Blog

Today, we're talking financial models and projections; specifically, the perspectives you need to be  considering to build something accurate for operations and compelling for fundraising.

Yielding 10x growth or more, known as “hockey-stick growth,” remains the goal for many investors. But only one percent of startups become unicorns; in fact, most VC-backed companies don’t reach their expected rate of return. “That means 95% of founders—or more—are gonna have a bad time,” explains Rand Fishkin, the author of Lost and Founder, and co-founder of Moz and more recently of SparkToro. The gulf between expectations and how things play out can be substantial. However, that doesn’t have to fuel fights among stakeholders who are—at the end of the day—all on the same team.

Investors prefer investing in Delaware C Corps which don’t allow founders to take personal tax losses for early expenses. Many founders are tempted to make an S-Corp election which allows a pass-through tax treatment similar to an LLC. While that could be a small short term gain in the early days, it can jeopardize a much larger tax free gain in the future ($10M+) . Most typical startups should avoid tinkering with their tax treatment; if it really seems important it is best to tap in a professional.

Some very small businesses—particularly those that offer the professional or personal services of a single individual—can be launched and grown with few or no resources other than human time and talent. But most businesses require some money before they can be started—to pay for software, buy tools or equipment, lease office space, or pay for the time worked by employees or outside contractors. Since most entrepreneurs are not independently wealthy, and since, as we saw in Chapter 13, banks won’t lend money to startups, it is often necessary to raise funds by exchanging an ownership interest in your business (known as equity) for money. The people on the other side of the table who are willing to make that exchange are investors, and their interests, motivations, and capabilities cover a very wide range, both in the amount of money they can provide and the stage your company needs to be at when they invest.

It’s Delaware Franchise Tax Season! If you’re incorporated in Delaware and you’re staring at a terrifying notice with the number $85,165.00 on it, don’t panic. It’s very likely that your startup only owes $400. Read on for details on how to refigure your bill, easily file your report, and reduce your stress in future years.