SPEAKER_00: okay everybody welcome back to this week in startups i'm your host jason calacanis and this is our special startup basic series what is startup basics series we started a couple years ago to go over all the blocking and tackling the basic heuristic fundamentals of doing things right in

SPEAKER_01: your startup from a legal perspective from an accounting perspective and finance and hr all

SPEAKER_00: this stuff is let's be honest it can be super boring but it can also be super important and frequently we see companies that have to spend a lot of money cleaning up problems and so it's in our best interest that everybody get things right from the beginning and so one of those things you

SPEAKER_02: want to get right is accounting and finance with me again scott orne my friend from cruise consulting

SPEAKER_00: welcome back to the program scott hey jason thanks for having me all right so if anybody wants to see the previous ones we've done with wilson cincini uh etc salesforce you can go to thisweekinstartups.com slash basics thisweekinstartups.com slash basics and if you want to get in touch with scott go to cruiseconsulting.com twist all right scott uh on this episode i want to talk about the year end

SPEAKER_02: wrapping up your year always chaotic for startups probably have to do not just financing stuff but they might have hr stuff they have to get done by the end of the year like reviews uh and bonuses maybe they've got a board meeting they've got to get to they probably have you know year-end

SPEAKER_00: targets and quarterly you know fourth quarter targets they need to hit and then everybody's on vacation nobody's there to fund their companies it's just chaos so let's talk about one of those you know three or four storms that typically hits a startup or any company which is

SPEAKER_01: wrapping up the year what what are the what do you have to do to be prepared for q4 and wrapping up the year getting your taxes done getting your closing your books etc yeah you nailed it there

SPEAKER_08: is so much going on so maybe we can break it up into taxes and then just kind of like the financial world so for taxes it's actually kind of an exciting normally it's like you know it's it's not the most fun thing to do but with covet there still are a lot of like government grant or tax credit programs yum yum that people can take advantage of so it's almost like you get paid to actually do

SPEAKER_10: your taxes and take care of your taxes the correct way this year there's actually an incentive there's

SPEAKER_00: this on because let's face it a lot of companies startups included were beneficiaries of ppp loans uh there were other loans for retail people i mean we pumped a lot of stimulus into the system in 2020 and uh it continued into 2021 which i think some people don't know so let's break down yeah some of those uh goodies some of those covid goodies that got sent these are not stimmy

SPEAKER_12: checks to individuals this is actually for companies yeah and the government knew that

SPEAKER_08: starting you know post covid it was gonna be a really hard time to start a business but they also really needed employment right remember how many people like lost their jobs in 2020 it was shocking yeah it was crazy right and great great depression kind of stuff and so um it started with the trump administration and the biden administration carried it on there's a there's a category called employee retention tax credits ercs to be short and the simplest one to explain is it's going to be super important for your companies you know the launch investment companies anyone started after february 15th 2020 okay is actually eligible for up to 50 000 in employee retention tax credits in q3 21 and q3 or q4 21 so again you it's maxed at 50k per quarter but if you've got you know if you've got five that's 10 well-paid engineers on your team you're going to max that out pretty easily and so what you have to do is file an amended um payroll tax return with government it's called a 941 um some of the payroll companies are helping with this cpas like ourselves are helping with this you do want to have the backup on this to prove you're eligible because i do think there'll be some audits on this like the you know we talked about like all the money getting pumped into the economy well the irs is looking at that saying like wow that's great but we really need to make sure people play by the rules right let's do this right so that's the first one and again it's for newly formed companies after that were formed after

SPEAKER_01: february 15 2020 so if your formation date is basically uh 18 months or less this is something you don't want to if you're under two years old but make sure that formation date is after

SPEAKER_20: february 1st 2020 when the pandemic hit yep and the concept here yeah february 15th is the

SPEAKER_08: february 15th got it and we've had companies that were incorporated like on february 13th no good make it which is a huge bummer but that is that's the magical it's a hundred thousand

SPEAKER_12: dollars potentially sitting out there so if you got 10 employees you're post uh february 15th so

SPEAKER_20: a seed a seed funded company coming out of an accelerator we'll count for this if you've been incorporated for three or four years no but if you've been incorporated after february 15th that's

SPEAKER_02: great and the goal of this is for you to be incentivized to you know hire that 10th person let's say 11th person so this is not like in canada where people will get like an entire engineer for free or you know these huge credits but it's a little something it's a pot sweetener it's certainly something you want to check out now the other thing i wanted to know about was the r&d tech credits because i keep hearing about this i think there are even some startups that are specializing and trying to get people these i get pitched on them a couple of times obviously in canada australia ireland a number of countries uh historically that are trying to promote their tech businesses and

