This article was published in the Fall 2019 issue
by Stephen Day, Principal, VPTax
Here’s the rub: winning in the startup game is all about the offering and getting that offering to customers. That said, there is a difference between winning and “not losing.” Nobody built a successful business because they had awesome administrative processes. But I know plenty of promising businesses that damaged or even lost their upside because they didn’t take care of administration.
The message is simple. Honor your great ideas and their upside by allocating the right amount of resources to administration (a.k.a. “the back office”).
What Could Go Wrong?
VPTax has a 30-year history with Silicon Valley startups. After a few years in the Silicon Slopes market, we’ve noticed something very familiar; it is hard to know how to right-size the back office! Some take the “What could go wrong?” approach.
Here are just a few examples of issues we’ve seen in the last few months:
- Ignore notification that the annual corporate registration is due. A huge deal comes along with a potential new customer, a legit Fortune 1000 company. They ask for a “Certificate of Good Standing” from the state of incorporation. It takes a week (or two) to get the company reinstated with the state. This gives the “whale” of a customer a chance to rethink the deal and to wonder if your company is ready to deal.
- A new round of funding is ready to close and investors will require a financial statement audit. The estimated audit fees are double what the investors expected because several areas of “accounting cleanup” must be addressed (e.g., recording share-based compensation, income tax provision, revenue recognition). Aside from the cash the audit will cost, the additional time and distraction of cleaning up accounting distracts the team trying to grow the business.
- Founders have heard rumblings that SaaS may now be taxable for sales tax purposes but never find the time to truly figure it out. A state, one in which the sales team attended a trade show, launches a sales tax audit. Next thing you know, you are paying 8% of all sales to customers in that state dating back to the day they opened for business. Sad part is, this is a tax your customers owed and should have paid in the first place.
Right-Sizing the Back Office
The list of “gotchas” could go on and on: human resources, taxes, accounting, legal, etc. From Silicon Valley to Silicon Slopes to Research Triangle to the Big Apple, entrepreneurs are finding creative ways to right-size the back office and reduce unexpected risks. Chief among these strategies are “fractional” service providers.
A fractional service provider is an “expert for rent”. This way, the company only pays for the services it needs. On a task or hourly basis, fractional service providers are more expensive than hiring employees. However, there are benefits:
Knowledge: access to a deeper and broader level of expertise than any one person can provide
Flexibility: it is easier to turn off outside service providers than to remove an employee
Hidden costs: infrastructure (hardware, software, materials) are embedded in the advisor’s rate
When it is time to hire for the function, your outside service provider is the “safety net” and transition partner to help the new person succeed
To all founders, you already know your team is critical to success. My suggestion is to expand the definition of “team” and include a small group of trusted advisors that, on a fractional basis, help your company avoid the “gotchas” of ignoring the administrivia and stay focused on your #1 thing: getting your cool idea out to the world!
VPTax offers “fractional” Tax Department services. Their mission is to make sure tax administration does not get in the way of growing your business.
Read the rest of the articles in the Fall 2019 issue of Silicon Slopes Magazine