

• Financial decisions have begun to impact long-term strategy and execution
• Managing cash flow is critical
• Preparing for fundraising or accelerating growth.
• Founders need better insights into financial conditions.

Using an outsourced CFO at the right time can significantly enhance decision-making and improve financial stability. So how much will it cost to have an outsourced CFO? The answer is directly related to the stage, complexity and goals of your start-up. However, the value proposition remains the same: receive experienced financial leadership without the expenses associated with hiring a full-time executive.

הפוסט How much does outsourced CFO cost הופיע לראשונה ב-ERB.

Accounting firms that specialise in working with early-stage startups provide startups with strategic benefits, rather than merely providing an administrative service.

Why Startups Require Specialized Accounting Services

Startups operate in a vastly different financial environment than established companies. Their revenue streams can be erratic, expenses can change quickly and most of their funding is derived from various sources – founder’s capital, angel investors, or by way of seed or venture capital rounds.

Startups need to make financial decisions in an environment of uncertainty, and they require their accounting service to extend beyond simple bookkeeping and compliance functions. Specialized accounting firms provide their startup clients with the expertise to create flexible financial structures that will continue to develop as the business grows, rather than placing these companies into the rigid and inflexible accounting structures designed for established companies.

Creating a Financial Infrastructure on Day One

An accounting firm’s responsibility to early-stage startup clients include the building of a clearly defined and organised financial infrastructure. To start with, creating solid accounting practices and establishing a clear chart of accounts (COA) along with internal processes to keep track of revenues, expenses and cash flow.

Having up-to-date and precise financial reports provides entrepreneurs an in-depth view of where their money is being expended, how long until all of their money is gone (or runway), and what choices they have made, which could affect their finances the most. In the absence of this knowledge, otherwise flourishing companies are sometimes caught short of cash or face other unanticipated risks financially.

Controlling Cash Flow and Burn Rate

Cash flow is vital to the survival of any early-stage startup; even with good ideas and markets that are expanding, they can disappear without capital. An appropriate accounting firm can provide the founders with tools to maintain cash flow, accurately monitor their burn rate, and accurately forecast their upcoming financial needs.

With adequate planning based on accurate forecasts, the founders will be able proactively to plan their fundraising activities, instead of being forced to scramble in an emergency. This type of transparency allows the founders to make informed decisions relating to recruitment, product development and expansion into new markets.

Part of what all early-stage startups need to provide before they can fundraise is the assurance that they have their financial house in order. Investors want to see authentic financial statements, realistic projections, and a thorough understanding of how the company intends to generate revenue. Accounting & compliance as it pertains to startups.

Financial material to support an investor conversation

An accounting practice that specializes in working with startups can draft the financial documents necessary for conversations with potential investors (i.e., income statement, balance sheet, cash flows, and projections), along with explaining these numbers to founding team members in a clear and professional way that builds credibility and trust during due diligence.

​Following Compliance

At the same time, early-stage startups are expected to comply with federal, state, and international tax laws, file tax returns, and follow regulations both in their home country and abroad, all while operating with little or no internal support. Founders who do not have expert support may find that the effort required to remain compliant is overwhelming and will take away from their focus on growing the business.

An accounting practice that focuses on early-stage startups will ensure that filings are completed correctly and timely, reducing the likelihood of fines or penalties due to non-compliance. With this peace of mind, founders can concentrate on scaling their business without worrying about whether their financial obligations are being properly managed.

The Importance of Continuity

As a startup matures, its financial requirements will change. The financial structures that were established during pre-seed funding may no longer be sufficient following venture capital funding or for entry into new markets. One benefit of working with a startup-specific accounting firm is the continuity it provides.

By remaining with the same accounting firm while continuing to grow, startups will have access to advisors who already comprehend the founders’ business model, past financial history, and the startup’s desired trajectory. This continual relationship allows the founders to have a smoother transition of their financial responsibilities during growth, as well as to provide the necessary information for long-term forecasting and more structured financial planning.

How ERB Supports Early-Stage Startups

With ERB’s depth of experience with early-stage startups, the team at ERB understands the specific hurdles that founders address in their initial stages of growth. ARB works closely and directly with each client to develop the financial structures needed to achieve compliance and provide other valuable insight to assist the founders in making sound business decisions. The unique combination of the technical experience of ERB’s staff working with startups enables them to provide funding options for clients during their foundational period.

Selecting The Right Accounting Partner

For early-stage startups, selecting an accounting firm should not only be based on credentials or price. Early-stage startups should seek an accountant who understands the evolving nature of business, who can interpret the founders’ financial data into relevant analytical tools, who has experience supporting equity-raising activities, and who will flex to support the growing needs of the company over time.

By partnering with an accounting firm that has a specialty in early-stage startups, founders can have more than financial statements from their accountant; they will receive clarity, confidence, and the resources to continue to build a successful company on a solid financial foundation.

הפוסט Accounting Services for Startups in the Early Stages הופיע לראשונה ב-ERB.

