Accounting & Financial Modeling for Startups with Frank Mastronuzzi of Punch Financial

Alright, and we're live for this edition of this alumni master session. Hello everyone, my name is Mike Supravici. For those of you that don't know me, I run the Graduate Success Group here at the Founder Institute, and our role is to help your business grow in any way that we can. And today is a very, very important topic. It's actually one of the most popular topics, believe it or not. On our blog, the most amount of, you know, because it makes sense. I guess a lot of you want to learn how to make money. And I have someone that I've known for a while, Frank here. We go back a long, long time, and he is probably one of the top experts on revenue models, on accounting practices that I know. And he's been— he's also one of the top-rated mentors. So we are in here for a treat. Um, you know, Frank, uh, can you quickly introduce yourself and then we can go into the presentation?

Sure, sure, of course. Thanks, Mike. Um, as Mike mentioned, my name is Frank Mascheruzzi. I am the managing partner and founding partner of Punch Financial. Um, we are a boutique accounting and finance CFO services for startups and venture funds. Um, I've been doing, um, Outsource CFO Accounting for the last 6 years. Mike mentioned in email prior to that, that I was an alum from Founders Institute and in the first class in Los Angeles. I also still mentor and do sessions. And then talking to Mike recently, he, as he just mentioned, the accounting topic is always a hot topic that people have questions on. So we thought it'd be good to give session today.

Awesome, awesome. So let's go ahead and jump right there, Mike. Yeah, so let's go ahead and jump into the presentation now.

Looks like Mike is frozen, so I'm gonna— I'm gonna enable chat just in case everyone can hear me. If you guys have any questions or comments, or feel free to ask me. We can hear you, good. I'll keep going, and if you guys have any questions or comments, feel free to chime in or send a message, and I'm happy to stop as I go. Again, this is really meant to be interactive. I did this because these are top questions I get asked all the time, and if I can help you guys avoid making mistakes, that's the goal of this session, and to make it a little bit fun. So I will share my screen and start the session.

Yep, we just had it, Frank. Looks great.

