The Finance & Ops Stack for Early-Stage Startups
Choices that you make early in your startup’s journey will determine how easily you can scale. Even choices that seem simple now, like QuickBooks vs. FreshBooks, can either facilitate a smooth transition from 10 to 100 employees, or create hurdles you’ll have to jump over as you grow.
Small companies need to perform all the same financial functions as a large company: pay vendors, manage payroll, invoice customers, produce financial reports, and so on. When you’re setting up your company’s operating systems and processes, you need:
- to look professional;
- to stay nimble and not overcomplicate things;
- to avoid getting locked into a system you’ll need to change later.
As a small company with ambitions to grow, you need systems that are error-resistant and labor-light. We’ve implemented the systems outlined in this document at several early-stage companies that have gone on to successfully scale. We believe that following this plan will set you up for future success.
Consider this the finance and ops stack that can accelerate your growth in early-stage and beyond.
Choosing a Business Structure
If you want to become a venture-scale startup, we recommend becoming a C-Corp right away. You’ll eventually need to adopt this structure if you want to grow and attract investors, so it’s best to avoid the hassle of having to convert your company down the line.
We also recommend setting up in Delaware—not necessarily because of any advantages Delaware offers, but because it’s an industry standard. Your future investors will be familiar with how Delaware-based corporations work, and that familiarity is an advantage in and of itself.
Choosing a Law Firm
There are a handful of law firms that have a lot of experience working with startups. These firms are willing to work cheap in the early stages because they understand your cash constraints—and they want to earn your business now so you’ll retain them as you grow.
These startup-friendly law firms will have free “startup legal packs” of templates online, including things like employee agreements, confidentiality agreements, employee stock option plans, and so on. You can customize these documents for your own use, but starting with a standard template will make you look professional and save lots of time.
Of course, every startup is unique, but working with a startup-savvy law firm will help you set up an industry-standard structure that will work for you over the long term. In particular, a good lawyer can help you set up your cap table to avoid common pitfalls and prepare you for attracting investors down the road. For example, you’ll want to make sure even founders’ shares vest over time—you don’t want someone getting 25% of your company for just 2 months of work.
As you start to grow, we also recommend working with a firm like Carta to manage your stock option vesting schedules, 409a valuations, and federated cap table access.
The bottom line: Save your innovation for your product, not your corporate structure. Investors like corporate structures they can clearly recognize.
Choosing a Bank
First of all, DO NOT use your personal accounts or credit cards for any business expenses. Your accountants, and your future self, will thank you.
That said, you have two basic options when it comes to choosing a bank:
Pros: These banks know startups and understand your needs. They may give you a personal banker and good terms on a business credit card. They might also convene networking events for startups.
Cons: Their websites and apps aren’t as robust as bigger banks’ are. Their fees can be high, and their office hours are short.
- Big banks: Chase, Bank of America, Wells Fargo, etc.
Pros: Great websites and mobile apps—that means easy online bill pay, mobile check scanning, PDF statements, and other conveniences. Their fees tend to be lower, and their branches are everywhere. Integrating with common accounting systems like QuickBooks will be easy. These banks can easily scale with you as you grow.
Cons: They’re less willing to lend to unproven businesses. Until you’ve been in operation for two years, in their eyes you’ll essentially only have your personal credit to show for yourself.
Choosing a Credit Card
Again, DO NOT put any business expenses on your personal credit card. Consolidate all business expenses on a corporate credit card.
You can always get a business credit card through your bank, but it’s worth shopping around. There are a lot of credit cards out there that specialize in startups and small businesses. In fact, you may want to shop around for a bank and a credit card simultaneously, and see if you can find one provider you like for both.
Here are some good credit card options for startups:
- Amex. Their cards have plenty of tech behind them, and they can easily scale with you as you grow. Plus, you’ll earn the travel and other rewards you expect from a major brand.
- Brex. Their startup-friendly credit terms don’t require a personal guarantee or personal credit score, which means you’ll likely start out at a higher credit limit than you might with other cards. In addition to traditional points-based rewards, Brex offers discounts and credits with partners including Slack, AWS, Zoom, Dropbox, Carta, Google Ads, and more.
- FoundersCard. This card is all about the perks: elite status with airlines, complimentary upgrades, private member rates at hotels, special benefits with business partners like Shopify and Stripe, and special pricing and promotions with lifestyle brands like Bang & Olufsen, Rent the Runway, SoulCycle, and more.
- PEX. These prepaid cards allow you to set spending rules and limits, so they’re great for handing out to contractors or employees. They come with a mobile app for submitting receipts, and robust back-end systems for managing your budgets.
- Ramp. In addition to offering traditional rewards points, this card automatically identifies potential savings for your business. It can support multiple users throughout your company.
Setting up Payroll and Benefits
There are three basic options, and we recommend the third:
1. DIY. Pay with checks, do your own taxes, figure it all out on the backs of envelopes. DO NOT DO THIS. The penalties for screwing up are too high.
