Addressing The Worst Financial Advice Given To VC-backed Startups

By Healy Jones 

As accountants for more than 650 venture-funded startups, we see tons of terrible financial advice being hoisted onto startups and their founders.

Some of the most common questions we hear from founders include: What valuation should I take? What should the CEO be paid? How fast should we try to grow? What vendors should we use?

Around all of these questions, there is a pile of bad advice for founders to cut through.

Here, we tackle a few suggestions for common issues:

High valuations

High valuations are always best, right?

Not always. Sure, it always feels great to have the highest valuation possible. After all, you experience lower dilution at a fundraise when your company is highly valued. And the press loves to talk about valuations.

But high valuations often come with financial engineering: Special preferred stock that gives the VC a lot of privileges that can make selling the company a lot harder. And overly high valuations can make the next round of financing difficult.

Founders need to think carefully about the implications of an overly huge valuation. Being able to meet growth expectations against a massive valuation can put a lot of undue pressure on founders and can make reasonably sized exits—which can be quite lucrative—impossible.

Compensation

The next most common piece of bad advice we see is that “founders shouldn’t make any money” and that startup founders/CEOs should be compensated almost entirely in equity.

That might be romantic on the surface, but it sets up a poor incentive alignment over time.

For instance, a founder living off of $30,000 a year in San Francisco is going to feel a lot of personal financial pressure. This leads to poor decision-making and presents a long-term, structural risk to the company.

Founders, give yourself a salary that allows you to focus on the business instead of worrying about putting food on the table. The average salary we recommend for a very early-stage, funded startup founder is somewhere between $115,000 and $140,000 a year, depending on the size of the startup.

Venture debt

Lastly, we often hear from founders that their next round “has to be from a VC” when other options, like venture debt, are available. This often overlooked avenue presents benefits to founders who might not be looking to raise another round, but still need some additional capital to extend runway, build a key feature, etc.

Venture debt is also a great solution for companies that want to achieve certain milestones before going into funding rounds. We’ve seen enormous growth in the venture debt market as more and more founders have realized that this is an option.

In short, there’s a ton of bad advice out there for founders so definitely make sure you’re consulting accounting experts when it comes time to make these important decisions.

Healy Jones is a VP at Kruze Consulting, where he spends his time advising startups on the intersection of their strategy, financing and projections. Previously, he held finance and marketing roles with several startups, and has been an investor at multiple venture capital funds. 

Illustration: Dom Guzman