Okay. Hopefully you guys all can see that. I'm not 100% sure given they're having— we're having a little bit of difficulty, but I keep seeing it pop up and down, so I will just keep going through. And if you guys have any questions, like I said, just feel free to give it a shout in the chat. So here's what I've decided is the top 10 financial operation tips for founders. The number one comment I always make to founders is your cash won't manage itself. I see this one too many times, a lot of times in that founders, they put their money in the bank account, they manage to the checking account, and then they know as long as there's cash in the bank and they have enough to pay, you know, payroll expenses and so forth, it will be fine. That's not a good approach for a lot of reasons. One, we see that a lot of people just put money into a checking account and there needs to be good cash management. So what we highly recommend is 3 accounts, one being a checking account, one being a savings account, and one being a money management account depending on how much funds you raise. The reason why we recommend the checking account be an operating account and you only put enough in there, sweep it from your bank account and/or your savings account, because you wanna make sure there's just enough cash in that operating account so that if anything happens, you know, kiting, any type of issues that happen with that checking account, you're protecting the rest of your cash. Second part of that is also that your cash is working and earning interest. We see a lot of times, 9 times out of 10, founders don't put the rest of their cash to operate, to work for them. They leave it there and because they want to keep it liquid, but there's ways to keep it liquid. You can, you know, SVB has a money market account, but the return is on the fairly low side. We highly recommend Fidelity's money management account. It's highly liquid. It's FDIC insured up to $1.5 million. And you can earn a higher rate of return on your cash. And it only takes a day or two to sweep it into your bank account. I'm just gonna do a check-in to make sure you guys— the deck is frozen. Okay. Yep, I'm going back to the deck. I'm only on the first slide, so I will keep moving onto the second. So I was talking about money management. Definitely open up an operating account, a savings account, and a money management account. Like I said, I tend to use a checking account and a savings account so that you can stage whatever you need in the short term. And then any excess capital, if you raise money, you can put it into some sort of treasury function, which would be a money market account. You could even do it if you can afford to lock it up for a little longer. You can do CDs. There's a lot of other options that I can discuss later on. Um, for that said, the number one tip that I talk about is finding the bank, new banking relationship. I talk about this all the time and I see this. Um, you need to build a banking relationship along the same ways you're building your venture capital relationships. Um, because when you need debt financing, um, a line of credit, anything outside of the norm of just your banking operations, you need to have a relationship with your bankers. Most people only know the commercial banks like Wells Fargo, Bank of America, Chase. There's a whole nother tier of banks that you should definitely get involved with and start building a relationship with someone at those banks, whether it be at Silicon Valley Bank. Bridge Bank does a great job. There's Square One Bank. There's plenty of other banks that you should start building relationships so that when you need some sort of vehicle outside of the standard checking and savings, you'll have that. I always say safeguard your cash in another bank. So that's why I mentioned Fidelity and other banks' accounts so that you don't have it all sitting in one account. Earning good interest can provide a little more runway. Like I said, 9 times out of 10, most people don't don't put their money to work. As far as bank relationships, we get this asked all the time. What we see for early-stage companies, the banks that tend to do the best technology are Chase Bank is our preference that we use and have dedicated resources. There's a couple others out there, Silicon Valley Bank, but is not so tech-friendly as far as operations go from an accounting perspective. And so I also recommend instead of getting physical checks, use a service like Bill.com to do your accounts payable so that you don't have any physical checks. So someone can't write a check and steal money. What you can do is just use your Bill.com service to write— they'll write a physical check, they'll print it with your banking and routing number, and they'll send it out. To whomever you need them to do it. I'm just doing a quick check back in. Um, okay, you guys are fine. You can see this slide. I'm gonna keep moving, um, flying blind, so I apologize. Um, okay, the next tip question we get, the second most frequent question we get, is what banking or credit card relationship should we get? Again, that ties back to the first. If you have a good banking relationship, then getting credit won't be a problem. The number one problem that every founder has is, do you want to co-sign for that credit card or not? If you don't want to co-sign, there's a couple of options that you have. One is a lot of banks will let you put money into a CD as security for that credit card. So if you want a credit card for $50,000 or $25,000, they'll ask you to put $50,000 in a secure CD as collateral for that credit card. There are other options. A lot of you probably have heard of Brex. Brex does not require a cosignature and it's, your credit limit is based on, based on how much cash is in the bank. So they will require, login and have access to your bank balances at all times. As your bank balance drops, so does your credit limit. Um, it, it's, um, there's a lot of pluses and minuses that because you're really just, you're really just temporarily using your own cash, um, as a prepaid. There's a lot of prepaid cards out there like Emburse or TeamPay. Um, both are very great products if you have the cash and really just want to an expense management system, then I highly recommend not using a credit card because the biggest problem we have in accounting, and every company does this at first, is they get one credit card, they share the number across everyone at the company, and then we have no idea who made that charge, what it was for, and we're chasing down credit card items all the time. I highly recommend that you don't do that. There's a couple of options depending again on your, on your entity. One is American Express does an amazing job as far as managing subcards. The controls are awesome. Their interface is awesome. But obviously getting an Amex is a lot more difficult, especially if you don't want to co-sign. If you do don't wanna co-sign and wanna use one of these other services like I mentioned, I'm a big fan of TeamPay. It's a prepaid debit card, one-time use virtual card. They also have physical cards, but it only authorizes the card