SPEAKER_00: invest in it will give a full tax credit for r d in other words an engineer or scientist is working on something forward-looking not maintaining your current version but working on your 2.0

SPEAKER_27: you fill out a form at the end of the year typically in those countries but we have this in the

SPEAKER_08: united states as well we do and it's it's been around like vanessa cruz my wonderful wife and the founder of cruise and something is one of the first people to figure this out probably like four years ago and what what had happened is the irs and the treasury got together before rd tax credits you could only apply it on profits and so like startups are not going to be profitable for a long time it's just the way it is so it wasn't super applicable and then you know vanessa figured this out through the regulation change that the irs and treasury said hey you know what we're going to let you take the r d tax credit against your payroll taxes and pretty much every startup pays payroll taxes because by definition you're building software

SPEAKER_29: and you're hiring engineers and so it became this like immediate roi for all the startups so it's not

SPEAKER_02: just based on profit you're a startup you're obviously investing for the first five to ten years if you're venture backed they're not looking for dividends they want you to build the business and work on the top line growth but here you're saying hey the change here is you're getting this tax

SPEAKER_00: credit of up to 250 000 a year does it matter if they're an employee or they're a contractor

SPEAKER_33: it just matters you paid taxes it matters yeah if it it's u.s based employees that are like

SPEAKER_08: engineers scientists it is rooted in the hard sciences there's four there's a four-part criteria to be eligible super and by the way if i may it's super important that companies follow the rules on this we are seeing audits like we're involved in audits right now this is happening we had a company acquired by a fortune 500 company that's going through the audit right now like this happens so please do it correctly i'm slightly biased but i'd say work with cpa firms it's great that there are startups doing this but like cpa firms have a way higher level of diligence and regulation yes

SPEAKER_35: exactly well you're putting your name on it therefore if there was something fugazi there is some

SPEAKER_08: blowback for an accounting firm right oh huge and we're signing the tax return this is a component of the tax return like visualize like stapling a giant section to your tax return and sending in right like it's not like a standalone document it is part of your tax return so it's u.s based employees that are engineers scientists hard sciences and then u.s based contractors also apply as long as they're scientists researchers the the people sometimes people get a little confused um if it's someone who's a contractor in another country that doesn't count because they they're not paying social

David Sacks: security taxes in the first place got it so the government doesn't really want to like rebate

SPEAKER_01: social security taxes that weren't paid in the first place yeah the goal here uh in our government

SPEAKER_00: is to have employment here in the united states and taxes paid here in the united states so if they're going to create an incentive like this or the other incentives that were created during covid

SPEAKER_02: it follows that the incentive is designed to grow america's economy not other economies right so

SPEAKER_42: absolutely fair enough and they want everyone to hire as many engineers as possible because that's like

David Sacks: that's what creates all these amazing companies that then hire thousands and thousands of people so correct yeah i think i think this tax policy is actually really smart on the r d stuff because

SPEAKER_01: it's incentivizing companies the correct way and let's be honest this isn't some crazy 10 million

SPEAKER_08: dollar grift this is 250k it's capped at right it's capped at 250 but you can actually um in the in the fine print you can actually go above 250 but everything above 250 is applied to the profits kind of like the old school way got it so you so the so the startups are most of them are maxing out that too or not

SPEAKER_53: maxing out they're hitting that 250 the super well-funded ones but not really going that far beyond it makes

SPEAKER_01: sense um yeah so all right so then what are the best practices for just making sure you get your taxes done on time like what should you be doing in on an infrastructure basis to make sure that the end of

SPEAKER_02: the year in taxes gets done easily gracefully and you're not like chasing your tail or have you know

SPEAKER_08: investors or board members uh upsetting you yep well the the maybe the simplest thing is to actually line up your tax preparer or cpa now we always joke kind of internally at cruise that like january 2nd comes and we get like 10x the emails if people want because because everyone set their calendar reminder for january 2nd to line up a taxpayer if you can do it in november and december this is the slow time for a lot of accountants and so great to line it up now um and then you're gonna want to kind of like there's a lot of checklists on the internet like we have our own checklist for each startup metro so if you're in boston or austin or new york or san francisco you can get your own checklist and the big things you're going to want to cover or prepare for are 1099s which go out to all your contractors and firms like partnerships like law firms or landlords are often partnerships because it's like held under reach type of structure you will send them 1099s that's you have to do that i forget the fine but i think it's like two thousand dollars per 1099 not sent out and those do get audited the next one you're going to want to do is your delaware franchise tax which is typically due march 1st again that's your corporate shield like your liability shield

