When and How to Start a Finance Plan | Kruze Consulting COO Scott Orn

of Cruze Consulting. He's gonna talk through when and how to start a finance plan. Scott, thanks so much for joining us. Before I pass it over to you, just a couple housekeeping reminders. So this is a 20-minute interactive session. Feel free to drop your questions in the chat. Scott's gonna take them along the way, so drop in any timely questions that you have. We'll also leave time for Q&A at the end if you still have questions. We encourage you to keep your cameras on if you're comfortable, keep yourself muted for the presentation, but feel free to come off mute if you do have a question, or you can always raise your hand, and that way Scott will know that you have a question for him. And final reminder— yeah, you lost my last— final reminder, these sessions will be recorded and available after, so make sure that you subscribe to SASR's YouTube and follow SASR on SlideShare. Scott, your turn to take it away. Thanks so much.

Awesome. Thank you so much. And this is my, uh, this is when I look handsome, uh, picture here. Um, so I'm going to talk about tons of systems, tons of tax compliance, and some fundraising and, you know, kind of forward-looking financial modeling stuff that hopefully is really, really helpful for your startup. I love questions, so like you can fire away. Um, just take yourself off mute because I won't be able to see the actual questions coming up. Um, so just take yourself off mute, ask question, I'll answer it. I love doing that, it's actually more fun for me. Um, with that, any questions to start off with? Everyone good?

Cool.

So a little bit about Kruze Consulting. We are an accounting firm that my wife started, uh, 9 years ago. She was a Deloitte tax CPA, then the controller of a startup that went from $5 to $20 million in revenue in 2 and a half years. So like the growth curve that all your companies want to be on. They were acquired, she started Cruise, and we were actually dating at the time, and I had done 3 years of investment banking, Hamburg Quest and JP Morgan, and then had become a partner at a venture lending fund that did about $100 million worth of deals. You've probably heard of Angie's List, Upwork, Impossible Foods, Serena Lily, FreshBooks, tons of companies. But I, like you, wanted to start a company or build something. So I joined Vanessa as a third person. Now we're about 75 people. We have about almost 400 clients. Clients raised $1 billion last year, raised $4.5 billion over time. So that's us. So all we just work with startups, venture-backed startups, like all day long. So hopefully this information is really tailored to you. Just so you know that we know what we're talking about, one of our clients, Voicia, was acquired by Cisco. One of our clients, FleetSmith, was acquired by Apple. One of our clients went public through a SPAC. Another client was acquired by Fox. These are all pretty large deals. And with that comes a lot of public— when public companies buy startups, there's a lot of due diligence requirements, not just on the financial side, but a ton of tax due diligence. And so this is really where we shine, and this is what I'm trying to teach you today. Um, this is me again. And so really, just think about the things we're going to talk about here are rock-solid financial systems, that can scale, that you're not like trying to rip out or change or do something along the way. Tax and legal compliance mistakes that you want to avoid if possible. And then we'll talk about kind of forward-looking, you know, financial plan, like financial modeling and being due diligence ready. And my basic philosophy is be due diligence ready like every day, like day one. Don't try to like tell yourself you're going to catch up on it or you're going to catch up on your financials or your tax compliance, because you never do, because life at a startup is just pretty chaotic and tough, and there's always someone asking for your time. And so you tend to procrastinate. And then when that magical call comes from a venture capitalist or from an acquirer and you're not ready, it's incredibly stressful. It's an incredible amount of work, and you, you, you end up sending negative signals to either the buyer or the investor. Because they can kind of see you're not ready or didn't do the work. Whereas when you prepare for this stuff, you look like a well-oiled machine to them, which boosts their confidence, which can actually boost the valuation they're willing to pay. There's going to be no surprises on the other side. So it's just better to do this stuff, uh, up front. Um, let's go next slide. So I'm going to talk about systems here, and we'll start with, uh, one of the most important kind of system choices you're going to make: payroll and benefits. Basically like your HR system. And so I always, I say this like the big four: TriNet, Justworks, Rippling, and Gusto. Sequoia is another good firm that we recommend quite a bit. And really the decision here breaks down into, you know, do you want to do just payroll and benefits, or do you want to have a PEO system, a professional employer organization? And the difference is if you're using like Gusto or Rippling's just regular system the employees are working for your company, you're handling payroll, you're handling helping them choose benefits and making benefit selections. If you're working with TriNet, Justworks, or Rippling has a new PEO service, there's essentially like the, the employees are working for that entity and then the side relationship with you. And the benefit, the selling point for a PEO, is that they can pull all of these kind of disparate employee bases together to get to really big patient populations and, and get better benefit prices for you. And so it's really kind of a buying power type of thing. Now that said, I think that, that there's definitely a place for that, but also PEOs charge higher fees, so you're kind of trading off some of the benefit savings with paying higher fees. The other things that PEOs do well is they do handle some of the state and municipal tax compliance for you, which can actually be pretty helpful, especially now. I don't know about you, but at Kruze we've been hiring remotely for 3 years now, so we're in a lot of different states. And with— when COVID hit, a lot of employee bases kind of scattered from San Francisco or New York, some of the big expensive markets, and people went all over. And so all of a sudden, a lot of startups found themselves having tax nexus, employees, assets in other states. And so what we've seen recently is a bigger push to PEOs. If we— if I would have given this presentation pre-COVID, I would have talked about PEOs a little bit but not that much. We're just seeing PEOs become more popular. That said, Rippling and Gusto have, um, you know, Rippling does have their PEO offering, but basically their systems, payroll benefits um, are very, very strong. I would say Kruze has— out of our 400 clients, I think we're at like 175 with Gusto and probably like 80 with Rippling, something like that, maybe 100 with Rippling. So those are the two dominant players that we work with. TriNet's probably 40 clients. Justworks is probably 25 clients. Um, so we tend to gravitate towards Rippling and Gusto for a couple reasons, really strong technology. The Autopilot feature that Gusto introduced 9 years ago or 8 years ago was a game changer. Before that, people like my wife, accountants, would have to manually run payroll and it would take like an hour per client. And so startups were paying for a lot of administrative time that they didn't really need once Gusto introduced Autopilot. And so all the other payroll providers have now copied Autopilot. There's also just a lot of nice things in these systems for onboarding, offer letters, getting background checks. So the world— the payroll benefit systems have just come a really long way over the last 5 years, and, and hopefully you're working with one of these providers. I would— if I'd love to open it up to any questions. Anyone have any questions or any experiences they want to share with any of the payroll or benefit systems?