just once it's been approved for a specific transaction. So you're not technically, there's no credit limit on the card. It's only just raising the credit limit immediately before you need to make that charge. It's a great way of decentralizing and managing expense management. And okay, great. I'm getting— I can tell that you get— okay, good. I will keep going until I hear differently. Um, and so these are the— those are solutions that I always recommend on the credit card. Don't fall into the trap of getting one card and letting everyone use that one card. It becomes a problem. Make people accountable and set limits so that you're reducing your risk. So I said get sub-accounts for team members and make them responsible. It's, it's pretty critical, um, because otherwise you'll spend a lot of time chasing down transactions and you don't know. Um, I highly recommend TeamPay just because it is, um, a decentralized expense management. It's based on Slack, so you're not changing anyone's behavior. Everyone just goes into the TeamPay channel anytime they want to spend any money. Um, it's all configured. And so I want to go buy a trip to whatever conference, I want to go buy a computer, um, I ask in TeamPay, can I make this purchase? It is directed towards my manager. They approve it. And then whatever type of transaction, it either will issue a virtual card or allow each user to have a physical card, and it will up that limit for that specific card. So again, credit cards can become a mess. I say get those involved and managed early so that you don't have the problem of chasing and spending a lot of time on expense statements like expense of Travel and expenses are the biggest time suck operationally of any company. So if you can be proactive in managing the process now, it'll save you a lot of time as you begin to grow and scale. And it's a really good operational move to get the systems integrated early so that you're not chasing these down later. Expense statements are always a pain in the ass. So I highly recommend a Brex or a TeamPay or Imburs, which is not truly a credit limit. It's a prepaid debit card, but it still helps you manage expenses closely. Okay. Number 3, all the time, what accounting software should we use? And now I'll even throw in, you know, the pilots and the benches and all the other AI buzzword accounting systems out there. At the end of the day, here's— this is my personal opinion. I've been doing accounting for 20-plus years. Um, AI might get— and, and, and AI and rules may get you 80% of the way, but your business is unique to you. It's like a fingerprint. And so the other 20% will always require manual intervention. Um, and so what I say on building out any infrastructure early on is build, pick, select systems that will allow you to scale big long-term and not have to switch midstream, which will cause pain and problems for you. So, you know, the big question we get typically is Xero versus QuickBooks. You know, QuickBooks, you know, the pluses and minuses. Xero is an international-based software out of Australia. It's built to have currency conversion and data conversion and really meant for businesses that are not US-based. They're trying to make a roadway into the US market, but QuickBooks, obviously, and Intuit have the lion's share of the market. And the reason for that is because they're also able to write APIs directly into and have a big lead on Xero on other systems that integrate directly with QuickBooks like Gusto, TSheets for timesheets. You know, there's a lot of other softwares out there. So I always say though, you know, as you're going to bring your accounting in-house, how are you going to find people that are trained on those systems? In Xero, you're not going to find as many people out there that are familiar with Xero as they are with QuickBooks. But, you know, you really need to look at the larger picture of where you want to go. If you're going to have currency conversion, if you're going to have different locations, you know, do you step into— I get this asked a lot of times— do we start right away with a NetSuite or an Intact? Again, depending on where you think you're going to be going and how fast, I think QuickBooks or Xero, um, preferably QuickBooks is good enough to get you off the ground for the first 2 to 3 years until it's a pain point, and then migrating to your next system would be the ideal situation. Um, again, at that point you have a clearer picture on how fast you're going, where you're growing internationally, U.S., um, and so you can then decide to take the next step. The next step on Intact or NetSuite is very expensive. So therefore, getting started early, some people want to jump early on to the, you know, the SaaS version of light of NetSuite. It's still very expensive and doesn't have the functionality that, that you're going to need. So why pay for it? There's easy migration from QuickBooks or Xero to NetSuite and Intact. The pilots versus the benches and the local or local firm accounting is, is supposed to be a science, but we— I would say it's more of an art because not all accountants are built the same. The pilots and the benches are really trying to get to the mechanics of, of AI and the recurring transactions. Great. That's easy to do. You can set up rules in QuickBooks already. You don't need the QuickBooks or the benches of the pilots. Um, the pluses and minuses is pilots still figuring it all out, but it's early, early stage. Um, Bench is a proprietary software, so the problem with Bench is that your data is locked up there. You can't, you can't migrate into a QuickBooks or a Xero later. It's a proprietary system, so you have to pull the reports and that's about it. Um, I'm just going to do a quick Check to see, okay, I'm gonna keep going 'cause I haven't seen any other notes. You're not gonna be able to get your data out. So you have basically have to do a clean cut between bench and pilot. Pilot's making progress. They allow you to use your own accounting software and then they're layering their AI on top of it. It's still TBD. A lot of it's still being manually done. Um, just like bench, it's being manually done. There's no true AI that's fully functioning in the, in the grand sense of the term AI. Um, so I always say hire accounting staff with software familiarity. So, you know, make sure they're very, very versed in what you're doing. And a lot of local firms all say they work with startups, um, regional accounting, traditional accounting firms. Yeah, they can classify your expenses, but they really don't understand the next 2 or 3 steps of what challenges are unique to startups like the R&D tax credit. If you're in California in the US, the fundraising and what a SAFE is and all the specifics that are unique, they don't know how to handle the accounting for that. And so therefore it just sits there in kind of a limbo status. So I would really, really press to make sure that they are working with startups they have startup clients that you can speak to and get, get a better understanding of how they operate with startups, because not all accounting and bookkeeping firms are the same. Phase 2 is an