Founders and Finances: How Early Transparency Protects Your Startup's Future

Starting a business with a partner is an amazing adventure. The initial energy and drive to realize a shared vision for your business is extremely powerful. As time passes, however, and your business really starts to take off, you will realize that basic financial management is what keeps your business going. 

And that, as said before, is harder than it looks, even for experienced entrepreneurs.

Money and relationships are very sensitive to early-stage financial design. How a company treats money early on is a real test of a founder (or two or three) partnership. 

Most relationships are wrecked by early capital allocation and/or spending issues. If you are planning on founding with a partner or partners, you will want to create some basic financial boundaries and operational systems early in the life of your new company. 

These boundaries will protect your emerging friendship and help launch your enterprise.

The Reality of Shared Operational Costs

Early-stage expenses can seem like a drop in the bucket to start. A founder might spend money to purchase a domain or subscribe to project management software. Some founders have even reported spending money to purchase coffee while sitting in a shop working on early ideas. 

Sometimes one founder will pay for something and remind the other of the cost.

This informal approach works fine. Until it doesn't.

Tracking all the expenses as they occur can become a real pain. 

Typically, these costs are deemed too low to keep track of and are left for the owner to reimburse. But this creates many problems as these costs can add up quickly. Typically, a founder is trying to keep track of as many expenses as possible, in an attempt to get the most out of their money. 

But this can lead to frustration and resentment between the co-founders.

In other words, you need to create a financial structure for your company quickly. To avoid confusion with small sums, it is necessary to set up an account for your company’s operations. 

You can create a joint online bank account for your early-stage capital and cash flow for your operational expenses. This type of account is ideal because it allows you to be fully informed about the flow of money in and out of your account at any given time.

Defining Financial Roles and Boundaries

One person can’t do everything, which is why even in a two-person team, a division of labor has to be established. Structure creates freedom, and when everything is in one person’s hands, then no one is held accountable for anything.

Structure creates freedom.

Giving someone control over the money is actually very freeing for them and stops them from being involved in the work of the other founder(s).

Founders Need to Assign Someone to Be the Lead Financial Custodian to Manage and Report on All Company Expenditures.

Set Spending Thresholds: Establish thresholds for spending approval. This may include small daily or monthly operational expenses that an individual can approve. However, larger capital expenditures would require co-founder approval before spending.

Schedule Periodic Cash Flow Meetings: Schedule meetings every two weeks to review cash flow, measure your burn rate, and list near-term cash requirements for upcoming releases and initiatives.

By outlining financial responsibilities, founders can create a framework that normalizes discussing money and even makes routine financial checks a breeze.

Managing Equity, Contributions, and Burn Rate

Money has a way of evoking strong emotions and tapping into the risk that founders are taking. Money is also a measure of the effort that founders are putting into their startup. As a result, documenting the unequal amount of capital that founders have contributed to a startup is very important. 

How did the money get into the startup in the first place? What are the terms and conditions around that money?

In terms of documentation of the founders' contributions, it is very important to distinguish between contributions as non-refundable equity investments and contributions as founder loans that are expected to be repaid from incoming funding (if there will be any). 

How will one handle unexpected cash requirements 6 months after the founders' contributions? The only correct way to handle these contributions and their expected returns is to document every single dollar contributed by each founder and the expected returns for each contribution.

While controlling your burn rate is essential to a company’s early survival, saving every dollar until funding can arrive gives your team more time to work towards a product-market fit.

Every dollar saved extends your runway.

Every dollar saved extends your runway. In the short term, that means more time for your team to get to product-market fit. And in the long term, it will save your startup from the funding churn that kills so many startups.

Building Culture Through Financial Transparency

The way you keep financial records also has to match how you have set up your organizational culture to run as a business when you grow and start hiring your first employees.

And that starts day one.

A Founding Team that respects Company Resources and maintains transparency with their finances builds an Organizational Culture that is based on the same principles of transparency, accountability, and wise use of resources.