Scott, this is Poya. Hey man, as always. But I was just gonna say, all four are great for different reasons, so way to make good recommendations.

Yeah, you can't really go wrong. Um, you know, again, if you're gonna have employees in like 20 different states, then a PEO makes a lot of sense. If you're gonna be pretty simple, then, you know, just straight payroll and benefits. Rippling does have some pretty— has really excellent reporting, which I really like. And they also have basically kind of like a single sign-on/OCTA type of functionality where you can— your employees can be provisioned applications that your company uses, which is really nice, which other comp— which other players haven't matched. So I— a lot of times people ask me what we use because, you know, if you're, if you're buying a mattress from someone, you want to know what mattress the mattress salesman sleeps on, right? And so we use Rippling. We've used Gusto in the past. It's phenomenal. Um, but again, we've, we've had good experience with all these folks. So I'll move on. If there's any, any other questions on this, there's usually a lot of questions on payroll and benefits. So I have one real quick questions. Yeah, Matt, about—

so when you have different regions, let's say a lot of these platforms are region-specific or country-specific, any input on possibly one that isn't that can help tie them together, or a way to go about making that less painful?

Yeah, great question. So these are all US-centric systems. Um, when you're— when you have employees in other countries, there's a couple different approaches you can do. We're gonna— this is a little bit nitty-gritty, but it's a really great question, Matt. You can do two things. You can set up a subsidiary in that other country, and your subsidiary will have a bank account and will hire employees directly in those countries. Or you can use what is called a global PEO, basically like a TriNet Justworks but in other countries. There's businesses out there that have set up this global infrastructure of, you know, entities in every country you can think of. And so when you go to them and say, I need to hire a developer in Ukraine and I need to hire a marketing person in the Philippines, they can basically accommodate you. You do pay a pretty big premium for that, but you're not having to set up subsidiaries across the world, which I do not recommend. It really increases your tax risk and a lot of tax complexity. So that's like, I would say the starter move is to use a global PEO. And then once you, maybe you develop like a team in Ukraine of 10 people or 5 people, then maybe it's time to set up that subsidiary. Now, Matt, you didn't talk, you talked about employees, but there's a lot of like international contractors that we're seeing our clients base use quite a bit too. And so there's other companies, there's a few that have just been, funded. Papaya Deal, um, there's a company called Pilots doing it, um, who are all trying to make this a little bit easier to pay your contractors. And maybe kind of like, it kind of looks, it's like a nice little overlay, um, so that you can pay your contractors and international employees in one fell swoop. So there is a lot of innovation here. Um, I actually talked to Parker Conrad like 3 weeks ago at Rippling, asking him if they were integrating with any of these international, you know, payment networks. And he said they, they're trying, they're working on it, but a lot of those systems don't have a ton of data or a ton of hooks yet. And so it's still a very nascent world. But if you just need to hire like 1 or 2 people and they need to be employees and, and don't fit the criteria of contractors, then use a global PEO. If you, um, if you are going to hire a bunch of people in one country, then I would set up a subsidiary. Does that answer your question, Matt? Good?

