I do not have the funds to pay this !
Few companies will operate with employees as the sole source of
workers for your company. Your mentors,
advisors, and board members may work on a fixed fee, or may require billing per
time worked. Legal, accounting, and
other contracts are least likely to work on a fixed fee basis and will bill by
time spent. Getting those bills in the
mail with totals that make you feel like passing out are difficult. Debt generally increases and becomes a larger
problem while raising added capital.
Legal fees alone work leading to a closing can become very large.
Investors will require you to provide financials for review prior
to closing. One of the areas of concern
is outstanding debt or fees due. Owing
fees for services payable at the close of a financing is more common than you
think. Having the debt portion being too
high becomes a concern because no one wants to invest in past work! In addition, the amount of residual cash
after payment must be enough to conduct the work promised to the investors.
It is possible to swap some of the debt for equity. This can cause dilution that may be more acceptable
than spending the cash. Assuming the
service provider is willing to take the equity, the reduced debt translates to
a reduced cash payment. The investors
may want a discount from the negotiated price to deal with the dilution. Basically, any dilution causes a reduction in
your holding percentage and you take a haircut too.
Most likely, you will have times when debt accrual must
happen. As an entrepreneur in a startup,
there is no cash to work with except from personal savings. Certain providers are essential and working a
pay it later arrangement is required.
There are things you can do to monitor and limit the debt accrual, but
these should not be at the expense of the quality of work required. For example, having a poor job on legal
agreements will create pain and cost you money later. Inferior manufacturing work will cause loss in
product quality and poor market acceptance.
Some areas require quality work and costs accrued and compromise is not
acceptable.
The best you can do is to identify the areas where cuts are
acceptable and areas where they are not.
Secondly, you must develop a mechanism to track the expense accruals so
you do not have sticker shock. You can
slow work down or defer it if costs get too high, but this only works if you
know the expenses and the projected rates of accrual.
Managing many times includes managing
expectations. In the case of expenses,
your expectations need the management.
Knowing where you are in expenditures is your only tool to knowing when
to manage the workflow and alter accruals or payment methods. Discussions with your service providers early
along with constant monitoring will save you a lot of pain later. Working out alternate payment methods or
stock swap alternatives up front will provide for an easier time later. In short, avoid sticker shock by monitoring. Develop payment alternatives early or later
by negotiating with the providers. Surprises
on amounts owed are never funny!
Taffy Williams is the author of: Think Agile: How Smart Entrepreneurs Adapt in Order to Succeed to via Amazon