After closing a pre-seed or seed round, one of your initial tasks as a founder will be to manage your company's early financial operations. The decisions made during this stage should position you to effectively communicate with your investors and board, build credibility and trust, and monitor runway to ensure financial stability.
With over two decades of experience as a CFO in the Israeli tech industry, working at companies like Wix and CrazyLabs, I have overseen finance, operations, legal matters, and strategy in different stages of growth. This includes handling fundraising, mergers and acquisitions, and IPO processes. Now, as part of my role as Partner & CFO at F2, I assist our portfolio founders in navigating the early stages of financial decision-making.
Making early financial decisions can be intimidating for technical founders, who are typically used to focusing on the product and R&D side of their start up. However, by implementing a few best practices, founders can approach financial decisions with more confidence. Below, I share my tips for establishing a solid financial foundation for early-stage Israeli founders.
Considerations when setting up your company structure
When Israeli founders are setting up their company, there are several factors to consider and the company’s structure is the first. These factors include the location of the leadership team, the target market, and tax considerations.
Typically, Israeli founding teams establish a parent company in Israel and a subsidiary in the US.
It is important to note that Israel offers an attractive tax regime for Israeli companies. However, if the majority of your team is based in the US, it may be preferable to establish your parent company there. I recommend that founders discuss these options with their tax advisors before making a final decision on the company's structure to avoid having to reverse this decision later on.
Choosing financial partners for your startup
When choosing your banking, legal, audit and accounting teams, you want to make sure you are taking a professional approach. My recommended approach is to choose institutions and teams that are considered best-in-class (i.e., auditors from the big four). These institutions and teams should have extensive experience working with startups in the high-tech industry and be able to provide you with the full range of services you will need.
While it may be tempting to work with a family lawyer or a bank branch with whom you already have a personal relationship, working with top-tier providers enhances your credibility when seeking funding from VCs and ensures you receive the necessary support.
When selecting potential service providers, I always tell founders that the chemistry you have with the team is also important and should be considered as part of your decision. Ideally, this will be a long-term relationship, so it is important to work with people you get along well with and who want to see you win.
Building an early stage budget
Budgeting, while not the most exciting aspect of starting a venture, is the key for making rational decisions from the very beginning and ensuring that biases do not impact your execution. It should be done before fundraising, as it is part of the due diligence process that any venture capitalist will expect to review.
Budget planning also helps in monitoring cash burn and comparing it to the company's available cash. It can signal when the company should start preparing for its next fundraising round, while ensuring a safe margin runway.
Your budget should reflect the strategic plan that shows milestones and key performance indicators (KPIs) for at least the next two years. In the early stage, when there is typically little or no revenue, the major expenses in the budget are your team's salaries. Other expenses you should consider when preparing the budget appear below. I also recommend looking at your budget from a monthly, and quarterly perspective. For instance, recruiting someone in January will have a different impact on the budget compared to recruiting them in December.
For Israeli founders, who often have teams in both Israel and the US, deciding on a budget exchange rate is important. While funding will be provided in US dollars, operational costs such as office rent, salaries, and other expenses will be in the local currency. Choosing a conversion rate that considers market fluctuations is crucial to avoid any surprises later on. When determining the budget rate, I suggest looking at the average exchange rate of the last three to six months to determine the rate you use to plan your budget and to take a conservative approach.
Option plans at the early stage
After incorporating your company, you will need to work with your legal counsel to develop your stock option plans. These plans are designed to attract and retain talent. Common plans include a four-year vesting period with a one-year cliff, where 25% of the options granted vest after one year and the remaining options vest monthly or quarterly over the next three years. Another approach is a graded vesting schedule tied to specific milestones or time intervals. There are various types of plans available to ensure that equity is earned proportionally over time and tied to ongoing contributions. As founder, you want to make sure that you have a good grasp on the equity pool allocated for stock options. The appropriate size of the equity pool depends on factors such as the company’s growth stage, hiring plans and industry standards. When granting stock options or other equity incentives you should consider mitigating the risk of granting excessive equity to employees who may not stay with the company long-term.
Leveraging financial decisions to demonstrate strength
As a founder, your main focus should be on building and marketing your product, rather than fixing financial reporting. Having a solid financial infrastructure in place enables you to be agile and responsive to changes in the market. With a strong financial foundation, you will be able to adapt to new technologies and trends, as well as hire the right people for the job. Most importantly, you can protect your time and avoid distractions in the future.
The success of a company depends not only on the idea behind it but also on how effectively that idea is executed. Demonstrating good financial decision-making is a strong signal to investors that you are a founder that can execute.
