As Founder of a startup, you have a thousand things to be concerned about every day. Taking care of a few “little” things at the beginning can make a big difference in your success.
It's tempting to start a business and dive right into the details of your product or service without considering some of the key aspects that contribute to success.
These four simple tactics will make a big difference as your company grows and probably save you a few headaches along the way.
Focus on Profitability, Not Revenue
Big revenue numbers are meaningless if you cannot reach profitability with your business model. Entrepreneurs typically focus on income as a key measure of success. However, revenue only tells a part financial of the story of your business. If your business model does not create profitability on a small scale, it is not likely to on a large scale.
Investors accept that in the early startup stages, expenses will exceed revenue as entrepreneurs focus on building the business. Investors also expect that in a predictable period, revenues will exceed expenses and then grow exponentially faster.
When investors mention “scalability,” this difference between revenue and cost growth curves is what they mean. If profitability is not in the picture, then the business may be scalable, but certainly not viable. Entrepreneurs who emphasize profitability and revenue growth set their business up for success.
Outsource Accounting and Taxes
Leverage the knowledge of a trusted, experienced professional. What you spend in fees will save you significant time and possibly save you from financial disasters, such as unpaid taxes. Outsourcing these tasks is a priority because they require a high degree of expertise that most entrepreneurs do not have and should not spend time on learning beyond the basics.
Where entrepreneurs need to be careful is that they do not outsource and then ignore these tasks.
Founders must be aware of every financial aspect of their company, so they need to stay current on their internal accounting practices, tax liabilities, workers comp payments and other key events.
Pro Tip: Remember, as CEO you are delegating these tasks, not your responsibility for them. Regular meetings with your accountant and tax person must occur to understand what has happened and to discuss the next 3-6 and 12 months. Even though outsourced, entrepreneurs should treat these expert providers as part of the core team.
Hold On To Your Equity
Avoid giving away blocks of equity in exchange for services or to entice a non-essential resource to join the team. At the beginning of a startup, it is common for entrepreneurs to offer chunks of equity in exchange for services like website development or as enticement when recruiting a key team member.
In essence, using equity instead of cash turns contractors and employees into investors. Unless they have experience as investors and understand the risks associated with equity, this will cause problems. For example, when the company raises funds and the โsweat equityโ is reduced in value by a real investment, the contractor/employee expectations around the value of their stake will create friction.
One company I worked with hired a CMO and granted the person 5% equity when they joined. Within a short time, it was clear the person was not a good fit. When the person was let go, the company had to spend significant funds to buy back the equity to avoid having an adversarial investor on their cap table.
A better course of action might be creating an employee pool with 10-15 percent of the equity. New hires can participate in a program based on their position and actual contribution. Equity should vest at regular intervals, not automatically, but based on measurable metrics and documented performance.
Separate Business and Personal Finances
Not doing so will create a financial mess that may cause substantial issues.
One entrepreneur, who I coached, hired a programmer and a designer for website development. She paid for the work out of her personal checking account and used her social security number on the 1099s rather than a business ID during the first couple of years. She had to spend time and resources to correct two years worth of personal and business tax returns to avoid financial and investment complications.
An entrepreneur should open a business checking account the moment of company creation, so it is evident where funds come from and where they go.
Start Well, Finish Better
As Founder, if you take the time to do these four basic things well, you will give your startup significant advantages when it begins to grow.
What else would you add to this list?
Photo Sources: Profit Keyboard Button via www.gotcredit.com; Papers on Desk via Foam on Flikr; Long Dock Company, stock certificate via William Creswell on Flikr; Calculating Taxes via www.SeniorLiving.Org on Flikr.