Yeah.

Awesome. Any other questions? This— there's— this is a lot of complexity here.

Cool.

Okay. This one's a pretty easy one. Um, so just, you need an accounting system. You need to start, like, you know, tracking your expenses, tracking your investment, that kind of stuff. We recommend QuickBooks Online. Uh, there's a challenger to QuickBooks, which is Xero. And for those who don't know, Xero actually was, like, the first cloud accounting tool. And QuickBooks had been a desktop application, like old school, and Xero really scared QuickBooks, and QuickBooks, uh, hightailed it and built QuickBooks Online, which has become kind of the dominant platform in the United States. Xero is very strong in Europe and in Asia. It actually originated out of New Zealand. Um, great, great company. Stock's done very well. I'm a proud shareholder of Xero. But we, we recommend QuickBooks Online. Part of that is we at Kruze have built a lot of proprietary software that plugs into QuickBooks, so it automates a lot of our work. So we're pretty, we're pretty tied into QuickBooks. But if you're using Xero, it's working for you, that's, that's totally fine. Just try to use something.

These—

the software is actually pretty cheap and easy, and, um, and it's good to just kind of get the habit of using an accounting software. We often get questions about startup credit cards. The two kind of things you do as soon as you know you're going to get money is you typically set up a bank account, which I'll talk about next, and you typically get a credit card to pay for all the web services and all the expenses of the business. And so historically, there wasn't very much innovation in the credit card market, especially for startups. If you were a founder 5 years ago, you would, you would basically personally guarantee a credit card with like American Express or Chase. Or you would work with probably Silicon Valley Bank and they would segregate a portion of your cash. They might take like $30,000 or $40,000 out of your normal bank account, put it into a different bank account that you can't touch, and that backs your credit card. And so it was kind of like not a good situation for either, you know, either use case. And then along came Brex and they had a pretty innovative idea. They basically underwrite your creditworthiness based on the cash in your bank account and what you're spending. And they don't require a personal guarantee. And this was a game changer. Like I've had companies on the verge of like a day away from going bankrupt. And I'll casually ask the founder and say like, "Hey, did you pay your credit cards off? Are they personally guaranteed?" And the founder has, who has a million things going on at that moment and is probably pretty sad and depressed, will remember they didn't pay their credit card. And if they would have waited one day later, they might've owed $30,000 or $40,000 personally for this company's obligation that they personally guaranteed. So this is a big deal. So we put a lot of our companies on Brex. When Brex came out and started taking market share, Silicon Valley Bank and American Express did something very smart. They both developed— SVB has an Innovator's Card. I think American Express calls it the Startup Card. But they have— they basically mirrored Brex product offering. And they don't have personal guarantees. They have startup-centric benefits, you know, rewards. And probably most importantly for us as an accounting firm, Brex has a very good integration with QuickBooks, which makes our process a lot easier. And so SVB and American Express were really pressured to improve their integrations, which they've done. So everything, it's classic capitalism and competition. Everything has gotten a lot better in this market since Brex came on board. Any questions on credit cards? No?

Good.