ERP growth, you know, where I mentioned ERP growth, international growth, you know, do you need currency conversion? Are you going to be taking transactions in other countries? You know, ideally I see that, you know, QuickBooks tends to be the, the, the interim step between an Intact or a NetSuite. These are my preferences that I've seen that are easy to work with, but that doesn't necessarily always fit for every company. But, but that's kind of what I would say as far as an accounting software and finding someone to do it. I've also— I'll take this time to kind of also say that getting your accounting done on a regular basis is important because I've seen this way, way too often. People postpone it. They think they're going to get to it and then it's one month becomes two months and two months become three months and then they're ready to raise money and they're rushing to get the accounting done. There's something really simple that investors are and VCs are looking at and that's called your audit trail in your accounting software. It'll show exactly when the accounting was done. They'll be able to see that you're not managing your accounting on a regular basis, and it is of concern because, hey, I'm giving you more of my money and you're not managing the money I'm giving you well now. And so I've seen that cause some problems. So I would say if you're too busy, you know, managing the operations of the business, which you should be, it might My advice is always focus on product and sales and everything else. Find the best partner you can. Hire someone like Punch that will get you on a regular basis, close the books, do it quicker because that's all we do. And then give you kind of, you know, the financial statements that you can then send to your investors on a regular basis with commentary. And I'll mention that a little later on. I'm just gonna, like, take a quick breather, a sense of the room. Okay, it seems like everything's good. We're moving. I'll continue moving forward on the next slide. It doesn't seem like there's any questions. Another— again, another question I get all the time: contractor versus employees. And I'm telling you what's supposed to happen. Not— it doesn't happen. As a founder myself, I get you have to make decisions that take risk. But this is one, especially if you're California-based, and more and more states are getting aggressive towards this because of the shift from, you know, to the gig economy and contractors. If you label someone a contractor versus an employee, make sure you're following all the steps you possibly can to protect yourself, because I've seen this go south on a handful of clients and it is very, very problematic. So I will, I will give you guys those scary warnings so that you understand that, because it does impact you. The way to differentiate between a contractor and employee, I typically I like to say use the plumber test. So that is if you hire a plumber because your sink is clogged, what do you do? You call the plumber, you say, my sink is clogged, someone come fix it. The guy says, I'll be there, you know, tomorrow between 2 and 4. Shows up with all of his own equipment, fixes the sink, right? And then gives you a bill and walks away. That's truly the sign of a contractor. So In terms of your contractors, you shouldn't be giving them equipment, i.e., computers. You shouldn't be giving them work emails, so they shouldn't have an email address. If not, I always recommend using Contractor 1 or Contractor 2 so that anyone working with the person knows that that person is reinforced as a contractor and not an employee. You're not supposed to tell them what time to show up and what time to leave. So there's a lot of things that are precedent in the law and the case law, and the California EDD has been hyper-aggressive on this. So the, the thing that I'll say is be very careful in your terminology and in your approach. So they're not employees, so they don't have timesheets, they have invoices, right? And they should be sending you an invoice regular. And the other problem is if the invoice is the exact same amount on the exact same frequency, so every 2 weeks it's $3,000, then that shows that it really is possibly an employee and not a contractor. So I try to say, um, change up the invoices, change up the payment amounts, and change up the time frequencies so that it doesn't look and have a pattern of a payroll. Now here's where the scary— this is scary, but I always do say it because I've seen this happen to a couple people. So if the California or any Department of Labor determines that your employee, your contractor truly was an employee, then here's what happens. You have to— you're, you're the company's responsible for the withholdings that should have been withheld from that person's paycheck. And the employer matching taxes. Now, of course, you're not— it's your obligation to go chase down that contractor to get the money back. And good luck with that. It's going to be— your chances are slim to none. And the company is responsible. Now, I've seen this be in a lot— in large amounts of tax liability for the company. And so companies are like, we can't afford that. We're going to go bankrupt. And the problem with that is bankruptcy does not— this employment tax liability does not get extinguished with bankruptcy. So even if the company files bankruptcy, the tax liability for that contractor that should have been an employee is your liability personally as founders of the company. And so you have to extinguish that debt. So So be very, very careful. Typically what triggers this is someone gets let go as a contractor, that contractor will file for unemployment, and that's what triggers the audit and all the problems that come with it. So I always give advice to be very wary. So if it truly is, you know, if you're treating them as a contractor and there may be issues, I would make sure that you're very clear about the start and end date of their contract so they're not surprised and run out of money and so that you can manage their expectations and not surprise them, which will cause them to file an unemployment claim. Um, and also, I see this all the time, be very careful in correcting their terminology also. So if they email you or text you about, you know, payroll or timesheet or, um, as an employee, you got to be very clear and reinforce that they're not an employee. They're that everything that you do and say is treating them as a contractor. Cap table management. Mike, I'm just gonna do a quick check-in to make sure. Okay, thumbs up, everyone. Okay, good. Cap table management. Again, another one that people put off or they think their attorneys are gonna handle for them. Um, don't fall into that trap. I would say do it from day one and do it right, and so that it's easy to help. And also, a good bookkeeping accounting firm will do this for you. Carta was so expensive, they didn't have an entry-level product. They did release a lower-cost version, but there's other options out there like Capshare, which is a Shareworks product, which Morgan in town, they just bought. So there is competition in the space. It's heating up.

