With a Series A fundraise we see typical raise sizes in the range of $10M+. Being a good financial steward for that amount of money as a founder is a lot of responsibility and for that reason, I would encourage any Founder at this stage to make your next C-Suite hire a full-time CFO or VP of Finance. If there is a Co-founder on the team that has a finance background it may be a good time to make the title official. Through my experience working with early-stage startups, I find the Co-founder who is designated the “finance head” actually would rather be the Chief Operations Officer (COO) – so it’s important to hash these roles out at this point and make them more formal.
Why a CFO? Founders, especially those who come from finance backgrounds may feel that it is still too soon to make this hire and that it would serve the company better to put resources toward more technical hires – I understand this point of view, however, it’s critical for the success of the company to have an experienced CFO take the reigns of the finance department at this critical juncture.
Here are some aspects that you as a founder will be able to relinquish the reigns on:
Financial Modeling and Board Reporting: A great CFO at this stage will be able to deep dive into the Unit Economics of your nascent company and identify areas the company can improve its margins, negotiate better vendor terms, and handle the numerous board requests that will flood the founder’s inbox. If you have given up a board seat at Series A which 99% of the time is the case do not take for granted the time-suck that is dealing with status updates/information rights requests from investors. A good CFO will be able to take over getting the metrics and key numbers investors want to see pretty much on demand.
A good balance of Risk Aversion: I find most CFO’s to be risk-averse whilst I find founders to be the polar opposite and embrace risk for the benefit of scaling. A great CFO can sanity check lofty growth and sales goals and bring the founder, who invariably has large visions for world domination, back to earth. As Steve Jobs popularized a reality distortion field is definitely needed for a bold CEO to get their teams motivated and the CFO can play the perfect counterbalance.
Fundraising strategy: CFO’s should be able to help founders strategize and time for any future fundraising and help lay the groundwork through their networks to make sure the right set of VCs and strategic investors are onboard when the time comes time to fundraise. CFO’s who come from Venture backgrounds or Banking usually have networks in place to help with future financing rounds.
Financial Operations and building out a finance department: For Series A startups this means reviewing the back office operations which would include accountants (companies like us at ShayCPA), any fractional CFO/Consultant hires, Financial Statement/SOC2 audits, and managing the annual budgeting and forecasting process.
Overseeing HR functions and assisting with hiring+compensation strategy: Managing headcount, and getting the best people onto the team at Series A can prove a competitive process. CFO’s can help guide founders to manage budget expectations and keep costs in check, particularly when it comes to hiring. During a recent expense analysis for one of our clients, we saw that 85% of their expenses were for labor split between 65% for Full-time hires and 20% for Subcontractors. This is the norm for most tech companies at this stage so it’s a huge line item that needs to be carefully considered as it’s driving your burn rate and runway calculations.
You may be thinking “I already have a CPA who managed our books and taxes and a fractional CFO, and by the way, I have an MBA from (Insert Ivy League School here) – why do I need a Full-Time CFO – We managed to get to this point without one?”
CPA’s firms like ours at ShayCPA can certainly help with tax compliance, bookkeeping, and preparation of financial statements, and sure a Fractional CFO can come in help you with that killer financial model and help you strategically think through your financial operations but there is nothing like having someone on the inside who has skin in the game, normally in some form of equity, who can roll up their sleeves and address all aspects of the Finance function on a full-time basis. The issue I find with accounting firms and fractional CFO’s is that inherently we work with multiple clients/projects and by definition, that means our time on any specific client is limited. Also when there are multiple hands overseeing the finance function there can be duplication of effort, no clear assignee of specific tasks, and a tug of war between various service providers (bookkeepers, accountants, fractional CFO’s), and cloud providers like Gusto/Justworks/Pilot, etc. Not to mention internal team members, mostly on the operations side, who may also be responsible for specific tasks.
As an example, each year registered agents from Delaware send out emails to founders requesting a tax return be filed with Delaware. This is something that is usually part of our tax preparation service, but invariably each year we see founders try to file these things on their own as they are responding to emails, and then tag us in later when they realize they don’t have all the information available to them. When there is a single responsible person for the finance function it makes situations like the above a mute point and everyone has a clear understanding of what their responsibilities are.
Accounting firms and Fractional CFO’s usually take ZERO fiduciary responsibility on the part of the startup so any mishaps along the way like not withholding social security taxes or paying sales tax can lead to trust fund penalties that are directly tied to you personally as the founder, not any service providers. A full-time CFO usually would take fiduciary duty and it would be the additional level of fiscal responsibility your tech company needs.
Overall we’ve seen companies that value putting a CFO in place at earlier stages perform better than companies that persist without one. From a selfish standpoint, it’s a lot easier for us as accountants to work with tech companies that have a full-time CFO versus those that don’t. On average we see half of our clients take on a CFO/VP of Finance hire at Series A, and half of them delay the hire until Series B or later. If you are a founder reading this as you raise your Series A – make sure to add a line item in your budget for Full-Time CFO for your upcoming raise.