10 financial considerations to make before starting a company
What is your business going to look like in 12 months time, 2 years or even 5 years time? What will the revenue model look like? You need get some financial modelling in place to determine what your projected P&L, balance sheet and cash flow will look like. If you are on the brink of your first startup, there could be some sizable outgoings that you’ve not considered, so it’s a good idea to speak to someone who understands modelling to make sure you’re not missing anything. The key here is to be realistic. Investors are going to want to see your business plan before they get involved, and wildly ambitious goals won’t do you any favours.
When building your financial model you need to look carefully at what your overheads are going to be. These will change depending on the nature of your startup i.e. an IoT startup will have many more upfront costs than say, a SAAS company. You need to look at production, office space, and salaries among other things. If you are looking at raising funds, building this into your model will give you an indication of when you need to close a round by (factoring in your timeframe — this process can take several months)
Starting a business costs money, so how are you planning on doing this? Are you going to bootstrap the business to get your minimum viable product out the door? Are you going to use your savings? or perhaps stay in employment and start your business around your current work? We strongly suggest you take a real look at the implications of any route you take. If you are using your savings, use a financial model to determine how far your money will take you before your business has to start turning a profit. One thing is absolutely key, If you want to raise funds, you need to keep your house in order — investors and banks will want to see your finances so they need to be comprehensive and crystal clear from the beginning.
You’ve worked through your business plan, and decided that you are going to need to raise some money — but not all money is created equal. You need to decide how to raise this capital, are you looking to raise equity or debt? This will have a very big impact on your business further down the line, and will also influence the sort of investors you’re going to target. Look at the correct approach for talking to investors, check out our previous article on getting your pitch together for advice. You also need to consider when you want to raise — most startups that raise money do it more than once, and you’re not going to raise two rounds straight after each other. Getting your timing and numbers right is crucial. Crowdfunding is also becoming increasingly more popular with tech startups, but it’s not the easiest route to take. If you’ve got a really unique and exciting product then you may well hit your target, but perhaps have a backup plan. It’s also a good idea to look at any potential tax relief you could qualify for such as EIS or SEIS as this could be beneficial to investors.
This might not seem that important when you have so much else to focus on, but it’s one of the main issues we see with new businesses, and it’s a colossal pain-in-the-neck to sort it out later on. Begin with setting up separate accounts. Determine what is your company’s expenditure and what’s yours. Speak to an accountant about sorting out your personal finances, and they can help you determine what is deductible. Getting these things locked down before you get going will save you a huge amount of time later on. And whilst we’re on the subject of wallets, please please PLEASE keep, and record your receipts. Your accountant will love you for it.
You should speak with an accountant to ensure your company is correctly registered for various types of tax, and they can handle your HMRC communications from the start. This will free up a lot of time for you to focus on your business. It comes down to what your time is worth. Is it better spent on your product, customers and team, or dealing with HMRC, accounting and bookkeeping. By doing it yourself, you can make a small cost saving, but from our experience it is often time not spent well.
As tech startups go, most aren’t a one man band, especially not the good ones. So you are going to need to hire, and hire well. This is without doubt the most important role for the founder of any startup, and should be taken very seriously. It also brings up a whole host of new questions. How do you go about hiring employees? Who’s the best you can get at the right price? You may ask yourself what’s the company structure is going to look like? This is unlikely to be too relevant at this stage. Startup founders & employees will fill the gaps fluidly, and if not, you’ve likely made a mistake in hiring…. As soon as you start paying staff or contractors, you need to register with HMRC for PAYE as an employer. You must register before the first payday, and it can sometimes take over 2 weeks to go through, so you need on the ball here!
So, you either have or have found a partner in crime; your co-founder. What is the co-founder split? You need to make sure they are as invested as you are, so do you split it 50/50? What about equity for your team? There are numerous ways you can reward your team and retain their love and loyalty. Implementing an EMI scheme is one of the most popular routes for tech startups in the UK. It’s designed to give your employees a share of the business they are helping you build, and in turn incentivise them to go the extra mile. Issuing EMI options can also help with recruitment, so it’s worth looking into as good talent is hard to find. We’ve written about EMI options before, so check out the article if you want to know more.
Have you thought about what happens to your business if your co-founder wants out? If they decide to leave, there is a good chance that you’ll probably seen it coming. The best way to stop things getting nasty is to get a plan in place before you go into business together. You’re not going to want someone who no longer has anything to do with the company owning a substantial amount of shares. Once you have raised equity or debt, it is likely the investors will insist on some form of reverse vesting on the shares, make sure you understand what this means to you. If there is a split before such provisions are in place, it can be very messy, try to avoid it….
You should always have an exit strategy. What would your best case scenario be? What would be the worst? If you’re bootstrapping your business, or using your savings, what happens to you if the company folds? And if you make a healthy exit? Do you retire to a sun-kissed Island or perhaps stay on as an advisor? One key point (we’ve already mentioned it — we’re just drumming it home) if you are planning on selling your business in the future, keep immaculate records. You don’t want to jeopardise your chances of a sale, because your finances aren’t crystal clear.
When it comes to starting a business, getting the finances right is fundamental to success. Remember, keep your accounts comprehensive and clear for your potential investors, and the taxman.Think ahead. Make a plan. Even if the business takes a different turn you’ll be able to deal with it better.
And keep your receipts!
If you’re about to push launch on a tech startup and want some advice, drop us an email or pop in for a drink. For general tech news and info, follow us on twitter
Originally published at ihorizon.co.uk on October 27, 2015.