All right, everyone, I'm working to get Frank back into the chat room here. Just give us a quick second here and I'll make that happen. Okay. Sorry about that. Sometimes this is the kind of thing that happens with webinars from time to time. Hey, Frank, looks like you're back in.

Yeah. Sorry.

Okay, look, it's not a webinar until something, something wrong happens, right? So it's all— yeah, let's, let's go ahead and jump back in. I'm going to close my video here.

Okay. So I think we finished cap table, so I will move on to the financial narrative.

Yeah, that's fine. Okay, that works.

Okay, perfect. So I was saying, I think this is crucial to fundraising and getting started early on is really making sure that your chart of accounts and your income statement and balance sheet tell your story. I said, this is where good accountants differentiate themselves from mediocre accountants, because what happens, and we see a lot of times The standard, you know, bookkeepers will use big categories like revenue and expenses and not get into detail of what is actually happening in the business by defining the chart of accounts. And so what I always say is that the FASTA statement should, should tell the story. So your revenue by channel should be subaccounts, right? So that we know where the company is growing, what's growing faster, where you're kind of looking to drive different revenue streams, what part of the business is working better than others. On the flip side, also on the expenses, the two big categories and groups tend to be payroll and customer acquisition and marketing. And so I always say break those out into detail and by, by category. So I always— we always tend to break out the engineering and product guys into R&D tax credit and technology. Customer acquisition, we get to the granularity of, you know, Facebook versus Instagram versus, you know, Google Search, so that the people reading the financials can get a clear color and detail provided on how you're actually doing and what's working and what's not working, right? So I always harp on this because it really does make a difference. And then venture guys tend to always say they can tell the sophistication of the startup by their financial statements. So a very minimal, minimal approach to financial statements shows that you're not as sophisticated And so therefore they feel like they're not dealing— they can negotiate harder, they can do other things. I also say that a simple trick that I always mention is a chart of accounts with, with a numbered chart of accounts is what most good CFOs will do. So, you know, getting a standard numbering of your chart of accounts will help and will show your sophistication. In QuickBooks, there's a real simple and everyone, no one, no one does this, but, but Puncher's clients do. Based on how much cash is in the bank, we work backwards and create a budget of burn, your real burn versus projections are one thing, this is real burn and runway. And so what we do is there's a budget versus actual function in QuickBooks. We highly, highly recommend you use that because it can show you quickly where you are vis-à-vis your burn and what you're expected. Companies run out of money all the time and not expecting it because they're not watching this. And I think this is a very good way to keep abreast of what's happening so that you know what's going on with your cash. And the last piece I always say is use these monthly closes as ways to communicate with your investors. If you look at any of the data, like a Visible VC or anyone else that manages communication with investors, you're 3x more likely to raise more money from your current investors if you communicate your business updates and financials on a regular basis, If they have to ask you what's going on, as one investor said, it's already too late. I'm already pissed. And so I always recommend getting on a consistent schedule, like going to the gym. You want to get on a consistent schedule for your investor updates, whether it's quarterly or monthly, it's up to you. But I'll tell you, once you start, if it's monthly, you have to stay monthly. So I always say, hey, maybe start quarterly at first so that you're not held to the gun on a monthly. And you're there, still there, and you're moving, Mike. So that's good. Yeah, much better.

I agree 100% on this, by the way. This is a huge, hugely important thing. As long as you can keep people in the loop on what's going on with your business, the more likely people can be proactive. Interesting question in the chat room here from Riva. If you're working with a third party but you pay them regularly, what does that make them?

It depends on, again, are they invoicing? The states will look at it. If it's regular and they haven't been submitting invoices, then they're going to deem that as a, as a, as an employee. Um, and so if you have it on autopay every 3 weeks or 2 weeks for $2,000, they're going to say that's, that supports them being a an employee and not a contractor.

Oh, so she, she gives us an example of like a virtual assistant that was hired through an agency, um, or, uh, you know, an intern through a third-party program, which is a whole different thing, I guess. But maybe let's start with the virtual assistant hired through an agency, and then we can cover the intern next.

Well, agencies are best, um, if you can, if you can hire— I always say, if you're going to hire a contractor, if they have an LLC or a company entity, Mike, that's best, right? Because then you're not hiring a contractor, you're hiring a company. And so then that helps eliminate that conversation. So the virtual assistant through an agency is the company. You're hiring a company, you're not hiring a contractor. But if I'm hiring— so, you know, Punch, instead of hiring Frank Masternuzzi and paying me as an accountant, you're paying Punch Financial that's not a contractor, right? That automatically is a service provider. And so it's when you're dealing with the individuals that become a problem.

Yeah, that makes a lot of sense. Do you have a checklist or something that you usually go through when you talk to founders about this?

It's, it's based on the jurisdiction that they're in. So it's the, it's the precedent that that each state has. So Microsoft lost a huge employee versus contract case in the state of Washington, right? And so they'll look at precedent. The checklist is, it's this slide, right? It's not big enough, but I'll try to make it bigger.

Yeah, you can share your screen. If you can turn your screen share on, we can see it. Right now it's just us two on the screen. Screen.

Oh, wait, we're not. I thought you guys saw, um, screen. So it, it's, it's a little out of, um, as you, as it's, it's not scaling, but I'll read it. So paid upon completion of projects. So I'm reading the checklist under independent contractors. So you're paying them on completion of a project, not hourly or salary. Provides their own materials, right? The employee uses the employer's materials, tools, and equipment. An independent contractor works for multiple clients. An employee typically just works for one. A contractor is temporary relationship until project is complete. Late. A contractor decides the manner and means of performing, so they decide when they work, how they want to work, where they want to work, right? An employee has to come into the office, usually has set hours, and has a contract, an employee handbook saying here's the dos and don'ts of working for this company. An independent contractor and a client agree on scope of project, so it's, it's usually task-oriented. And the employer determine, you know, an employee and employer basis. The employee tells them what to do, right? A contractor is being typically hired for their expertise. Did that make sense?

If anyone has any more questions, just post them in the chat room and I'll try to relay them over to Frank.

And then I saw someone say that they didn't see the cap table slide. Mike, I'm happy to send the slides to you guys, um, and you can distribute them.

