

Expenses are like spending equity - drusenko
http://david.weebly.com/1/post/2011/02/expenses-are-like-spending-equity.html

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pge
I've always looked at this a little differently - There are only two sources
of cash for a startup, customers and investors. Every dollar you spend has to
come from one or the other. The more of your dollars that come from customers,
the less of your company you have to sell off to investors. So, use the hard
won dollars from your customers wisely, so you can minimize how much you have
to take from investors (zero in the best case).

~~~
JacobIrwin
Don't retained earnings become a part of owner's equity after dividends?

To me, a buck is a buck. Spend it all "wisely."

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pge
yes and no - different bucks have different costs. Every dollar you spend is
an investment, so you should be asking what return you're going to get for it.
For example, if I add another developer, how much value will be created by the
extra expense? If I buy a new sofa, how much value? So, on the one hand, I
agree with you that every dollar should be invested for maximum return, and it
doesnt matter where it came from, but on the other hand, there are decisions
to be made about going out and getting more capital above and beyond your
retained earnings (i.e. debt or equity financing). That money comes at a much
higher price, so the return on it has to justify the cost.

To put it in terms of an individual rather than a company, the decision to
take out a mortgage to buy a house is connected but somewhat different than
the decision of where to spend or invest your salary dollars. The mortgage is
a loan that comes at a cost (the annual interest), yet it enables you to do
something (buy a house)that you could not have done out of your earnings. So,
many people choose that the return on owning a home (whether financial or
otherwise) justifies the decision to seek out a source of capital beyond their
earnings, even though that capital comes at a cost.

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drusenko
I need to give credit to my co-founder Dan for coming up with this analogy. I
think it's especially potent because while entrepreneurs can lose touch with
the value of money (eventually, it all just becomes "numbers"), equity always
seems to stay near and dear to an entrepreneur's heart.

~~~
dannyv
Hah, thanks. I think I mentioned this years ago.

I believe the analogy is most appropriate when a company hasn't yet discovered
a solid, profitable business model. When you're in the early, exploratory days
of your business, spending cash on non-critical items is literally like
spending equity because non-critical purchases (especially extravagant ones)
cut down your runway and do not raise the valuation.

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onan_barbarian
Who buys a $20K couch at a startup?

Besides, this analogy is pointless. Saying a $20K couch - or a $20K
breakroom/kitchen refit (more realistic) is 'equivalent' to 0.2% is
meaningless. If you just turned profitable then you can afford it and you have
to decide if the $20K is worth spending (vs. saving, or handing out as cash to
the employees, or buying something else). If not, you have to decide whether
$20K is worth shortening your run-way by however many days/weeks it will
shorten your runway.

Knowing that it was 0.2% of a historical figure (amount of money you raised)
doesn't tell you anything. If you've made $10M of revenue since, you'd look at
a $20K expenditure quite differently than if you've made $0.

This might all make more sense if you're building a company to make noise on
Hacker News for a while, then exit (perhaps a 'talent acquisition'), without
any real plans to make revenue in the meantime.

~~~
drusenko
> Who buys a $20K couch at a startup?

Apparently, some people do. But it's more of a symbol for frivolous expenses
than anything else.

This thought was meant for the "we just raised money" phase of a startup. It's
certainly very applicable to the money you just raised, since by definition it
was a trade of equity-for-money.

It's not just about being able to "afford it" (which is obviously better than
not being able to afford it). Even if you are generating a ton of revenue,
blowing it all in non-helpful ways is still not justified.

We've built a company that generates very significant revenue, and it remains
even more important to have anchors to keep the value of money in perspective.

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rdl
The thing this needs to take into account is the time value of money and of
risk in a startup.

$10k/mo for the next 5 years is a lot less painful for a seed stage startup
than $200k up-front, if you're going to be increasing in valuation as fast as
a successful venture-funded startup.

Reducing risk also needs to be part of the psychological model; sometimes it
is worth spending 5% to get to a milestone with less risk, because owning 10%
of a $50mm exit is a lot more valuable than 15% of $10mm.

The biggest trick I've found with startups is to just delay and defer anything
not on the path; it's a lot easier to say "we'll buy a nicer couch later" vs.
"no, a nice couch isn't a reasonable thing to spend money on". The other thing
is to find people with a much better time value of money than you, and use
their money to pay for things -- landlords doing upgrades for you (cash
upfront) in exchange for higher rent, deferring getting an office entirely,
etc. Basically, converting potential capex into opex.

~~~
neworbit
A decent rule of thumb is usually "would you spend it if it was your own
money" - most people aren't going to go buy $20,000 couches for the office,
but they might buy an $800 couch or a $150 Craigslist special. Feel free to
ignore this if you are Larry Ellison :)

~~~
rdl
Actually, there have been a lot of times where I'd spend more of my own money
(and have) than I would startup money -- e.g. I'll bring in my personal game
systems but wouldn't pay for them with company money, let people use my
personal car, etc. That's a rational decision for a founder, especially since
behaving that way might encourage others to be cost-conscious (you wouldn't
expect employees to do the same thing, but they might be willing to try a
software load balancer instead of a $50k F5 if you have the right culture, or
at the very least to get the best pricing and terms possible from vendors)

~~~
neworbit
Yeah I used to piss off the CFO a couple of jobs ago by spending entirely
modest amounts of money to make the engineers happy/productive and explaining
"this is something where I would spend my own money to do this, and in fact I
did, if you don't want to cut me a reimbursement check then don't."

It's always kind of crazy to see finance people bitch about buying dinner or
espressos for the team when they're working late.

But sometimes the company ends up with a tightass CFO like that after the
founder buys a $20k couch, so there we go!

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ahrens
A dollar saved is always easier to come by than a dollar earned. Very many
companies start to spend their hard earned money foolishely once they become
big or get funded. You should always treat the companys money as your own, or
you shouldn't be allowed to make monetary decisions.

I always look to IKEAs founder Ingvar Kamprad for inspiration in these
matters. He still buys schampoo in discount stores even though he is one of
the richest people in the world (he doesn't show up in a lot of lists since
his wealth is in funds and not in his name).

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neworbit
as one of my good buddies said "Who buys a $20,000 couch? Do you know how many
servers you could get for that price?"

~~~
MrFlibble
Exactly. Break it down into something useful & tangible.

This is the startup equivalent of reminding a 2 pack a day smoker that their
habit could pay 1/3 of their rent or buy dinner for a month.

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JacobIrwin
I agree with the article. But mostly with what is mentioned at the end. "Many
times over."

If you look at your expenses like capital investments and you employ a good
strategy of weighing alternatives against alternatives then that .1% may
dilute to .001% with a future higher valuation.

The investors money is in place to cover the expenses that allow you to build
the startup company's infrastructure. Try not to look at it so painstakingly.

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far33d
When you put it that way, a $20k couch costs you the same amount of equity as
you would give a senior engineer in a post-series-A company.

~~~
j_baker
If I had a startup, I'd probably rather have the senior engineer than the
couch.

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diego
At the risk of sounding obvious, you have different sources of energy to
spend: your own time/effort, cash, equity. Figuring out when to use which is
the trick. You can't optimize everything, so you have to think about it and
give it your best guess.

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amalcon
I like it. Sort of the business version of "Just because I have money doesn't
mean I need to spend it."

