Session 3, Part 2: Financial Projections

Session 3, Part 2: Financial Projections

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visit MIT OpenCourseWare at JOSEPH HADZIMA: OK, you
met the financing sources. You got a little bit
of an insight there. Part of what you're going to
need when you talk to them is some idea of what
the financials look like for your business. And joining us tonight
to show you how to do that is Charlie Tillet. Now, Charlie's been doing
this for– he was in the $10K. I think he'll talk
about that a bit. CHARLIE TILLETT: Yep. JOSEPH HADZIMA: And I was
in– I've been doing things around the world– I
was in Istanbul two years ago, in a
setting with 25 teams from around the Muslim world. And I was mentoring
a team from Pakistan. And I'm looking at
their slide deck, and I get to the financials,
and I say, where did you get this template? And they didn't quite
understand what I was saying. And I'm looking at it,
it was Charlie's template that he uses in the course. So his speeches here have
transformed financial plans all over the world, in
Pakistan, and he's graciously come back to talk to us. Charlie was the
person I mentioned who I met outside of the MIT
Enterprise Forum meeting, and asked him what he was doing,
and that led to a whole career with a bunch of
entrepreneurs up north. CHARLIE TILLETT: Yep. JOSEPH HADZIMA: And
I'll sort of let you pick it up there, Charlie. CHARLIE TILLETT: OK, great. Thanks, Joe. What was the first
story he told? AUDIENCE: Jumping in
your pickup truck. CHARLIE TILLETT: OK, yeah. So we will get to that. So it's great to
be here tonight. I've got probably
twice as many slides as I should cover in my little
over an hour that I've got. So I'm going to go quick. But feel free to ask any
questions as we go along. And what I'll try and do is,
I wrote down a few notes, listening to the
panel, the great panel that we had here,
maybe some terms that they brought up
that they didn't really give enough explanation
or background on. So I'm going to try to touch
on those as we go as well. So tonight we're going to
talk about your business plan financials. Putting together that
critical spreadsheet that you've got to have when you
walk into that meeting, right? Or when you send
someone your deck, and how to put that together. But we're going to
step back a little bit. And as people say, I was a
CFO of a couple of companies. But part of my job was
being a salesperson. And what I would
do is I would walk into these meetings with
a deck and with a team. But my job was to sell
that team to the investors. And in return, they
would give us money, and we would give them stock. But what we're really
selling is the team, and the concept of the business
that we're trying to build. Then, will talk about what
is your business model, and building your
financial projections. And so this template that
I'm going to show you tonight is up on the website. There's a new
template this year. It's got a little more detail
in terms of cost of goods sold, in case you're doing something
that's got more of a hardware component. This gives a little
more detail on that. But that was what I
was trying to think of. So this template is
going to be out there, so that you can download it. It's an Excel spreadsheet. You can start plugging
in your own stuff in it. And I'll tell you
the things that you need to take out when you
actually show it to someone. And then, the last
part is we're going to talk about sharing the pie. So I've added a couple
things to this talk about putting together your
business plan spreadsheet. And one of them is talking
about the venture capital perspective, and helping
you sit it in their shoes and evaluate your opportunity. But also thinking about the
other uses or takers of equity in your company. And by equity, I mean stock. So I've got couple
slides on here on thinking about your
company, and all of the people, and all of the entities that
could potentially get stock in your company,
and what that does to your ownership
in the company. So my background is I was a
graduate from Sloan in '91. That was the inaugural
year– oh, well, in 1990 was the inaugural year
of the $10K Contest. Well, it's now the $100K. And we were the
third place team. So rather than get,
you know, I think it's now $20,000 or $30,000
worth of free legal service and accounting
service, we got $300 to split between
the three of us. So since that wasn't enough
to start our business, we all went our separate ways. But what I did,
Joe introduced me to some guys who had
an interesting idea for some network
monitoring equipment. And they didn't really
know how to build a business around that. And that experience
in the $10K Contest was critical, because I'd
worked with these two guys. And we'd sat at the– we didn't
have Wi-Fi at that time– so we're sitting in
the computer lab, plugging it into a
spreadsheet late at night, going, well, if we increase
the sales price by this much, what does it do to our business? If we are able to reduce
cost by this much, what does it do to our business? How many salespeople
are we going to need? And I went through
that whole exercise of building that template for
the business plan contest. And because of that, I
had tremendous credibility when I started. I knew what I was talking
about when I went in to talk to these guys who
had this data communications product. And I was able to
convince them that I could help them build their model. And sure enough, I
was able to do that. But it was the entering
into the contest, and working with the
team, and working through all of that, that
helped give me that experience. The company was
NetScout Systems. We completed several
rounds of venture financing there, and went public in 1999. I then got involved
with a company, which fortunately
