Disclaimer: This post was originally penned in 2017, and was refreshed in May 2019.
Here’s a hint: it’s not a long vacation
A lot of entrepreneurs use DocSend for their fundraising (here’s the case study), and when I chat with them about how it’s going they all have the same mentality: “just as soon as I close this funding everything will be awesome!”
This shouldn’t be surprising; fundraising isn’t easy and we entrepreneurs keep ourselves motivated by mentally promising that everything will go back to normal afterwards. This is, in fact, not often true. Here’s a quick anecdote from a CEO who just raised an A round, which is generally pretty representative:
“We just had our first investor meeting this week after closing the financing. We spent so much time actually fundraising that this was our worst month this year for performance. I literally saw the investor’s face fall. I just promised the world, and our stats are already falling behind the promise. Also, I need to double my team in 6 months.”
Keeping the performance up isn’t the only additional concern: now that you have more cash on hand, you have pressure to spend it. Hire more people, find a new office, redesign your product, get a COO, and the list goes on.
This list varies at each stage of financing. I was at Facebook when it went public, and although that in no way resembled my friend’s A round, it’s clear that each round of financing has its own agenda of challenges.
For this post, I’m going to go through all the things we had to figure out after we closed our first round of real funding (it’s a long list). My friend Rohan Seth asked me about this yesterday, and I figured I might as well share as it’s not the first or the last time I’ll be asked (here’s an analogous post to what a PM at Facebook does).
In late 2013, we closed $1.7m from a fantastic group of investors including SoftTech, Cowboy, Lerer, and angels. In no particular order, here is the list of things we needed to figure out after closing and who we now use now:
Accounting Services (i.e. a human): The Team Group
The first accounting firm I hired was based on a referral, and they lasted about three weeks. It immediately became clear they were used to working with traditional SMBs. They didn’t understand how we were spending our money, what our business did, or what our investors cared about. They were also very slow to respond.
The Team Group understands how high-growth, tech-startups operate, which makes them easy to work with. Especially relative to our first choice, we’ve been thrilled to work with them. They deliver on what they promise, they help with a wide range of requests, they respond very quickly, and they get way out in front of issues before they arise. We pay them a fixed monthly fee, which also makes me feel free to reach out when I need their help.
We’re still a group of six engineers, and I can’t stress how helpful it is to have someone to ask about one-off business questions.
Banking: Silicon Valley Bank
Before raising money, we put our shared, founder-contributed money into a US Bank account. We initially tried to use the brand in the financial district, but I gave up when I was unable to explain to them that our business was incorporated in Delaware but we were located in San Francisco. They demanded to talk to our headquarters in Delaware, which showed they have never worked with a startup before.
[small aside] The standard startup practice is to incorporate in Delaware and use a registered agent there (it’s a strange standard, whose history is a longer conversation). These agents are really companies that we pay very little money to, and they are clearly not going to talk with US Bank. I then tried the US Bank branch in China Town, and I was relived that they actually understood our corporate structure. [end aside]
After raising, we decided to use a bank that caters more to startups. We really liked the people we worked with at US Bank, but it was still clear we weren’t their typical clientele. So we switched to SVB.
409a Valuation: Scalar Analytics
409a valuations are used by the IRS to set the tax basis for stock option grants. There typically aren’t many company metrics to go on for early financings, so 409a valuations at this stage typically involve comparables, complex calculations, and the evaluating firm’s intuition. Our firm used comparables plus the Black Scholes Model to calculate our common stock price (cough, overkill, cough).
The standard output is that the common stock strike price is defined as a percentage of the preferred stock price. Common stock is cheaper, which makes sense as common stock doesn’t have the protective or control clauses of preferred stock. There happens to be a commonly agreed upon range for the percentage given your industry and the limited numbers available. Typically, a number in this range is backed into given what’s available.
Scalar has a good reputation (very important) and was efficient at giving us a quick turnaround. Their price was also reasonable relative to other options (some were cheaper; some were way more expensive). Getting this valuation done is also really important before you give out any stock grants, so you need to do it early. If you don’t do it, and your stock goes up a lot (which we all hope it does), then you could be in trouble. Just get it done.
We used another payroll provider for a bit. It was annoying and felt like it was made in the 1990’s (which is was). I was apprehensive about the transition, but the CEO of ZenPayroll, Josh Reeves, is a friend from Stanford and I figured it had to be better. I’m incredibly happy we switched and it turned out to be pretty easy to change over (our accountant was quite helpful). Many times, I’ve had to go in and see what’s actually happening or make personal cost calculations. I love how easy their system is to use. I highly recommend using them from the start.
We started off using a full-service HR and accounting firm. They were quite responsive, but everything was manual and we paid them a not insignificant fee. Zenefits automates almost everything, and you can get things done on your own in one place. They have a fantastic business model in that they act as your insurance broker (for which they are paid) but don’t charge anything extra. For reference, your typical insurance broker does nothing after signing you up other than to collect a paycheck in perpetuity (a percent of your insurance spend). Zenefits gives you a great software platform for your broker fee and you never know the difference, other than having a useful ongoing software platform to use. Here again, I recommend using them from the start. Note: they aren’t a full-service HR firm so you’ll need to do it yourself or get help for one-off HR stuff.
