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Posted: June 02, 2014

Finance after founders

It should be your company's first hire

Dan King

Finance plays an indispensable role in the value creation and protection of your company.  Sure, the finance function is not on the front lines selling stuff and generating revenue.  But they are working hard to preserve the enterprise value the company is building. 

A solid finance team can clearly articulate to investors the economic value your company is building and lends additional credibility to your financial statements.  You finance team can help explain why your company is worth what it is, with facts and data. 

Below is just one practical reason your first hire as a founder should be in finance:

Let’s say your start-up company is 4 years old and has become wildly successful.  You have consulted your board and advisors, you are ready to exit and believe a fair valuation for your company is $50 million.  This valuation number was derived from comparable exits of companies similar in size, industry and growth trajectory.  You find a willing buyer and receive a letter of interest, or letter of intent to buy your company for $50 million.  The only catch: The buyer requires the dreaded due diligence.

Through due diligence, the buyer determined they cannot reasonably rely upon the financial statements provided because they have been prepared by the cheapest finance crew your money could buy, and the team was added as late in the game as possible to preserve some cash.  Net net, the company saved a buck, but got exactly what it paid for.

This lack of clarity and insight into your financial position has now shifted the negotiating leverage to the buyer.  In return for accepting a riskier financial picture, they require a 15 percent reduction of the purchase price.  Ouch – $7.5 million just got whacked out of your valuation.  Now ask this question: Could I have preserved that value by spending more on the finance function and hiring better talent, sooner?  If so, would I still have benefitted from the investment?  The answer to both questions is a resounding yes.

Having a solid finance function early will set the company up for success right from the beginning.   Finance can “see around the corner” and help the company articulate the economic value proposition your start-up so desperately needs when it goes to exit. 

So be diligent on your end when starting up your company.  Miguel de Cervantes said, “Diligence is the mother of good fortune."

Dan King is a financial operations leader with significant experience in venture capital and private equity-backed technology companies in software, SaaS, Cloud and ecommerce business models. He began his career as a CPA with KPMG in the Silicon Valley and is active throughout the Colorado technology and small business community.  Dan can be reached at djk235@hotmail.com

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