didn't last too long. And then was at a
Homeland Security company that made bomb detection
equipment for airports. So completely different
industry, but the same metrics. The same tools apply. The same spreadsheet that
I'd built to get NetScout off the ground was
the same spreadsheet that I used to get
Reveal off the ground. And it's the same spreadsheet
that you guys can all use to get your
business off the ground. I raised $125 million in
more than 10 transactions over that period. So you're probably
saying to yourself, I'm too busy to
do my financials. Right? I've got more
important things to do. One, they're not going
to be right anyway. I mean, who can
sit here and say, we're going to be able to be
spot on on our financials? Right? The second is, the VCs aren't
going to believe it anyway. They're going to
look at your numbers, and they're going
to say, they've got their own ideas of this. And the third is, you've got
more important things to do. Building the team, figuring
out what the product is, and looking at who
your customers are. But the reality
is the financials are the scoreboard, the
scorecard for your company. So if you don't know
what you're shooting for, then how do you know
whether you're making progress against those goals? But the more important
thing is kind of what I was
talking about with me and my team in the $10K Contest. It helps you understand what
your key assumptions are, because you've got to put those
assumptions into either numbers or formulas. You've got to understand
what the drivers are. So if you're able to
increase prices by 10%, what does that do? Is that an important
lever or not? Or is it more important
to get your costs down? Or is it more important to
outsource your development and get your R&D spending down? Is it more important to do
software as a service model, or sell it is a product? And how do those things
impact how much cash you're going to need? So it's a great exercise that
helps you understand what's going on in your business. Because as the CEO
of your company, the number one
job is to maintain the cash in the company. It's the oxygen supply. And without that, you could be
doing everything else right, but it doesn't take
long for people to start walking
out the door when they're not getting a paycheck. Now, your management
team– we've had those days where I
have to go to the guys and say, hey, guys, there's
not going to be anything in the envelope this week. But for your rank
and file employees, you can't be missing payroll. And your vendors will only
let you stretch out payables for so long. So you've got to know where
you stand with your cash, and what cash you need. So you don't need
to be an accountant, but you've got to
understand these key terms. And you've got to be
able to discuss them. Because the investors
up here, they also don't expect you to
be an accountant. But they do expect you
to understand the drivers in your business, and what the
key metrics in your business are. In Reveal Imaging–
Reveal Imaging was a company that made
bomb detection equipment. And there we had an
all-star management team. We had five guys– this
was founded in 2003, 18 months after 9/11–
we had five guys who'd been in Homeland Security
for more than a decade each. So there were a
lot of people who wanted to get into Homeland
Security on September 12, OK? But there were not
a lot of people who were in Homeland Security,
the Homeland Security business, on September 10. And we had five of
those guys here. So we had a market opportunity. The Congress had said,
all passenger bags that go on a passenger
airliner in the United States have to be screened
for explosives. And we want a machine that
can automatically do that. We don't want people
looking at X-ray images. And there were
machines on the market. These guys had actually–
of the eight machines that had been certified–
these guys had been involved in getting four
of those machines certified. So we really had
an all-star team. They had come up with an
idea for a product that was half the size of
the existing equipment. Also half of the throughput,
but half of the cost. And so those metrics were very
compelling for the smaller airports like Burlington,
Vermont, or Nantucket, Mass, rather than the Logan's. But there's 500 airports in
the country, and one by one they were getting ticked
off by our competitors. So we had an opportunity
to get to market that we had to get to fast,
because once those airports were staffed with our
competitors' equipment, they were no longer
an opportunity. So we went out, and we
hit the ground running. And we started raising money
the first day we got together as a management team. We raised an angel round within
90 days of $1 million dollars. And then, within six months, we
raised our first venture round. And it was a $5 million,
but it was in two tranches. The tranches were a
$5 million tranche, and a second $5 million tranche,
based upon hitting milestones. Because we wanted to raise
as much money as possible, but our investors were reluctant
to give us everything up front. So we reached this
compromise, where we said, OK, we're going
to hit some milestones, and because we had
the financial plan, and we knew how far $5
million would take us, we knew what we could get done
before we ran out of money. And so we were able
to pre-negotiate an increase in value upon
hitting that milestone. So it was kind of a
win-win, because we did not have to spend– once we
raised the $5 million, we didn't have to immediately
start thinking about raising the next $5 million,
because we had that kind of in our hip pocket. All I can say is that,
as soon as we raised a round of financing,
I started thinking about the next financing
that we were going to do. It could have been
bank financing, like an equipment
line, which is simply as you buy equipment for