SPEAKER_02: yeah i don't want that to expire there's a reason why everybody is like filing in delaware it's not because of the incredible vistas in delaware it's because of the you know very pro uh shareholder um

SPEAKER_08: uh framework that they've developed over years yeah and in that website is not the greatest website of all time you think that so sometimes just this is a little meta tip here but people punch in their numbers and they're kind of like in a hurry to pay it and they'll email us and say like it says i owe forty thousand dollars or eighty thousand dollars there's just be patient let the website think calculate you'll probably owe like four hundred dollars not forty thousand dollars but i might have saved like three people a heart attack just by explaining that um so that's that's one and then the second big one or third big one is the states so california is april 15th new york i'm forgetting the date but i think it might be march 15th or march 30th massachusetts is march 15th or march 30th check check the the um the uh calendars but each state that you're operating in and that you've registered to do business in you you typically have to pay like a franchise tax or an annual tax california is the largest 800 i think new york's 350 just make sure you pay that if you don't pay that they'll kind of they're in the bowels of the irs and the state governments those those uh numbers and accounts and your social security number are all there and like eight months later you'll get a debit on your

SPEAKER_53: bank account end up paying way more than you just would have taken care of it just do it right yeah do

SPEAKER_02: it right now what about ppp is this uh a lot of companies uh you know that we invested in

SPEAKER_69: reported back like hey we had our best month ever and it was like this spike and we're like what is that that a lot of customers like no we got a ppp loan whatever and it's like okay is it a loan

SPEAKER_02: or is it a gift from the government this idea was always that there would be forgiveness for these if certain things happened and i think that's happening now correct it's yeah most companies

SPEAKER_08: now are have been really good about getting their ppp forgiven if you remember there was the initial ppp and then there was something called ppp2 which for companies are like really hard hit like you mentioned the restaurants earlier retail yeah retail um or companies that like how to basically like shut down so most companies have done forgiveness for those that haven't it's a good time to do both one and two now make sure you're using this is independent of taxes you can do this at any time exactly that's a great point and you kind of want to clean it up if you can like now would be a great time at the end of the year so it's reflected on your 2021 financials there's no weird hangover like like the way you're talking about it right you've had to ask that diligence question of like what's this bad what's this 250 or 500 000 balance on the balance sheet right you know so clean it up the good news is that is not taxable income at a federal level some of the states it is taxable so like california is taxable um but so federal like it's just going to be on your other income line down way at the bottom of your bound of your profit and loss statement do not book this as revenue that would be that's like cash accounting cash accounting doing incorrectly someone book it as revenue and that's the kind of thing that you find out a month from now you know when you're you're pregnant you don't want to do that um so just book it as other income it's a forgiveness it goes the equity section of your balance sheet very easy and you're just going to do that in your lenders online portal they all have their own portal you go in there there's only like two or three questions really for the early stage companies your payroll provider can typically do a very quick export of a report that's ppp centric that will give you all the answers and then it's just important to you know sign or agree to the reps and warranties like you should and you're good you'll you actually find out like two weeks later it's actually a very fast process but now like now's the time to do it like

SPEAKER_10: just it's like a little bit of like winter cleaning just just sweep out you know get the stuff done

SPEAKER_35: and of course you should have been doing your pnls all along every month you should have been

SPEAKER_02: correctly reconciling your bank statements to your pnls to your accounting you should have been you know making sure the credit cards and all the expenses were properly um what's the term when you assign them to a category uh categorization okay categorize properly there's some other word for when you put things into buckets on your pnl i forgot what they call that process um where you're like

SPEAKER_12: okay we're gonna have these buckets for revenue these buckets for expenses your chart of accounts

SPEAKER_08: and that chart of accounts is your friend because that helps you quickly and your investors when

SPEAKER_85: they send you the profit and loss statement you can eyeball it quickly and see where they're spending their money and you know oh god i understand yeah oh yeah this is marketing spend oh my god look

SPEAKER_02: this is a company that's a subscription-based consumer company com.com steezy fitbot oh yeah they spend a lot of money on facebook ads okay that's their okay but oh yeah where's the salaries okay