Cool. Again, don't be shy. I'm happy to take questions on any subject. The next thing, as you sign that term sheet and you know you're about to get $1 million or $100,000 or $10 million, you need a bank to put that deposit into. And so there's kind of the big four, the way we look at it. Silicon Valley Bank is the grandfather of the whole Valley. They've been around for almost 40 years. In the Kruze client base, SVB is trending at about 65, 70% market share. So they are the majority of our clients are using SVB. Next up is First Republic. First Republic has also been around for a long time. They're about 15, 20% of our client base. And really those are the two kind of legacy banks. SVB is known for having a very broad product suite, so they can do deposits, wires, loans, which are very big. They also do a lot of LP banking, like venture capital fund banking, which helps their business. First Republic has a similar product roadmap or product suite, but they don't really do a lot of lending. So that's a way that SVB really differentiates themselves. First Republic, I would say, is very customer service-centric. SVB is too, But I would say First Republic is like the classic white glove, they'll get back to you in an hour kind of thing. And so we bank with First Republic, although again, we send tons of clients to SVB. Mercury and Brex Cash have both come on the scene probably in like the last 18 months or so. And we're very close to both companies. We talk to them all the time. We do like press and PR and stuff with them. Mercury and Brex are both having success at the low end of the market, as you would expect for any kind of new entrant. They're getting a lot of like super early-stage clients. And I watch those clients, they grow. It's like the story of Silicon Valley. You get them, you get companies early and they grow. And so Mercury and Brex are starting to pick up a lot of traction. If we would have looked at this slide 5 years ago, again, it would have been just SVB and just First Republic and been super boring. But there's a lot of innovation happening in fintech and it's happening here in the startup banking. Another company that's actually just got funded, which is pretty interesting, is RHO. R-H-O. And RHO has basically taken the approach, they're working with startups, they're like Mercury, they're like an app-based bank, but they're trying to automate a lot of the bill pay stuff. So when you work with like SVB or First Republic, you're typically using bill.com as well to do your payables, pay vendors. Contractors, that kind of stuff. Ro had the epiphany that they could probably integrate that service into a bank. And so for those who want like a simplified view and be able to pay their vendors through their bank, Ro is actually really good. So check out Ro. Any questions on banking? No?

Cool.

One question actually. Yeah, fire away. For debt financing, if you go back, not necessarily banks, but like there's a lot of alternative methods of companies like cap chase, PIPE, like where they give you cash up front so you don't get diluted, right, as an investor. Are you seeing an upward trend just within your network and portfolio companies for that type of financing? Like, do you know—

we—

so I, I was a partner at a venture lending firm, so I know debt very, very well. Um, we haven't really seen much. There, there's, there's revenue-based, um, lending like Ladder Capital And I have heard of Pipe, and they're doing kind of— they're letting you finance specific invoices, like customer invoices. I think it's super smart. What we typically see is though, revenue financing and something like Pipe appeal to companies that haven't raised a ton of capital yet because they're really trying to manage their working capital very tightly and very specifically. Where we see kind of the bigger deals and more venture debt happening is with companies that have raised a lot of VC money, lenders like SVB, Bridge Bank, Comerica, and then the funds like WTI and Trowel Point are underwriting those companies in a different way. They're looking at the enterprise value of the company and where they're trying to go and making a bet via a loan. And they're also looking at the equity backers, like the VCs, and saying like, you know what, Sequoia, Accel, Benchmark, Andreessen Horowitz, all the top firms, they tend to write another check even if things aren't going great. So I can feel a little bit safer about funding this company. And they take a much broader collateral pool. So they take a pledge typically on all the assets of the company. The banks do do some working, like accounts receivable financing, and it's very, very inexpensive. So the companies are using, you know, Lighter Capital, Pipe, others, They're typically paying a much higher interest rate, but it's worth it to them. It's a great financing vehicle for them because they don't have those equity backers to kind of fall back on. And so it's the cost of capital is worth it for them. Does that answer your question, Puya?

Yeah, yeah, 100%.