your manufacturing facility, or as you buy computers for
your software engineers, you send a copy of the
invoice over to the bank, and they will provide–
they will give you 90% of that money back– and
you now have a loan to the bank. So it didn't look like a
lot of money, $500,000. But as we were getting close
to running out of money, and we hadn't met
that milestone there we had committed to to
get the second $5 million, that $500,000 was
very important to us. Because that gave us an
extra three months of runway to get closer to the goal. So I'm going to kind of
take you behind the scenes to think about what does
a venture capitalist want. When they put in
their money, they're interested in getting 3x
to 5x absolute returns. So if they put $1 million
into your company, they want to get $3
million back to $5 million back, on top of the $1 million. So they've got to get $4
million to $6 million back. And if it's $5
million, do the math. Their investment horizon
is five to seven years. And what I will say is that,
when you take venture money, that clock starts ticking
the day that that money gets wired into your account. And while five years
seems like forever, the investors realize that five
years goes by in a heartbeat. And they will start
pounding you to run faster than you think you can
possibly run from day one. And it's motivating,
and it's a great thing. And if you have
the right partners, they're helping you
do the right things. But you got to
recognize that it's going to be– I think they
admitted up here– it's going to be a very
intense environment when you take that money. So you better be prepared for
it when you take the money. They also want to get–
I mean, you heard up here that they want to get a
significant amount of money invested. It depends on the firm. Some firms might want
to put in $1 million, some firms might want
to put in $5 million. It depends on the firm. But they want to have
a significant amount of money invested. And they want to have a
significant ownership. So if $5 million
is their target, they don't want to
put in $5 million and get 10% of the company. They want to have– at an
early stage investment– they want to have a
significant amount. So the formula to think
about how much equity you have to give up is
the percentage of equity that the venture
capitalists are going to get is the money that they
invest– and we'll have some examples on
the next page– divided by the pre-money value plus
the money that they invested. Now, that's the formula. It doesn't really give you
the answer, because what's the pre-money valuation? But as you heard up here, kind
of where is the market today, he was saying he sees
a lot of companies in the $3 million to $6
million pre-money range, right? So there is kind of a sense
of where the market is today, and what other
companies are getting. But where that pre-money
valuation comes in, that's the key to
the negotiation that you have to do. The other part is how much
money they're investing. So if we look at a
couple of examples here. Say a Series A round, $5
million invested on a $5 million pre-money. So we take the $5 million
invested, we add that to the pre-money of $5 million. It's 5 over 10, it
comes out to 50%. If there's a Series B,
let's say it's $10 million invested on a $15
million pre-money. That'd be $10 million over 10
plus 15, would be 10 over 25, or 40%. But recognize that when the
Series B money comes in, the Series A investors get
diluted by the same 40% that everyone else
gets diluted by. And I have an example
walking through that. Typically, the A
and the B investors are going to be the same people. So the B investors are kind
of diluting themselves. But recognize that
that dilution happens. So don't think that you're
giving up 50% of your company, and then 40% of your
company, and you're left with 10% of your company. You're really left with
30% of your company, right? So if an investor is looking
for three to five times on their money, and
they've put $15 million in, and they own 70% of
the company, then three times the $15 million
invested is $45 million, plus the original
$15 million back, so they've got to
get $60 million. They own 70% of the company. So that company has to be valued
at $85 million to $130 million for them to get
that type of return. And so in order to
get so that valuation, you've got to grow your
revenues to $40 to $60 million. So there's a lot of
businesses that you guys could start that can grow to–
you know, another comment you heard here was make
sure that your investors and your opportunity and
your investment dollars are aligned, right? One of the big
problems was people going after what turned out to
be a small opportunity with too much capital. So the problem is, is that
once someone has $15 million invested in your company, you've
got to go after the big return. So you could have
a business that could be a great
business for you and a couple of your MIT
pals that goes to $5 million in revenue, or $10
million in revenue, and there's three of you,
and you each own 33%, and you have no outside income,
and no outside investors, and it's very profitable. It could be a
great business that could be just a
gold mine for you, but it would not be an
appropriate investment for some of our panelists here. And if they had come
in as an investor, then there's going to be a
mismatch, and a lot of tension. Because you can't get to a
happy place for both of you. So I know that this screen's a
little bit hard to read here, but let me just walk you
real quickly through. If you've got a
founding group here that has four million shares
between all of the founders, they've got 100% of the equity,
and there's 100% right there. You then bring in some early
employees and give them– and there'd be a
list, I have a list in the back of showing kind
