This Week in Startups
The Top 6 Startup Finance FAQ's | Startup Finance Basics w/ Kruze's Scott Orn
· Summarized
Key takeaways
- Founders should not attempt to evade payroll taxes, as these are usually unavoidable and can lead to penalties.
- When shutting down a startup, communicate openly with investors and ensure employee compensation for accrued PTO.
- Understanding Delaware franchise taxes is crucial; there are strategies to significantly lower unexpected tax bills.
- It's essential to have clear contracts and to invoice customers promptly while recognizing revenue appropriately.
- Accurate representation of revenues, including distinguishing between implementation revenue and ARR, is vital for credibility with investors.
- Venture debt can be a useful financial tool, but it should be used cautiously and strategically.
Summary
Introduction to Startup Finance Basics
Jason Calacanis welcomes Scott Orn, COO of Kruze Consulting, to this episode focused on startup finance basics. They address common queries from founders regarding finance, accounting, and taxes, emphasizing the importance of understanding these aspects for long-term success.
Avoiding Payroll Taxes as a Startup Founder
The duo starts by discussing the misconception among founders about avoiding payroll taxes. Scott stresses that while founders may wish to avoid these taxes, they are typically unavoidable. He warns against attempting to classify oneself as a contractor to dodge payroll taxes, as this can lead to severe penalties from the IRS. Instead, he recommends utilizing reputable payroll companies that manage these taxes automatically.
Officially Shutting Down a Startup
As the discussion evolves, Scott explains the proper process for shutting down a startup. He outlines how long it takes (typically one to three months), the importance of communicating with investors, and ensuring employees are compensated for any accrued PTO. This transparency is crucial for future funding opportunities.
Understanding Delaware Franchise Taxes
The podcast then addresses why startups sometimes receive hefty franchise tax bills from Delaware, explaining the complex calculations involved. Scott suggests ways founders can prepare and reduce these tax amounts significantly by understanding their share count and total assets.
Getting Paid as a Startup with Customers
When moving to customer payment processes, Scott underscores the importance of signing contracts and collecting payments upfront whenever possible. They discuss the significance of deferred revenue and recognizing income based on service delivery in financial statements.
Implementation Revenue vs. ARR for VCs
Jason and Scott highlight the difference between implementation revenue and ARR (Annual Recurring Revenue). Scott advises founders to accurately present their revenues to maintain credibility with VCs and avoid legal complications.
Raising Venture Debt During Series A
Finally, they touch on the subject of venture debt, recommending it as a safety net rather than a go-to solution for struggling startups. Scott warns against leveraging the company unnecessarily and stresses the importance of timing and methodical financial management.
Sponsors
- Kruze Consulting · Check out Kruze for consulting help with finance, accounting, and tax-related issues.
Show notes
Todays show:
In the latest edition of Startup Finance Basics, Jason sits down with Scott Orn from Kruze Consulting to answer the six most important founder/startup questions around finance, accounting, and taxes.
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Timestamps:
(0:00) Kruze COO, Scott Orn, joins Jason to dive into Finance Basics FAQs.
(1:05) How can I avoid paying payroll tax as a startup founder?
(6:54) How do you shut down a startup?
(11:33) Why do I owe Delaware $50,000 in franchise taxes?
(12:58) I've got my first customer lined up! How do I get paid?
(16:26) Can I tell VCs that implementation revenue is ARR?
(19:59) Should I raise venture debt when I raise my Series A?
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Check out Kruze: https://kruzeconsulting.com Check out more Finance Basics here: THISWEEKINSTARTUPS.COM/basics
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