Entrepreneur’s Toolkit: Startup Finance 101

Presented by Edison Partners, the Entrepreneur’s Toolkit Series is every startup’s guide to forming, funding, and growing a business.

Episode 2: “Cash & Notes” dives into the best practices that set a startup up for success, and the common mistakes to avoid! 

Financial habits can make or break a growing startup. Here are the tricks of the trade according to Chris DeMayo, Technology and Emerging Growth Services at the accounting and crypto advisement powerhouse Withum:

Cut costs in the beginning, but level up after fundraising
As an entrepreneur, you are “always weighing the value of your time versus the value of your money,” says DeMayo. In the early stages of growing a business, it makes sense to cut as many costs as possible,  including doing bookkeeping by hand.

Consider outsourcing accounting once you reach the “seed stage,” or after the  first round of fundraising. The best range for upgrading your record keeping methods would be between $500,000 to $1 million raised. Every business is unique, but this is the sweet spot for indicating when it’s worth investing more resources in accounting.

Bookkeeping doesn’t have to break the bank, though;  some of the most user-friendly and economical accounting services for startups include Quickbooks Online and Xero. Outsourced accounting firms (including ones like Withum) can also be crucial resources for startups. Experts will prevent you from making financial mistakes that could affect your reputation with potential investors and avoid mistakes that could potentially harm the business.

Get your yearly valuation checkup
Before you can offer up equity to employees, you need an independent evaluation of what your business is truly valued; that’s where your 409A Valuation comes in.  Don’t forget to get your yearly 409A Valuation. They are inexpensive, and are worth the effort to avoid possible financial roadblocks in the long run. Valuation consistency shows investors that you’re worth trusting.

Every entrepreneur stumbles along the way to the top, though; remember that you can always have valuations done retroactively, but you don’t want major gaps from one valuation to another.

Don’t get funding tunnel vision
It’s easy to get tunnel vision when it comes to seeking out funding sources. Don’t forget to expand your view by doing research and hiring quality advisors! There are many funding options for startups, including the Refundable R&D credit, through which  you will get refunded money from the IRS through payroll credits and many more resources.

Every state has its own laws for credits, so be sure to deepen your knowledge of the unique benefits that your state offers. For example, New Jersey has the NJ Grow Credit.  If you’re expanding outside of New Jersey, be aware of the credits available in those new areas. Many midwestern states have robust credit benefits for growing crypto mining businesses. 

Choose your company structure wisely
Early-stage companies often choose LLC structures vs. C Corporation structures  because of the personal tax breaks. Don’t be fooled – this “no-brainer” choice can cost you big in the long run! Check out this tax break opportunity: if you hold a Qualified Small Business stock for 5 years, the first million dollars is tax-free. That 5 year clock doesn’t start until  you’re a C Corporation.  

You can convert from an LLC to a C Corp, but this can cause unforeseen problems and cause issues for future funding. Talk to advisors and attorneys early on before setting structures.

Put your equity  agreements on paper
What does a 5% stake mean? This could be the root of a thousand  headaches in the form of lawsuits in the future. Especially when parsing out terms of equity, you need to put the terms in black and white. Go beyond handshake deals. If you avoid putting detailed terms in writing early on, it could kill fundraising opportunities.

Is it worth investing in organizational tools like Carta that automate agreements and keep track of terms? According to DeMayo, “Early on, founders get too aggressive using equity as currency. Have discipline, you need advisors for this.”

In the early stages of your startup, it’s worth taking the time to zoom out. Researching and listening to the wise words of mentors will help you avoid common pitfalls and maximize future success.

Thank you again to Edison Partners for their partnership on this series!

Watch the full episode on YouTube or listen on the go on Spotify.

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