SPEAKER_12: this is a sas company we got a lot of salaries in the sales and marketing team oh this is a direct

SPEAKER_69: to consumer product we don't have a sales team you know just for people who are shifting from one board meeting to another as a accountant lawyer or investor or board member that's how you kind of get your

SPEAKER_87: bearings on the business right totally and i think you're making a really great point in that

SPEAKER_08: people like you have a shorthand in their head and it allows you to like look at the stuff very quickly and know if the company's performing you know if it's not performing and know if there's

SPEAKER_25: anything fishy you know like you see a biotech company spending a lot of money on google ads and you're like something's wrong here like that doesn't you know there's something or consultings like

SPEAKER_91: sometimes there's like a consultant line you're like what's that about who is this hundred

SPEAKER_69: thousand dollar a month consulting for four months and it's like oh we hired a pr firm it's like what yeah what do we get out of that you know like all of a sudden these things stand out and

SPEAKER_00: you're like huh where the travel and expense line and you're like i've had companies that have this extraordinary 10 20 spent on t e and i'm like wow travel and entertainment in a startup like where

SPEAKER_08: exactly are we going yeah what's going on there yeah and also like you know it like we talked in a previous episode about like customer acquisition costs and lifetime value of the customer i think people like you are probably like doing a quick calculation in your head of like sales divided by marketing or advertising okay that looks like it's working you know so like you talked about com like that's probably something you do at the common board meeting i'm not on the board of com i wish i was

SPEAKER_99: yeah but yeah i mean i i own a lot which is even better uh but would have been nice to be on that

SPEAKER_69: board that was you know interestingly in the early days we didn't ask for a board season when we got

SPEAKER_02: over we got to five percent ownership we said hey you probably should have us as an observer or a board member just so you have us as help and uh it's been great for me it's super educational because i am up on a lot of these issues because you know the times that this comes to me is some weekend phone call like

SPEAKER_91: uh can i talk on the phone and i'm like oh god here we go yeah you can't put this in a in slack or sms

SPEAKER_00: okay it's gonna be like one of three or four short things none of them are good only one of them's good

SPEAKER_08: we're getting bought but the fact that they can call you is amazing like that i mean and that might be a 20-minute conversation with you whereas like the three-hour conversation with lawyer because

SPEAKER_85: you've seen so much you you like your shorthand so you know well generally speaking um these things

SPEAKER_71: are very scary when you go through them for the first time as a founder you probably have had this

SPEAKER_02: experience where you tell a founder like okay this is something we gotta fix it's gonna cost 20 000 to clean all this up it's gonna take four months and they're all of a sudden they start sweating they're in a panic and it's like yeah this is like painful in the same way you know going

SPEAKER_69: to the doctor and having to get a shot or going to the doctor and having to have a growth removed or maybe even worse you got a benign tumor or something like that there's like a scale of how

SPEAKER_02: bad things can be but generally speaking it's better to address them than not address them i think that's the big part that you'll get out of the startup basic series okay uh one thing i think is super important is um employee bonuses if you're doing them most startups are not doing bonuses but when you get to series a series b maybe series b there might be comp packages that include a bonus typically 10 20 30 percent of the salary in my experience for hitting very aggressive targets is that generally correct you don't see them in c and a but you might see them in b and c when you start having 10 20 million in revenue and you want to incentivize the management team to hit you know

SPEAKER_20: 3x 4x 5x growth and for the investors giving people a 30 bonus for you know doing an incremental 20 is great for everybody because the valuation goes up significantly it is it is and there's one

SPEAKER_29: little kind of small point here which is sometimes founders are really nervous like one of these calls

SPEAKER_08: you might get is like gosh my sales team is making so much money in bonuses this year good and exactly that's the point i want to make like that is actually some of the best money you can spend because it means they're killing the plan it means the next fundraise is going to be so much easier and at a higher valuation exactly so like it's okay like i've i've answered questions before like oftentimes the vp of sales is the highest paid person almost universally yeah yeah so that's okay

SPEAKER_69: it's something that i think a young founder has to get uh or not even age-wise young but a first-time

SPEAKER_00: founder has to get used to uh i remember when i was running my first magazine and i just told all the sales people hey you get 10 and they're getting paid 50k you know bases had five sales people one sales person all of a sudden sells a million dollars now this is in the 90s so now he's at 150k i was paying myself a 5k a month you know 6k a month draw basically 60 70k a year to live in manhattan at that time was okay salary wasn't terrible and this person's making twice as much i mean i see the payroll