Awesome, will do.

Um, but the cap table management, you know, I'll run through these fast again. Um, make sure you do it from day one. It was cost prohibitive at first, now it's not. Carta and, um, and Capshare, which is Shareworks' product, are very reasonably priced now. Um, it's worth— I think it's definitely worth it's money, because I've only seen that backfire if you don't have a clean— make sure it's your accountant or your lawyer so that you don't— a big piece with— have a lot of 409A valuation companies that are doing these and kind of everyone thinks they're a joke because there's, you know, they're basically asking you, what do you want it to be? I would say it hasn't happened yet, but these 409As will start getting challenged because it means that it's a huge, in a nutshell, it's a huge reduction in tax liability for the state. And so making sure you get a reputable firm to do your 409A so that God forbid it was challenged is not something you wanna deal with. So don't try to save money on using some, you know, there's a bunch of them out there I won't give you. I would stick with someone who has deep pockets that will be around to defend it should the IRS or the state challenge you on the 409A. I will— looks like I might have lost you.

No, we're still here.

Okay, good. I'll keep going on. Insurance is another big area that I will say in take on. Again, I understand you're limited on resources, but, um, you gotta start thinking as a founder that you're the one exposed to risk. And so your job— typically the CFO's job is to mitigate risk and reduce risk. And even investors want to see that, you know, as you've got more traction, what essence they're saying is that you're reducing the amount of risk as investment because you've started to show they have product-market fit. Um, there's way to— there's a really good bundle products out there, and there's others tackle this product for founders, but make sure you get that. $1,000 can give you the adequate coverage that will cover you down and, and prevent going belly up. Um, so I've seen these examples, so I'll read all of them. Um, in EPLI is important. Employee Practices Liability Insurance. That insurance protects if one of your employees sues the company. This is what the Trinet and the PEO sell because they're saying by co-employing your employees, if you're— one of your employees sues us, then they're— then Trinet's lawyers will defend it. And so that's why you have it bundled in with you. If you don't want to go with a PEO right away, you can buy an EPLI insurance pretty cheaply. And it's basically— I'll give a good scenario. The whistleblower at Snapchat, the employee that did that and was let go, got hired immediately by one of my startups. He turned around after 2 months of work, got fired, sued them for 25% of the company, obviously frivolous, but it cost them over $400,000 in insurance, legal fees to defend this frivolous lawsuit, which burned in a lot of the runway. Had they paid a couple thousand dollars for the EPLI insurance, then they would have saved that $400,000. And so that's a good example of why you want EPLI if you start having employees outside of just the founders. then you should get EPLI insurance. Um, and you can get that through a PEO or not. Um, that's up to you. Um, but I think, um, if it's just the founders, you don't need EPLI insurance because you're not employees, you're all founders. You're not going to sue the company. Uh, directors and officers insurance is important, um, because this protects you as a founder if one of the investors sues you for your capacity as a director or an officer. A lot of VCs will require, require D&O insurance once they sit on the board because they don't want to get sued personally for being on the board of the company. I always say it's a good idea to get D&O insurance early on because it does protect you as a founder. And I also would recommend having yourself indemnified as a founder from the company. Should you get sued personally. Um, and that's a question for your attorney. Uh, general liability, this is what everyone typically gets. Um, that's great, but that's not enough. There's a lot of other things that you need to get coverage on. Um, and tech liability is one of them. And case in point, um, uh, Capital One, right? That engineer stole all that information. Um, if if they didn't have tech liability, they'd be paying, you know, the Equifax payments that they're going to pay to cover for all those people is coming out of the insurance company's pocket and not Capital One's pocket, which is why they're doing it. And so even though you have a merchant processor, if you— if for any reason you have, you know, credit card data, personal data that's breached, you're going to be liable. So I recommend getting tech liability. There's some really good brokers that will bundle a lot of this together and give you kind of a super bundle for at least minimal coverage in all these areas. I highly recommend it because my next point, startups are majorly underinsured. There's a lot of risk and founders don't realize how much risk they themselves are at once they take on outside investment. Being in the role of a founder, you're opening yourself up to a bunch of lawsuits. Like employees suing you. Everyone's going to target you. And this happens more and more as you get larger, more successful. So don't forget insurance. It is your friend and it's not that expensive in the grand scheme of things. And like I said, don't risk burning your cash just to defend yourself on these frivolous lawsuits if you don't. And then I always annually reassess your insurance coverage. Come September, October of a year, revisit with your insurance broker. If they're not doing it, then they're the wrong broker. You need to see what's changed in your business and say, okay, are the coverages we have adequate because this is what's happened, right? And then a lot of times, you know, depending on what your business model is, some of your clients will require you to get some of these policies before you can sell to them. Disney's a big one where they require high levels of general liability and being named as additional insured. So I would say find a good insurance broker and that will grow with you and the company. Mike, I'm going to keep going until you kind of flag me and stop me.