2. Simple payroll providers like Intuit Payroll, Gusto, or Paychex. If you’re just starting out and your needs are very simple, these services can work. But you’ll have to figure out benefits on your own.
3. Professional Employer Organizations (PEOs). M13 recommends this option. It’ll be more expensive per employee (~$100/employee/month) than a payroll-only provider, but worth it in the long run, because it sets you up to provide benefits like a bigger company, pools your insurance liability, and helps you out with compliance issues.
These solutions (like Zenefits, Insperity, ADP TotalSource, etc) provide some light HR, walk you through benefits questions like maternity leave, make it easy to offer some simple perks like commuter benefits, and also do things like send you the compliance posters you’re required to post in your workplace. We believe this solution sets you up to scale more smoothly.
Choosing Accounting Software
As a startup, you’ll be choosing between very simple options like FreshBooks and slightly more robust options like QuickBooks. We’ll walk through both options, but we recommend QuickBooks.
- FreshBooks or Xero are very simple. As such, they typically work well for one-person or very small businesses. If you don’t understand anything about accounting at all, you may find these systems less intimidating—and harder to screw up.
- QuickBooks is more robust and may have a steeper learning curve, but it’s hard to beat. It’s common enough that every professional bookkeeper or accountant knows how to use it. It’s simple enough that you can use it if you need to run your own reports, yet robust enough to scale up with you for quite some time. It also integrates easily with a host of other software you’re likely to use, including Bill.com, Shopify, Amex, Abacus, and more. You probably won’t need another system until you have a complex supply chain, multiple entities to consolidate, or a large accounting department.
Setting up Bill Pay & Accounts Payable
If you don’t know much about accounting, ‘accounts payable’ may sound technical. But it’s all about paying your bills on time and answering crucial questions like:
- How do I mail a check?
- Who should approve invoices?
- How do I track W9 forms and issue 1099s at tax time?
- What happens if a vendor says we never paid them?
- Or, worse, what happens if we accidentally pay them twice?
There are basically two ways to set up your accounts payable system. We recommend the second.
1. DIY. In this approach, you’d use bank tools to set up e-payment profiles manually for all your vendors, send out wires, and so on. On the plus side, you’d be completely in control of when payments go out and all other aspects of paying vendors. On the minus side, this method is time-consuming, expensive (those bank fees add up!) and creates more room for human error.
2. Bill.com. This is a SaaS solution that stores PDF invoices, has approval routing, can pay via ACH or check, and offers some AI-enabled data-entry features. It syncs with most accounting systems (including our recommendation, QuickBooks), and is relatively cheap compared to the wire transfer fees you’d pay with a DIY approach. We believe it’s the most complete solution for a startup.
Setting up Invoicing & Accounts Receivable
This is actually a very common pain point we see with startups: billing customers. Many new businesses send out invoices and then pat themselves on the back for a job well done. They don’t even notice whether or not the invoice has been paid.
What most people don’t know is that collecting on invoices is its own sales cycle. The sale isn’t over until the money’s in the bank. Collecting the cash you’re owed often requires several follow-ups, at regular intervals. You may even need to charm someone in accounts payable.
We recommend using software solutions to manage your invoicing. This makes the process as streamlined as possible and gives you easy visibility into which customers pay on time and which require multiple reminders or escalations before they issue a check.
We recommend going with the most-used solution in your space:
With a software solution like QuickBooks, you’ll create an invoice online, and the software will send it to the customer with an easy ‘pay now’ button. When they pay, the invoice is closed on your end and the money goes to your bank account—no charm required.
Finding Office Space
These days, before you go looking for office space, you’ve got to ask yourself: do I even want an office?
You have the option now of being an all-remote company. On the plus side, if you’re all-remote, you can hire all over the world, and you eliminate the expense of office space. On the other hand, your staff will be working in different time zones, so you’ll be doing more asynchronous communication (which can lead to misunderstandings or delays), and it’ll be harder to maintain morale during crunch times.
If you do choose to go all-remote, build that approach into your culture. One company we worked with had a rule that meetings could include no more than 3 people in the same location, so that remote folks wouldn’t be left out of the conversation.
Most companies today are somewhere in the middle, with a mix of remote and HQ workers. We recommend strategically choosing a spot on that continuum that works for your mission and the culture you’re trying to create.
If you are getting office space, the key is not to get locked into a long-term lease. Ten years from now, your company will either be 10x bigger or it won’t exist anymore. You need flexibility at every point on that journey. On the other hand, once you have even two or three employees, you do need dedicated office space with ergonomic chairs and meeting rooms—you can’t just work out of coffee shops.
Some people like the idea of getting a white box and designing the space themselves, putting up their logo, and so on. We don’t recommend this route. It’s expensive and locks you into one location and one size for too long. You want a solution that’s flexible: 6 to 12 months’ commitment at a time, furnished, and with as many amenities handled for you as possible.
Here are some flexible options to consider:
- Corporate apartments. This is an underused resource—a two- or three-bedroom apartment would give you several secluded spaces, bathrooms, and a kitchen. There are corporate apartment buildings and brokers who specialize in corporate apartments who can help you find these spaces. This is a good option to consider in your very early stages.