It's a cool time in finance, like online, online lending, online finance. There's a lot happening here. So there'll be a lot— will probably be, you know, even more interesting things happening over the next year. So this is, we have got about 9 minutes left and I'll go through this quickly, but this is something that everyone always wants to talk about, tax compliance for my startup. How do I not mess up my tax compliance basically? So if, I'll go through this, but you can also just Google Kruze or Kruze Consulting and tax deadline for whatever city you live in. So San Francisco, Austin, New York, all the cities we cover. The real quick flow through on this is your payroll provider will do W-2s to your employees, like right now. That's happening right now in January. You are responsible for doing 1099s for all your contractors. So you basically give them a form that tells them how much you paid them so they can claim on their taxes. I think we're filing somewhere between 10,000 and 15,000 1099s over this week. Like we've started doing it, it's crazy. Wouldn't recommend it to anybody, but that's, that's part of our job. So we handle this kind of stuff for you. And then if you're working in a city like San Francisco or New York or some— Palo Alto's got a little bit— there's typically payroll taxes and sales taxes. Now most cities across the country don't have this. San Francisco and New York are highly tax kind of centric municipalities. There's a reason why a lot of people are moving out of San Francisco and New York. This is one of those reasons. But you will have some tax compliance obligations if you're in these cities. And then do not forget to do your Delaware franchise tax. That is super important. That protects— that keeps your Delaware company, your Delaware C-corp that you incorporated, current and keeps your liability shield. The whole reason for having a corporation is your liability shield. Keeps that intact. We've had companies who forget to do this. They get a VC term sheet. The VCs run a background— a compliance check on them and their corporation has lapsed 2 years ago. And it's super embarrassing. Plus you take a lot of risks. You do not want to do that. You're also going to have to file your corporate annual income tax, both federally and state. And a lot of companies, a lot of startups say, "Hey, I'm losing money. Do I really need to file a tax return?" The answer is yes. The IRS still wants to see your financial results and make sure and have the ability to audit you. You won't have to pay taxes. You just have to pay— you just have to file a tax return. And then of course, if you're in a place like California, New York, Massachusetts, a lot of states, they have like an annual tax or a franchise tax that you have to pay. Uh, your tax— your CPA or tax provider should handle that for you. And then finally, R&D tax credits are a pretty big deal. I'll go to the next slide. We at Kruze, we actually were one of the pioneers of R&D tax credits. We did about $8.5 million of R&D tax credits last year, and we'll do something like $20-25 million this year. We've grown quite a bit. But the idea is if you're doing real R&D, if you're a startup, you've been funded, you're probably building something very novel and it's true R&D. You can actually get a portion of the money you spend on employees based in the United States doing R&D, contractors in the United States who are doing R&D, and in some cases things like web hosting, or, you know, if you're a diagnostic company, like materials, stuff like that. and you can get credit for it and get a rebate on your Social Security taxes. Um, the rebate can go up to $250,000. It's very powerful. The average Kruze client last year saved $64,000 on, uh, the R&D tax credit rebate. So that's $64,000 that they were able to use to hire someone else or spend money on marketing. So it's, it's pretty powerful. The R&D tax credit is a component of your tax return. So like we do the R&D tax credit, we insert that in the tax return, we file the tax return with the federal government and the states, and then we submit a form to your payroll provider like Gusto or Rippling or TriNet, and they will actually process that rebate for you. So it can be really, really powerful. Again, you should be doing this if you're doing R&D. Any questions on this? All right. And we got 2 more minutes. Financial modeling, I really recommend you have, even if you're super early, just a simple financial model. We actually have one on the Kruze site for free. Just type in Kruze financial model. And it's, the one on our site is very simple. It's just a basic income statement with some cash adjustments at the bottom. But even just having that, having some guideposts on where you're going, and I would recommend you do like a 3-year model, even if it's very, very simple. Even if you don't have revenue, just know what you're gonna spend money on. Because when you hit a bump or even when things are going great and you wanna accelerate, it's really helpful to have these numbers handy. Also, when a venture capitalist or M&A appears, they're gonna wanna look at this stuff. And it's not so important that like, no one expects you to be like a Goldman Sachs financial analyst living in Excel all day. Update it once every 3 months, once every 6 months, But have something that you can really use as a map for your business. Some basics on financial modeling. Do, again, do 3 years. The simplified income statement is fine for most early-stage startups. If you have a capital-intensive company, then I would do a 3-statement model: income statement, balance sheet, cash flow statement. That's because you're making investments in machines or CapEx or something big. It's not gonna show up on your income statement, but it's gonna show up on your balance sheet and cash flow statement. And then your KPIs should be your drivers, you know, number of users, how many paying customers, you know, all that stuff. That's what drives your model. Again, we have a free one. You can just check it out. And then finally, we have like one minute here. Um, VC due diligence. Kruze has a due diligence checklist on our website. Just type in Kruze due diligence checklist. But the big things you want to have just always kind of sitting around in a box or Dropbox folder is your last 3 years of financial statements, you know, projections like we just talked about. If you have like a top 10, you know, of your clients, of the revenue-generating clients. Ideally, you would have like a customer LTV and churn rate, stuff like that, but that's sometimes a little bit more advanced than all companies can do, but that's definitely beneficial. And then you're gonna wanna have all your tax returns, any correspondence with tax authorities, If you've issued stock options, you're going to want to have a 409A. And then again, org charts, salary schedules for employees, and projected hiring plan is actually pretty important, like knowing where— how many people you're going to hire and what that entails. Because if someone buys you, they're going to want to know, like, what they're signing up for in the future.

And that's about it.

Any questions on diligence? I went through the last 5 minutes very fast, so if you have a question, please ask it.

Now, based on your financial models, is— do you have a one-size-fits-all model? Like, for instance, my company that I'm starting up now, we're actually— it's gonna be based on doing business-to-business consulting. So what financial model would you suggest for that?

Yeah, great question. So, so they are not one-size-fits-all. For very early-stage companies, again, you can kind of use that free model and that'll get you going. But typically a company will usually hire someone or the founders will build a financial model very specific to their company. There's a lot of free resources out on Google. So before you spend a bunch of money on it,