Yeah, let's do it.

Okay. I— this is just me. Oh, Always be ready for due diligence. I can't tell you how many times a week I get a panic call saying, oh shit, someone's interested in investing. Can you get all my accounting done in 2 days? Right? Like, this is back to the point of keeping your books clean and tight. Don't think you can push it off for later. There's something called the audit trail. A lot of investors won't invest because they're like, if you're not ready and you don't have your financial statements up to date, then I kind of get a little turned off. Even on the M&A side, you know, I've been through 5 or 6 just in the last couple of years where, because the accounting was ready to go and we were like, yeah, we're ready, there's nothing that needs to be done, it accelerated the close of the acquisition because they, they were— they got even more comfortable that we didn't have anything to hide and that we have to, you know, need 2 months to clean up the accounting, right? So it really goes a long way. I tell this story, Mike, all the time. I sat on a panel with the founder of AdMob, who would personally did a commercial for this when he said Google was looking to buy them. They had kept their books on a cash basis, not an accrual basis. The offer was large amounts of money for AdMob to get bought by Google. It took them 6 months to restate their financials. And towards the end of that 6 months, Google started getting cold feet and tried to pull the deal twice. And so the founder was like, I'll never be cheap on accounting again because I almost lost a huge sale to Google because our accounting was done by really bad bookkeepers. So I stress this, don't wait till the end. It's like going to the gym. You can't go to the gym 3 days in a row and think it's going to make you summer body ready. It's the consistency that's going to do it. So, and then I, again, a lot of times what doesn't happen is the books are closed and people are so busy in the day-to-day operations spend the time on a regular basis with your senior management team and go through everything and see and analyze and discuss, right? Because you, you have to make adjustments from that. And if you're not looking at the books and discussing where you are, then you don't know how things are working across the board. So I highly, highly recommend that you do a monthly review. It could be a, you know, stand-up scrum, I don't care, but you have to do this because It's critical. This is a review of the business and a lot of companies don't do this, so they don't know what's going on across the board. So I always say budgeting, modeling again. If I had a nickel for every time someone came to me, it was like, we need to raise money and we need to raise the money in 2 months. Like, yeah, that's not going to happen. You need to plan your runway and you need to budget. I always tell people that your burn, even though you think you have 6 months, I reduce it by 2 just to say, okay, knowing that you only have 4, because you have to raise money and start raising money in time. No one wants to date a desperate person when the lights go on at 2 o'clock at the bar. No one wants to fund a desperate startup that needs cash badly. It's just not attractive. So you have to plan accordingly and don't run out of runway. That's the picture of this plane missed the runway. And so you don't want to do that. Make sure your cash burn is under control. You know exactly how many months you have and that you have enough time to start fundraising before it's too late. I've turned down plenty of companies that say, hey, good luck, but we can't help you in 2 months. There's no way. If you don't have a relationship already built with a VC, you're not going to typically close money within a 60-day window. And Mike and founders can tell you that in more detail. And then my last comment is stop whining and just do this. Everyone whines, but you need to do it. So just do it. It's like going to the dentist. And trust me, if you practice this, it gets easier as you go. And, and it will help you really understand your business. And then I already kind of preempted this last one, but it's proactive communication. The screenshot I have here is, is the tool that's called visible.vc. It pulls in the data through APIs of all your analytic tools— Google, QuickBooks, Google Sheets, whatever you want in here, you know, um, app analytics, all that stuff. And so you can paint a picture of how the company's doing. You know, that first thing I'm showing is the months of runway left. That's 5.4 months of cash left. Here's their cash. Here's, you know, the burn. So this is the number one complaint we hear from investors. We have to chase down, you know, we didn't have to chase you down to give you money. But now we have to chase you down to find out what's going on. And so don't wait for them to ask 'cause it's just, again, it's already too late. Get into a regular cadence, like I said, monthly or quarterly, whatever you start with, it's easier then to stick with. But if you go from monthly to quarterly, they're gonna bitch. So start with quarterly and then if you need to go to monthly down the road, then you can. And that will increase your chances on investment, follow-on investment. So with that, I wanted to leave a little bit of time. Mike, did we—

Yeah, we're right up at our time, but that's okay. Look, there's a really interesting question here from Carolyn in the chat room. She's asking, you know, can you comment on the importance of having a DINS number. Is it important? Why? What can it help you do, etc.? Thanks.

Can you, Caroline, can you— what is it? I've never heard of a DINS number. So is that maybe, maybe a DUNS number?

Is that what you mean? D-U-N-S or something?