- WeWork and other co-working arrangements. Many cities (not just in Silicon Valley!) have incubators or other co-working spaces that not only provide desks but also organize networking events, connect you with potential investors and mentors, and plug you in to the local entrepreneurial ecosystem. Yes, there is an app for that: Croissant gives you credits to use in different co-working locations all over the world.
- Subletting space. A lot of startups, as they grow, will rent more space than they need today—because they just did a series C round and plan to hire 50 more people in the next 12 months, for example. They may sublet those extra desks to smaller companies. Going this route lets you soak up the vibe of a startup space without having to take care of amenities like snacks (or a long-term lease) yourself. Ask around in your local VC and startup community to find these options.
Setting up Expense Management
Any business needs a way to handle expenses and reimbursement. Here, the systems are simple enough that we recommend different solutions at different stages:
- When your team is just the founders: Use your corporate credit cards.
- When you’ve got fewer than 10 employees: You can use your payroll system or QuickBooks to manage expenses and reimbursement at this level.
- When you’ve got more than 10 employees: You’re getting to the point where your company has different departments and a growing staff. Each department needs the ability to set a budget and monitor spending. Use an expense management tool like Expensify, Concur, Abacus, or Tallie. These tools will allow you to gather receipts, code them to your chart of accounts, route approvals, and distribute reimbursements.
Setting up Document Management
We strongly recommend staying away from paper. This helps to avoid a single source of failure and ensures everyone is working in the same system.
In practice, that means you’re scanning all mail into PDFs and storing all documents in the cloud. We recommend Fujitsu ScanSnap for scanning, and Box, Dropbox, Google Drive, or Microsoft OneDrive for storing.
Here are two more key tips on document management:
- Organize your files by department, so permissions are bound to content, and teams can easily collaborate.
- Be disciplined about creating a cloud-based document management culture. Make sure every employee knows that they should always add email attachments to the central drive; that your company never sends paper checks, and payments always go through the accounting system; and so on.
If everything is in the cloud, it’s all dated, searchable, and trackable. Create this discipline when your company is still small, and it’ll save you a lot of time and headaches as you grow.
Tracking your KPIs
Investors care most about different KPIs at different stages. You can think of your goal as moving down an income statement, proving at each stage that your company is viable. In the early stages, you’ll be most focused on your early-stage KPIs, but it’s wise to have a handle on later-stage data points as well, so you’re always prepared to move forward.
Here are the most important data points for every stage:
- Seed stage: Number of sales & growth in customers. Basically, your earliest investors want to know if anyone is buying your product.
- Series A: Revenue growth. How fast is your revenue growing? You’ve proven that you can sell your product—now investors want to see the size of your target market and guess at your potential to scale.
- Series B: Gross margin. How profitable are your unit economics? When you’re starting out, you’re often spending more than you bring in—on marketing, ramping up capacity, and so on. But as you grow, investors also want to see that you’ll ultimately be profitable.
- Series C: Net income. How much are your operating expenses? Again, your company should be starting to mature at this stage—and that means keeping your expenses reasonable.
- Series D: EBITDA (earnings before interest, taxes, depreciation, and amortization). Now you’re close to proving that you’re ready to be a public company. Public company investors look at all these indicators, but focus most on overall profitability.
For a deep dive into KPIs and how to track them, check out our tutorial on creating a data strategy.
Understanding your Burn Rate
We’ve dealt with the numbers your investors want to see. The most important things for any founder to know are your burn rate and your runway. Basically, how much cash do you have, how fast are you spending it, and when will you run out?
You need to track these numbers all the time. You need processes to monitor them, and you need to know how changes will affect them—if you hire another person, for example, what does that do to your burn and how much does it shorten your runway?
We’ve got a tutorial on getting from your seed round to a series A that dives deeper into burn rate.
Here’s the quick-and-dirty version:
- Use QuickBooks to get a view of your actual revenue & expenses. Create a spreadsheet, or use our template, to track your projections of future revenue and expenses. Update this model with fresh numbers from QuickBooks every month, or whenever anything changes (you make a new hire, sign a big new client, etc.)
- Know how long it will take you to get more money. If you know that it takes four months to go from opening conversations with VCs to money in the bank, for example, then you need to know when you’ve got four months left on your runway—and start fundraising at month two.
Good systems now mean smoother scaling later.
The startup life is fast-paced and grueling. The last thing you want is to be frantically searching for a new accounting system after you’ve outgrown your back-of-the-envelope stage—while you’re in the middle of hiring an accounting team, beta-testing your product, and everything else on a founder’s to-do list (which is...everything).
Take the time to set up good systems now that can grow with your business. Your future self will thank you.
Your future investors will also thank you—a solid structure and sound systems for tracking money coming in and out will make you look more professional and make you a much safer bet for VCs.
Remember: save the innovation for your product. When you’re setting up your back-office systems, simple and predictable is best.