Because of the fast-paced and fluid nature of a startup, it is easy for many founders to misunderstand that understanding your startup’s financial leadership functions as being something that can wait until the startup reaches a certain size or growth level.

However, understanding the CFO’s impact on your startup at the earliest stages will greatly affect the long-term success of your startup.

While financial leadership is managing numbers, it is also providing a clear path to your startup through the creation of clarity, supporting strategic decisions, and ensuring that your startup’s growth will be based on sustainability.

The Role of the CFO

As a CFO for a startup, your job is to provide direction for the financial well-being of your startup while working with the business to ensure that your startup’s financial strategies align with the goals of your startup. Different to traditional CFO’s working in already established organizations, a startup’s CFO must work in an environment that is high in risk, limited in resource availability, and rapidly evolving.

Therefore, the CFO is responsible for not only the financial well-being of a startup but also helping the startup’s management team develop plans for the startup’s future growth. Specifically, the CFO is responsible for many tasks including budgeting, cash flow management, developing forecasts for the future of the startup, ensuring compliance, preparing reports for investors, and developing strategic plans to aid in future growth. In several situations, these early-stage responsibilities will be filled by an outsourced or fractional CFO who will act in a high-level role providing positive financial guidance to the company without the expense of hiring a full-time executive.

Utilizing Financial Strategies to grow

A CFO’s role within a startup exceeds merely helping the startup’s executives understand and utilize their startup’s financial data. As the CFO, your ability to leverage financial data into actionable information will increase the potential for you and your startup to succeed together. The reason for financial leadership is to give early-stage founders a framework for making informed decisions about which investments to make first based on how cash flow impacts their runway, not just how much money is in their bank account today.

A startup CFO helps early-stage founders create realistic budgets and cash flow forecasts so they can make better hiring decisions, develop better products and grow into new markets. Financial leadership gives early-stage founders a way to take an intentional approach to growth, using data rather than assumptions about where their company is headed.

Cash Flow, Burn Rate, and Runway Management

For early-stage companies, managing cash flow is critical to survival. Even the companies that are most likely to succeed may fail if they don’t have an accurate understanding of how long their cash will last. A CFO helps early-stage founders create realistic budgets and cash flow forecasts so they can make better hiring decisions, develop better products and grow into new markets.

CFOs provide early-stage founders with the information they need to effectively manage their finances by monitoring cash inflow and outflow, calculating burn rate, and updating runway projections.

With better visibility into cash flow and runway projections, early-stage founders can plan their fundraising efforts much more effectively rather than reacting to the pressure of needing money. By having a better understanding of their cash flow, a CFO helps create a more responsible approach to spending, with the goal of maximizing the potential of the company to achieve specific milestones.

Investor Readiness and Financial Reporting

Investment professionals expect transparency, consistency and professionalism when considering financing or investment opportunities with start-ups. A CFO is the principal author of the financial materials that investors receive, including financial statements, forecasts and performance metrics.

In addition to providing early-stage founders with the data they need to make informed decisions, financial leadership helps early-stage founders tell the story of their business in a clear and compelling manner. Properly structured financial reporting builds investor trust and demonstrates that the company is being operated in a responsible manner.

Compliance and Risk Management

As a company grows, it has more regulatory and tax obligations, and founders may be at risk of not meeting their compliance obligations without having an accurate understanding of what those obligations are. A CFO will ensure that all financial reporting, tax filings, and internal controls are accurately prepared and properly submitted, in a timely manner.

If founders want to reduce the likelihood of experiencing issues with regulatory compliance or tax compliance that may interrupt operations or damage their credibility with investors and partners, they should address compliance issues early in the life cycle of their company.

When Do Startups Need CFO-Level Guidance?

Whether or not a startup is large enough to justify hiring a full-time CFO at the beginning of operations depends on the startup. However, it is likely that most founders do not realize the benefit of having access to CFO-level guidance earlier than they think. This is where outsourcing or fractional CFO services become very valuable.

Having access to experienced financial leadership allows founders to focus on growing their companies while making sure that their financial decisions are structured, strategic, and aligned with their long-term goals.

Financial Leadership Is the Responsibility of Founders

Financial leadership ultimately starts and finishes with the founder. Financial leadership requires understanding the major aspects of financial reports, knowing how to ask the right questions, and using financial information to guide decision making.

The purpose of a startup CFO 101 course is to teach founders how to leverage the strategic value of financial leadership from the beginning and have a clear understanding of how to incorporate financial leadership into the culture of their company. A course does not teach the technical details of accounting, but instead, focuses on helping founders recognize the strategic value of financial leadership and, therefore, take financial leadership seriously and incorporate it into the company from day 1.

When founders embrace financial leadership and work with experienced advisors early in the life of their company, they set the stage for making more strategic business decisions, thus creating a foundation for smarter growth, stronger relationships with investors and long-term stability for their companies.

הפוסט Startups 101: A Focus on Financial Leadership for Startup Founders הופיע לראשונה ב-ERB.

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.

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