Yeah, yeah, or D&B. So here's, here's what it is, um, goes back to credit cards, right? The company doesn't have a credit history, so Dun Bradstreet— and I always recommend people do this— yeah, DUNS. Okay, there you go. No worries, I just want to make sure. Um, it— you have to start building a credit history for the company. So you using the, the EIN, what you do is you file with Dun Bradstreet and so they'll issue a DUNS number. And but what you have to do is build up your own history. So D&B will— Dun Bradstreet will charge you for this if you want to accelerate your credit history and they'll ask you to turn in your utility bills, your payment history, and they'll start helping you build a DUNS credit history, like with your Social Security number. I'm assuming this is an American company. A lot of investors or a lot of vendors will want your DUNS because it's kind of your credit history, right, as a company, your timeliness to pay it, the follow-up, all that stuff. So whether You do it or not is up to you, but it ties back to how fast you want to not use your own co-signing as a founder. If you spend the money, I call it blackmail. D&B will charge you, and, and, and the only way to accelerate your credit is to pay them for the service. But it will help if you are going to want to rely on the company and it's standing on its own two feet as a credit to get its own credit. So that's something I usually talk about later stage. But if you want to start building it and not having to pay D&B the fees to accelerate it, then I would say start that earlier rather than later.

Yeah, I agree. If there are any final questions for everyone in the chat room, this is a really good time to ask them. You know, from your experience, Frank, you know, In the perfect world, what would a startup do? They would engage with a firm like Punch, and then once they do that, what's the time commitment to kind of maintain and stay on top of this stuff? I assume that once you kind of get going, it's just not as large of a time commitment.

It isn't. It's diminishing. For us, it's a good question, Mike. A good firm will take control and then all you have to do is just replay. Our job is to, as I say, is to pull your head up and say when you need to look up. Because on the finance side, right, like keep your head down on product and sales. And when I need your head to be up, I'll grab your head and say, listen, you know, we do, we do a regular standing meeting at close. We review the financials. We give them a summary of what the risks are, what we And so for me, the kiss of death with a startup is when the founder gets too busy to spend an hour with us a month to go through their own financials. I get it. Most people don't like the finance side, but you need to do it. It's diminishing as far as, as you grow, we learn the business. It can go down to half an hour. We send all the reports ahead of time. We then don't— we say, read the report. Let's focus on what you what risks you have and what's coming up so that we can help you mitigate your risk. Your CFO's real job and your accounting firm's real job is to reduce risk, right? It's to help you avoid making those pitfalls. Like this happens all the time. Statement of Information filing for California, people forget it's supposed to be $20. If you forget to file it on time every other year, it's $250. So the state of California makes a ton of money because everyone forgets to do that stupid state information because it's every other year and it's $20. The state of Delaware filings, right? You, if you are Delaware C-Corp, you have to file your taxes, not a tax return, but you have to file a statement of information, which is based on the number of shares you've issued and authorized. And your assets, and it's a calculation based on that. Most companies forget to do that. And so again, a good bookkeeping accounting firm will keep track of all that and keep you on track and, and focus so that you can focus on what you need to do to get the business off the ground. But to your point, again, it's like going to the gym. It gets easier and easier and easier until you have curveballs. Or a fundraise. Like, so, you know, most of our clients, we get into a very steady rhythm. We're on Slack with them. They can ask us quick questions or scan a piece of mail that came and said, do we— how do we respond to this? And so we're— we've become an extension of the team, but it gets easier. It's, it's, it's the initial set up that takes more time and then that diminishes.

Yeah. And just a quick last question here and then, and then we can wrap up. You know, you mentioned in regards to like investment, and we talked about a lot about just how being able to pass diligence is critical here. What are some of the— what are, you know, how do you usually work with founders during that time period? And what kind of information do investors ask that a CFO can provide at that time?

Yeah, I mean, they're typically wanting the current, the financials as current as possible. So I'll see this all the time. And some of the companies in your program that, you know, I'm working with, they're like, you know, they're going back and forth on red lines and now they're like, we want to— we want the July numbers, right? It's August 2nd. They want the July numbers already. So we rush to get it done. So they want the most current financials. So that's why the easier and faster we can do it, like that for who I'm talking about was easy to get done because we know the process. The second is your cap table and documents with your cap table. They want to make sure that what you're telling them was a safe note. They can look at the safe note. They're going to look at your model and projections. So I always tend to say, you know, if it's the current year is '19, then your projections should always start with the next year and above because they will always look at the current year and say, well, you projected $20 million, you're only at, you know, $500,000, your projections already are off. And so I always say don't start with the current year unless your current year matches exactly what your projections were. And those are kind of the big areas that they'll ask for typically.

Awesome. Frank, this has been a terrific, terrific webinar. I really appreciate you taking the time out of your busy scheduled to do this, have to drop some knowledge for everyone in the chat room and for everyone that's going to watch this later. This is recorded. We're going to, uh, you know, transcribe this into our newsletter as we always do, put this into a podcast. So this will be available in a lot of different places, and we'll share the deck out as well, as we talked about earlier. So Frank, thank you so much for taking the time to do this. We really, really appreciate it.

Sure, Mike. Thank you.

All right, bye.

We're off.

Okay, bye everybody.