SPEAKER_69: going out and i'm like this guy's like got a bmw and he's going to the hamptons and i'm working and

SPEAKER_91: he had a share on the hamptons i was about to get resentful and then i was like uh i own the company

SPEAKER_33: you know and 95 of the company so yeah and that person is making your life so much easier so yeah

SPEAKER_00: i totally agree yeah i mean you want them to crush it now that doesn't mean in the next year you don't reset and say hey here's the new plan you're gonna get four percent you know instead of

SPEAKER_12: ten percent you're gonna get eight percent on the first million nine percent on the next 500k ten percent next 500k and 12 after two million and we set higher targets you are well within

SPEAKER_29: your right to do that totally great one other little uh thing that companies can do to make

SPEAKER_08: those bonuses a little more palpable is incentivize the sales team to get paid up front because then you're really just taking the cash you're getting from the customers you're almost like not dipping

David Sacks: into your equity to pay those extra bonuses too and it helps extend your runway so that's a little

SPEAKER_00: that's a great one and then you know in terms of cash flow another thing i've seen and i've always done is uh commissions get paid when cash comes in yes not when you sign so i've seen founders start

SPEAKER_69: paying people for signed contracts and then they cancel and then what do you have to do you have to pull the money out of the person's account and then in order to get paid your commissions you have to be here when the product is delivered and we get paid yes so those two criteria if somebody leaves and they've sold 500k looking forward they don't get the commissions on that because they're

SPEAKER_00: not here when that money comes in they may have sold it but they didn't deliver it and so there is a reasonable uh strategy there correct i totally agree both those points are fantastic and experienced

SPEAKER_08: sales people generally know that so don't let them kind of fast talk you around or try to push you around like those are two things you can really kind of hold to and in a startup there's no such thing

SPEAKER_00: as severance maybe series c or something like that when it's a robust but you don't see people in

SPEAKER_02: packages giving people robust severance packages and it's a bit of a red flag in an early stage

SPEAKER_08: startup when people ask for that kind of stuff correct i do think that there's a place for severance in the sense that you kind of think about it it's a little bit transactional from the company's perspective you only want to give severance if people are going to sign a release if they sign the release and that's something we do at cruise we want to we want to help people but we also want people to sign that release because you never know if someone's gonna wake up six

SPEAKER_25: months from now and say something bad about your blog post yeah yeah so i i'm just saying in the

SPEAKER_00: comp packages like i've heard people who are leaving like disney or something like that and then i'm on

SPEAKER_69: the board of a company like yeah they want a two-year severance i was like what yeah we have 18

SPEAKER_73: months of runway nobody's getting a two-year like literally they started a two-year subscribe like

SPEAKER_150: they can have two weeks severance or if they i mean if you if you leave the job you get zero like

SPEAKER_113: and if we fire you you get zero like yeah and then like oh now we have to do a whole paragraph

SPEAKER_08: on what is cause and it's like and that's also a red flag during the interview process for you that like maybe the person's coming from a fortune 500 company and it's notorious that that transition from a fortune 500 company to a startup is very difficult and that's kind of like your first red flag like someone asking for two years or a year or whatever crazy no people yeah i that just should tell you

SPEAKER_69: like you need to not a startup employee exactly exactly start employees thinking if you don't

SPEAKER_02: want me i got 10 other people who want me i don't i'll take six months off i got cash in the bank at three months off i'll be a consultant i'll be an entrepreneur in residence i'll sell nfts whatever

SPEAKER_29: totally and one other thing which is we start talking about severance employee liability insurance

SPEAKER_08: is actually a thing that i recommend to companies nowadays explain what it is yeah so that's that's basically that use case where that you let someone go for cause or something happens or someone's harassed or whatever it is employee liability insurance will actually protect you you will pay a deductible you know it's usually five or ten k but that insurance policy will actually pay for

SPEAKER_61: litigation it's amazing penalties things like that so that's something that didn't exist in the early

SPEAKER_115: days it's relatively new yeah and i think the reason is you have so many drive-by lawyers now who

SPEAKER_02: they know a startup has raised x amount of money you got 10 million in the bank they're like they're a target and literally people leave and they just know if they shake you down the cost of fighting it's 50k yeah and the cost of paying it off might be 15k and you can everybody moves on with their life i fight everything to the death period like only once have i ever acquiesced uh and it was for such a tiny amount of money i did but um it was like for unnecessary this is literally a true story when i was running mahalo somebody worked for us as a freelancer in california and then they claimed