Health Insurance: Anthem
Please don’t skimp on this; it’s really important. Yes it’s a big expense, but taking care of your team needs to be a given. There are a lot of options, and there’s no way around taking some time to consider them carefully. I could fill a separate blog post with info about health insurance, but I think once you get into it you’ll quickly figure out what plan you’re comfortable with. It will, after all, be your own health insurance policy as well.
I don’t have much perspective on the varying differences; what’s made the most difference has been our team’s individual choices of health providers. Anthem has good coverage in SF, and I have no complaints so far.
Accounting Software: QuickBooks Online
I know there are other options out there, but QuickBooks has been all we’ve needed it to be. It’s mostly important that your accountant is comfortable using it. The system makes it easy for the Team Group to put together the correct financial statements that keep us in squeaky clean compliance. It’s easy for me to go back and look for unusual expenses ahead of each investor update, and it’s easy for me to see how much we spend in each category of expense. It of course integrates with our expense and bill payment systems, which are up next.
Expensify definitely has its usability quirks, which I’m not happy about, but it’s proven to be a reliable and easy enough system to use for our team to use submitting expenses (SmartScan is surprisingly not useful). We cover everyone’s phone and internet bills, which they submit each month for reimbursement. They also use it to submit dental health bills, which we don’t use a provider for. We just have an annual cap on the amount of expense everyone can file. Our accountant set up the policy based on our rules, and deals with reimbursements (I take care of approvals).
Bill Payment: Bill.com
This system was recommended by our accounting firm, and it’s really meant to make their life easier. It’s used mainly for things like rent, legal, and contracting bills. I forward bills as I receive them (or they are automatically submitted), and then I approve the bills once they are there. It doesn’t take much time, but it does optimize making payments for accounting.
Company Insurance: Scottsdale and The hartford
Who you get insurance from is probably less important the type and coverage amounts you choose. We have three types of insurance:
- Directors and Officers Insurance: this can sometimes be required as part of your financing, and it’s meant to protect directors and officers in case of litigation. It’s a little known, and pretty ugly, fact that company directors and officers can be personally sued for company dealings. This is pretty pricey.
- Business Owners: this is standard and covers our business and our stuff. It’s cheap.
- Workers Compensation: this is also standard and doesn’t cost much. It’s just a check box.
Office Space: 2 Mint Plaza
Before fundraising, we just worked out of our apartments. This doesn’t scale very well once you start hiring (although some people make it last a surprisingly long time).
The first place we moved was into a co-working space called the Hatch at Harrison and 2nd. We looked at a bunch of options, and this space was the best combination of natural light (I hate dungeon-feeling offices), being stocked with food/drinks, location, and price.
After a few months, we upgraded and got our own office. Co-working spaces are great for awhile, but they are distracting. We got a converted loft space that’s 1,450 sq feet. The building is fantastic, and we’ve loved having our own quite area to code away in. Once we start hiring a sales team, we’ll need to figure out something new.
Office Space Broker: 42Floors
Although we didn’t use them, we’ve since gotten to know the team at 42Floors. We head great things about working with them, and (it’s a rare thing) they don’t require you exclusively use them as your broker. So if you’re looking for help finding office space, definitely check them out.
You actually have to deal with this before your fundraising as you absolutely should not negotiate your financing documents on your own. However, you should think carefully after closing your round about how your law firm did during the process. The firm that takes you through the first part of your company might not be suited for the next phase. We ended up switching firms. I have great respect for the first firm we worked with,but it became clear that working with a firm that has more relevant experience in our space was a better fit. Goodwin was very helpful thinking through our IP strategy, for instance.
If you need one-off legal help for minor things like ToS changes, you can always get a cheaper rate through a service like UpCounsel. Just keep in mind that for the important stuff like financings, you should pay a firm that has done it before and has the right connections.
Investor Updates: DocSend
[begin shameless plug]
After taking a bunch of money from people, they will undoubtedly want to know how you’re doing. We have board meetings every two months. Ahead of board meetings, I create an update document and send DocSend links to our board members and observers. After the board meeting, I send a separate document with the update the board meeting updates to our other investors via DocSend links (even those who don’t have contractual information rights).
Using DocSend shows me which investors looks at my updates, who they forward them to, and what they spend time looking at. It’s nice to know that if we spend a bunch of time on a product roadmap, people actually look at it. Our investors are awesome, and they keep up to date on our progress. It lets me know that when I reach out for help or advice, they actually know what our status is. I’ve heard from other companies that they haven’t been as lucky. Knowing that investors don’t look at updates is a great signal; it lets you anticipate who will be helpful and who you should let into future rounds.
To put it simply, DocSend enables investors like you to share sensitive materials with external business partners while getting real-time, actionable, feedback on document engagement, so you can be in full control of your business outcome. Click here to say goodbye to email attachments forever, and to get started with a free trial of DocSend!
[end shameless plug]
I’m sure that after our next round of fundraising, I’ll have an entirely different set of learnings to share. I hope this is helpful to all the startups that have just closed their first round of real funding and think: oh my gosh, what do I do now.
image via Steve Jurvetson