SkyDeck PlayBook #2: A Bay Area Budget on $100K
***This is not tax advice and always be sure to talk to an accountant
$100,000 does not go a long way in trying to build a startup, especially for young founders who start their businesses before working at a high paying tech job. It can be hard to make ends meet in one of the priciest cities in the world while working a low paying job and networking with friends/colleagues in San Francisco. Here are some tips and best practices on making the money last.
8 Months Runway
If you have $100K as your first investment, your goal is do everything you can with that money to justify to the right investors a pre-seed/seed round of funding. Product market fit + customer traction can take four to six months. Early sales will always takes longer than you would expect. Your goal with this money is not necessarily to make sales and become profitable, but rather to figure out a story (team, product, market, and defensibility) and proof (traction) to raise an early round of funding ($700K-$2.5M).
Early stage fundraising takes time (2–4 months).You are going to hear a lot of “No”s, but that is okay. One yes is worth it. More investors will flow from there.
Pay Yourself if You Have To
As an investor, we want the money that we put in to you to be as effective as possible. If you have $30K+ saved up and want to invest in your business by not paying yourself that is alright. If you don’t have that much saved up and need to pay yourself something, that is fine as well. We don’t want you worrying about how to pay the rent or groceries. Homeless founders who don’t eat can’t make a good startup. A salary of $20K-$33K is more than reasonable. Our goal is to have you focused on nothing but growing your business.
Business Expenses and Tax
One of the most enlightening things about running payroll is seeing money fly away to the IRS. For every $1 that I make (even at a low income level) 15+ cents will disappear in income taxes, while another 15 cents goes for payroll taxes and workers comp. Payroll is an enormous drag on the business from a tax standpoint by taking on at least 30% on everything purchased.
It is enormously helpful to run business expenses through the company, as it is far more efficient for your business to pay for something (before taxes). The IRS has guidelines on the kinds of things, but many things can be run through your business if they qualify as business expenses.
If you have space set aside at your home, you can deduct a portion of the square footage you are paying for. If you find that your team is constantly eating out separately each day of the week, think about making some team lunches each week in order to discuss a business topic. Every time you drive a car, use public transportation, or order an uber for business, you can run these expenses through the company. Healthcare, work computers, team outings and other legitimate business expenses should not be included in your payroll. Effectively optimizing can extend a run-rate by a month or two…which matters.
Example Budget
*** Set aside money 10% of total payroll costs for miscellaneous expenses. Stuff Comes Up.