SPEAKER_00: that they had done they were working like 10 hours a week uh maybe they did one month like 80 hours they claimed they did 18 hours in a row and that we didn't pay them over time over time yeah and we're

SPEAKER_69: like you're a freelancer you started 1099 contract we didn't direct your work you know we we have this

SPEAKER_71: all perfectly lined up with all the tests and everything and literally the person at the hearing

SPEAKER_00: said listen you uh you we we you you raised 20 million dollars for the company just pay it it's

SPEAKER_69: only four thousand dollars or whatever and i said but it's not true it we paid her the 2000 we don't need to pay another 2000 in overtime she was at 1099 she signed it i have 100 other 1099 people i'm

SPEAKER_91: gonna have to cancel the 1099 and move it offshore like literally this is my argument to the

SPEAKER_171: i guess it was a mediator type thing in california they do before you kind of go into all this yeah my

SPEAKER_12: returns are like you're in 8 000 for this already just buy it yeah you're you might win it's like

SPEAKER_02: how much is your cost to win 15 000 so now i'm like oh my god this is like sunk cost uh for

SPEAKER_00: people who want information on that we have a partner in broker.com twist uh so i will mention

SPEAKER_175: one partners no we work with a broker a lot too they're really really good at startup stuff that's

SPEAKER_08: actually where we get our insurance through a broker me too so if i can make one point on that the legal aspect too jason like you've done the wilson censini series like that every big law firm in silicon valley will give you a package including contractor agreements including the template to spec out what you're doing with that contract that is your best friend fill that out every time be

SPEAKER_00: religious about that it will protect you by the way and understand you you doesn't mean that people can't sue you they still can there's bogus claims filed all the time so even if you do everything right and then you have to understand what is the worst case scenario in all this it's not going to be the risk of room for your company it's going to be a speeding ticket and maybe you weren't actually

SPEAKER_02: speeding and you had to pay the speeding ticket like that's literally what happened to me i was driving 55 they claim i was driving 70 and i'm like how long am i going to fight the speeding ticket yes you know it's 25 bucks you know in the grand scheme of things i'll just pay it um so anything to do with

SPEAKER_139: the cap table at the end of the year yes and when you're doing this reconciling because i've never heard of reconciling your cap table in a year but you brought it up i think in our notes here this

SPEAKER_29: this is one of those like accounting things that all the good accounting firms do that no one really

SPEAKER_08: knows which is you take the cap table you know oftentimes people use carta or they use like an excel spreadsheet or whatever they're using and match the actual table.io yes that's another good one you you match the cash flow that carry the cash that came in from investors and a couple times a year this is not going to surprise you but we'll find like fifty thousand two hundred and fifty

SPEAKER_186: thousand dollars some like some meaningful amounts of money that wasn't on the cap table in other words

SPEAKER_71: you're doing the lawyer's job back testing the cap table exactly incoming uh investments well also the

SPEAKER_08: the main because we're accountants so we're working looking at the cash and like there'll often be a wire that bounced somehow and no one missing wire and the the vc firm thought they funded or the angel thought they funded it yes company not as organized as they probably should have been and didn't reconcile the cap table and so we get in there and that's kind of it's like a fun but

SPEAKER_61: also scary moment for the founder because they have to kind of go back to the investors and be

SPEAKER_69: like it's a big mistake this literally happened to me in vegas i was at the aria i had wired money they confirmed they wired it back i saw the wire it happened but for some reason the wire got reversed i'm now in vegas at the aria two full years later i go to the cage i'm like hey listen

SPEAKER_00: i need a marker she's like do you want your front cash i'm like what are you talking about

SPEAKER_69: she got 36k of front money here i'm like i have 36k here she's like yeah from i was like what's the date on that she said 10 months of data i said you guys wired that back said nope it's still here i look in the back it had gotten reversed i didn't know it had 36 dimes i was like give me that

SPEAKER_198: money i'm going to the poker room now let's go but it happens things get reversed customer you

SPEAKER_199: know yes exactly i would have had it there forever eventually would have come up on these claim sites

SPEAKER_02: i'm getting a bunch of emails from these claim sites now of like for some reason i had a wells fargo account for mahalo back in the day the account got shut down there 16k from like an adsense payment or something in limbo and all these third parties keep contacting me because they're i guess you have to publish it when you're wells fargo bad accounts or whatever you know like when there's

