How a Startup CFO Should Be Hired

Startup founders have plenty to worry about and wear many different hats.

• Developing their product
• Selling their product to customers
• Providing support to initial customers and getting feedback to enhance the product
• Being the face of the company
• Hiring great employees or contractors and managing them

Now what about finance? Should the founders be worrying about this AT ALL?

In my opinion, they should minimize their time doing anything financial. For the same reason that salespeople shouldn’t worry about code and programmers shouldn’t worry about legal issues, we ought to let the experts do their functions. Unless it’s a fintech company where the heart of your business model is financial analysis, technical founders should remove themselves from the weeds and never-ending financial responsibilities.

Most technical founders do exactly this. However, they often make a fundamental error. Sometimes, they’ll hire a full-time CFO, give them equity, and maybe even make them a co-founder. This is a strategic error in most cases.

I strongly believe they should hire an interim CFO instead. Here’s the benefit…

When a company is first founded and you’re bootstrapping, you don’t need to spend money on financial analysis.

In this stage, you are building the product and company. Hiring someone to do any finance work is a complete waste of the limited money you have. Build something worthwhile first.

The only thing that might be worthwhile is hiring someone to do a quick evaluation of your market, write a brief budget, and make some assumptions on the viability of your business idea. That ensures you’re not completely wasting time.

At the seed stage, you’ll have a more refined business model and the early stages of a product.

This is typically when you go to friends and family for an initial investment in the company. If you’re a little further along with a prototype, early customers, or sophistication in your business model, you might start raising money from angels.

This is when you ought to hire the interim CFO. They don’t need equity. They just need to help you with your investor deck. Among the things they can contribute:

• Financial statement preparation
• Financial model that details your assumptions (pricing, market size, sales volume, margins, etc)
• Budget and 5 year projections
• How much funding is ideal, building a cap table, and helping you understand the financing process
• They can probably help on other aspects of the investor deck (especially where there are numbers)
• Negotiating with investors
• Banking (once you get the money)

While this sounds like a lot of work, a good financial analyst can probably prepare investor materials in 20 hours and then be on-call for you when needed. You can call them as strategy changes, assumptions change, and investors start asking questions. You may want to invite them to attend investor presentations as well.

In the growth stage, you need someone that can help you think bigger. They will help with the following:

• Good pricing structure
• Helping you understand the factors making you more profitable
• Preparing financial statements
• Investor relations (on the finance side)
• A really good budget. This is an art rather than a science at this stage. They need to help you make strategic investments but stay disciplined when the future is less certain.
• Helping you hire well (on a financial level). This means sourcing talent internationally, strategically using contractors, negotiating a good compensation package with full-time hires, and using equity as an incentive and alignment tool
• Negotiating good business partnerships
• Making the right growth investments. For example, picking a good office location, making good capital purchases, etc.
• Reporting on every aspect of performance. This includes more than just your profitability. You want to measure your investment quality, operational metrics, employee performance metrics, and more. They can help with defining these KPIs and measuring them.
• Helping you decide the right timing to raise more money and then leading that process. When you’re a more established business, the CFO will take a larger role.
• Adding debt to your capital structure and maintaining good banking relationships
• The day to day accounting. By this time, you will use more sophisticated software and accounting techniques.

A good CFO should be able to do all of the above but they will begin hiring a full team to help handle this. At the beginning of your growth stage, one person should be able to do all this. They might hire some part-time help as needed (a bookkeeper or tax accountant, for example).

As the business grows into something larger, you may want to consider making the full-time CFO hire. This is probably going to happen around the time you’re raising your Series A. A little bit of equity might be good, however, I don’t believe it’s necessary until you’re a bit larger.

When you become a large company, you need someone sophisticated, experienced, and full-time.

It might be the same CFO that has grown with the company. But you need to bring in really good experience due to the complexity of running the finance department of a large company…

• Large teams, budgets, and corresponding processes
• Potentially many different countries with different finance and accounting rules, regulations, banking systems, currencies, etc
• A sophisticated business structure with different entities, balance sheets, transfer pricing, etc
• A sophisticated capital structure that includes different classes of stock, debt instruments, etc
• Significant accounting needs. You’ll have more complex system requirements and need a large team to track the day to day
• Much more structure in terms of spending approval
• The need to bring in outside auditors and tax accountants
• Much greater operational risk that the CFO will be responsible for considering and mitigating

Large companies will have a big finance and accounting department that the CFO leads.

I assume most people reading this are startup founders. So let’s go back to the startup. The interim CFO is an important hire.

So what should you look for in your CFO (regardless of business stage)?

1. Someone with extensive financial experience. They should have experience with all the things expected (at your company’s startup stage).
2. Someone with a perspective on how the finance function can SPECIFICALLY improve your company’s performance (or in other words, how they can add unique value to you)
3. Someone that isn’t afraid to critique your financial assumptions and offer independent feedback. While the founders be final decision-makers, the CFO should be independent and be honest in their feedback.
4. Someone that understands the flexibility that comes with a startup. Their financial model, budget, etc should have many different scenarios that can be easily modified.
5. Interim CFOs might charge a lot. Don’t be afraid to spend. But make them justify their value and time spent on the job. They are the financial wizard after all!

As you can see, there are a lot of skills in play here. That’s why an interim CFO is so important. You might want to change the person sitting in this role as you grow. You might have one person helping with investment, another person helping you grow, and another person managing a large finance function (as your company evolves to each stage). Of course, you want the option to keep a great CFO hire in place longer term. The interim label gives you that flexibility.

……

Some final thoughts: Every company will handle their finance needs a little bit differently. But hopefully this gives the startup founder a perspective on the CFO’s role and how to think about hiring them as they progress.

I offer interim CFO services at my own company. If you want to talk about your own needs, take a look at my company — Startup Conception. Beyond the finance services I articulate in this article, I help with operations, strategy, international business, and outsourcing.

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About the author: Dan owns several businesses across the futuristic landscape.

Startup Conception offers services to startups and small businesses including financial modeling & budgeting, investor decks, strategy, interim CFO/COO, international business, and IT outsourcing

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