SPEAKER_20: free money out there and they're like you have some money here and i had like a barney's gift certificate for 500 i found and i was like barney's out of business like the big question is did you

SPEAKER_205: win at the poker table at the aria or what happened to that 36k yeah that's a different story um all

SPEAKER_02: right let's see obviously you're going to do uh your uh financial model and make basically check in on that as you get to your end of the year probably going to be planning it for next year is that good to do with your accountants or share with your accountants and do waterfalls and stuff like that of when you're going to be cash out when does a founder go from making a model themselves in a spreadsheet to then getting their accountants involved with it if at all yeah most accounting

SPEAKER_08: firms will have like an fp a team or person so we have like a team that will actually planning exactly yes thank you for explaining that so so that's kind of like part of the package typically we have a free very simple but it's kind of all you need as a very early stage model on our website you can just download it i think google like financial model cruise consulting and that's designed to be very simple because sometimes people get intimidated they're like i'm not a goldman sachs analyst like how am i going to do this you really just need a forward-looking version of your profit and loss statement obviously you hit like series a or series b you're going to have the income statement balance sheet and cash flow statement because the board is going to want something more complex but even just doing that little exercise we'll do two things it'll tell your cash out date it will also help you see all the the moving parts of your business and where you're spending money how it's coming back to you so it's a really good exercise so we really recommend that and then getting the board to approve it in december or january i think is a really good best practice sure because it facilitates this whole conversation like you've probably been there many times where you're like hey i'm not sure this is aggressive enough or maybe you guys can do better or hey tone

SPEAKER_61: this down a little bit if you don't hit your revenue numbers you're going to run out cash really quickly

SPEAKER_00: i mean that is the key is understanding what cash is required to hit those targets and you might have

SPEAKER_69: investors who you know they're very successful your company's you know doubling revenue every year but they got companies in their portfolio that are tripling quadrupling you know doing 5x revenue and they've got these huge winners and they would rather you take more risk and then you have to have this very delicate conversation about well that's a really aggressive target i think we have the

SPEAKER_02: risk of ruin here we could burn through all of our money in 12 months i'd rather you know cut my burn 50 and have 24 months of revenue and that's really what a board is about is to have like a uh socratic kind of debate maybe is like the word or you know an honest candid debate about what everybody's goals are and how much risk we want to take and then you want to check in on that plan

SPEAKER_171: and hope is not a plan as doug leone at sequoia told me one time he's like what's your plan and

SPEAKER_02: i was like well and he just knew i didn't have a plan and he's like jason hope is not a plan uh because i said at some point well we hope to hit and he's like hope's not a plan plan it's a plan make a plan yep and so making a plan just it's good it's like writing because when you write you have clarity of thought when you make a plan you have clarity of thought very well said the other

SPEAKER_29: the other kind of socratic question you can ask them is if you were outside vc would you fund my

SPEAKER_08: company and that's a little bit you're putting them on the spot a little bit but you're gonna get like the real scoop there because like you said they've got a lot of companies maybe they're not going to give you kind of the full full feedback unless asked and that will give you like a good gut check and that way you ask that question when you've got 18 months of cash or 12 months of cash

SPEAKER_223: not when you have three months of cash right when you have three months of cash it's a big problem

SPEAKER_02: i really advise founders to not dip below 12 months of capital um if you're doing well in a market like today we're recording this in 2021 you might be watching in 2025 in a hot market you know savvy founders take advantage of a hot market yes period end of story uh obviously boards

SPEAKER_00: tend to approve these plans when you get to another sort of level and the plan also is about allocating money correctly so when you say you want to grow 25 a month you need to know the inputs there okay how much are you going to spend on facebook ads or google ads how much you're going to spend on a cmo do you even need a cmo are you going to use an outsourcer how many developers are you going to need do you have the current feature set what what is the resourcing to hit these numbers correct everything you just

SPEAKER_08: mentioned plus i'd add how many sales people do i need how many admin people do i need and it's interesting because a lot of times we see companies get like maybe the marketing and advertising budget correct but they don't staff up enough to support either those leads or being able to deliver on features and so the company is a little bit out of whack and so you you this is again why you do the plan because you're visualizing everything yeah and you get to take advantage of your board's feedback like they're all have horror stories of companies that messed up some aspect of it it can help you with that but those are the key inputs those are the key people and and just doing the work

SPEAKER_01: will give you the answers ahead of time and i think understanding the reality of hiring so you say you need 10 sales people to hit these numbers okay it's going to take you you're going to be able to

SPEAKER_00: hire one every three weeks let's say yes you're also going to lose half of them either by voluntary or involuntary which really means you have to hire 20. it really means you need to be hiring two every

SPEAKER_69: three weeks or one every seven eight days who's going to hire one salesperson every seven eight days like that's a high turnover position and then okay by the way if you're going to be selling you know 50 new

SPEAKER_00: clients a month you have 600 do you have the customer success people and support people and this is the rigor that comes into these kind of conversations and why hope is not a plan plan is a plan make a plan and then somebody on your team is hopefully going to say we're going to have 600 customers we have one

SPEAKER_02: person half time managing 60. that means we need like i don't know like five more people or something

SPEAKER_00: 10 more people like this is going to be disastrous if we don't get that online the freeing thing of it is now you don't have to panic because you can say hey we're every three sales people we should have

SPEAKER_12: one more customer support person online so you can actually understand the ratio you have the ratio and

SPEAKER_08: if i may a little pro tip when you've got that signed term sheet i know it's hard to do and you're going through diligence but if you're a founder and can kind of like pivot your brain a little bit to fire up recruiting and because because like you're talking about it takes a while to get the recruiting engine going and so we see companies miss their plan like they close around now but they're missing their plan next summer it's because they didn't have the recruiting engine hiring people fast they waited they closed the round they didn't you know then they took a a week off or two weeks off and you know before you know it you're behind your plan already so all the things you're talking about and then just kind of get it going a little faster than you might think yeah the plan is

SPEAKER_170: everything you build a plan and then the plan is a living breathing document you're going to put

SPEAKER_02: your actuals in there and then that's when you know the accounting the plan kind of come together in the board meeting okay here's what our pnl says looking back you know two months okay here's august and september and we don't have october yet we're in november okay but we got august september okay uh what wait our cash position is different uh the pnl says this the plan says that we should have a million more dollars or why do we have 500 000 extra and it's like oh we got a ppp loan for 250 and uh we didn't have to hire uh the pr firm we just decided to internalize that so we forgot to change that in the plan and that's that little back and forth that can occur where savvy people

SPEAKER_71: on the board are looking at when you wonder what's everybody doing when they're looking at the numbers and squinting and trying to figure it out they're trying to find some discrepancy or something that's

SPEAKER_02: not nominal just like when you have a rocket going off if something's vibrating or you see some chip fall off the space shuttle you're like why that tile fall off you're looking for things that are not normal i think the word nominal in space launches means normal so if it's not normal okay why is it normal why is it abnormal it could be a good reason could be a bad reason could be a blind spot maybe

SPEAKER_27: you just made a mistake in your plan maybe your sales people are cheaper maybe you hired more junior people instead of senior people and you're getting three for one who knows and being able to

SPEAKER_29: explain those deltas and especially if they're positive or you're hitting your plan i think is one of the single best ways to build confidence in your board you know circling back to that would

SPEAKER_08: you fund me in the future question if if you've been hitting plan every month by clockwork that's that makes that question that answer so much easier for them and ultimately you need those people to be confident in you if you're a founder because eventually you know people like you are going to make the intro to the series a investor you know like if you are not pleased and don't want to put your credibility on the line it's not you know it's not going to help them that much we are all in

SPEAKER_00: this life in a credibility building exercise uh you are for your services i am for my dollars and investments the founder is to receive those services and dollars we're all in a bit of a credibility

SPEAKER_91: uh exercise and doing the work that's why this is signed by me this is do the work doing this kind of work as arduous and boring and you know all due respect it can be pretty freaking boring i'm not

SPEAKER_69: saying that hanging out with accountants is boring but it might not be the same as going to ted conference

SPEAKER_00: or something but you got to get this stuff right and you know if you get it right my lord it lets you focus on other things and you just feel more confident coming into work every day the stress level the company goes down when it's properly managed spend the time spend the effort spend the money do it right okay scott great job and we'll uh i think we're going to talk about crypto in the next one and tokens and all that uh fun stuff so stick around and uh if you want to check out the corpus of all the basics we've done across a number of categories just go to thisweekandstartups.com

SPEAKER_02: basics and if you want to get in touch with scott cruz consulting k-r-u-z-e consulting.com twist and you'll get all your needs met there as well we'll see you next time