of who would get what– but you have some
early employees, and maybe some advisors,
that get a number of shares. And so already the founders
get diluted a little bit. They then bring
in an angel round of $500,000 at a $4.5
million pre-money. So we know for our formula,
$500,000 divided by $5 million, the angel investors
are going to get 10%. In this case, and in all these
cases, new shares are issued. The founders continue to own
their four million shares, but now there's five million
shares in the company, and the founders have
been diluted to 80%, OK? We now have kind of the
classic A round venture capitalists come in, and
they put in $5 million at the $5 million that
I talked about earlier. They get 50%. But one of the
things that is going to happen when the
A round comes in is the investors
are going to want to see that you
have an option pool so that you can issue stock
options to your employees. Because all employees
like stock options, and it provides extra
incentive to your employees. But the investors
are saying, we don't want to be diluted for the
first 100 people that you hire. So you've got to
set aside options to take care of those people
without them being diluted. So they still get their 50%, but
you've got to create this pool. And in my example, it's 12%. But it's somewhere in the
10% to 20% range, right? And that's a topic for
discussion and negotiation with your venture capitalists. Anything I'm saying wrong
here, feel free to hop in. So then we have our final
round is that $10 million at $15 million, and
these investors get 40%. Notice the A investors
are now down to 30%, and our founding team
is down to 18.2%. So this kind of walks you
through the progression of how stock gets distributed
to both employees, angel investors, and
venture capital investors. Yep? AUDIENCE: So the question I
have is other than the stock distribution, do
they get more control because they ask for
more seats on the board? Is that something which happens
a lot when the second round and third round happens? CHARLIE TILLETT: So the question
is, do they– so first off is the investors are going to
get preferred shares that have many more rights than
the common shares, OK? And there will be
anti-dilution provisions, there will be
ratchet provisions, in case there's a down round. But probably the most important
thing that will always happen is that they will get
board representation. And that is a little
bit of a negotiated– it's not negotiated that they
have board representation, but what I've seen is, so let's
say that you're the founder, you say we have two
seats, the founders have two seats on the board,
your venture capitalists come in, they get two
seats on the board, and then you agree that
the fifth board member will be mutually agreed upon. And you've got to
figure out– again, if you have problems
deciding on a mutually agreeable fifth board member at
this stage in the relationship, then these are not the
right venture guys for you to be working with, OK? So it should be pretty
easy to find someone that everyone agrees
has domain knowledge, has expertise in the field, is
entrepreneurial, and is going to be kind of neutral, right? So does that answer
your question? Yep? AUDIENCE: Yeah, on a previous
slide, you were talking about, say you've taken $10
million in VC money, but it turns out the
opportunity was smaller. It's only $5 million
in revenue per year. What are the
options, then, there? CHARLIE TILLETT:
So her question is, let's say you've taken more
money than the opportunity. There's really no
happy ending there, because the investors
are going to want to get their money back. And a company that
grows to $5 million, it's kind of the
walking dead, right? So you're now
making enough money to where you're not
going out of business, but there's another problem
there, is that companies that only get to $5 million and $10
million– now, I don't know, how much revenue does
Pinterest– you know, there's a lot of companies
out there that have no revenue and have tremendous valuations. But let's not plan that we're
going to catch lightning in a bottle, OK? So a company that has $5
million to $10 million in revenue, the reality is that
there's a very small market. Who's going to buy
a company like that? When we were at Reveal
Imaging, we grew the company to $100 million, and we grew
the company to $50 million in revenue, but our buyers were
aerospace defense companies that are huge. And they were willing
to pay us $125 million for $50 million revenue,
but nothing more than that. They were only willing to pay
us kind of 1.5 times revenue. They were hoping that we would
have $500 million in revenue, because they were willing
to pay $1.25 billion. But the problem is that a
$5 million to $10 million company doesn't get
any big company who's your– it's too small to go
public, and the big companies, it's not big enough
to move the needle. Especially if you've
already proven that it's not going to go like that, right? You've already decided that
it's going to go $5 million, $6 million, $7 million. It doesn't get anyone excited. So the business model,
and in my mind– I mean, you heard the term used a
couple of times on the panel tonight– how I think
of it is it's an income statement in percentage terms. And we'll show you some
of the business models from a number of companies in a
number of different industries. But when you think about
your business model, think about your business
reaching critical mass. Do you have to have some kind
of geographic dispersion? Or do you need a
critical mass of sales in order to get your
volume pricing down? Or maybe it's the
number of customers that gives you some kind of synergy. So when you think about your
business model, think about it, it's in the happy times, right? It's reached critical
mass, and it is kind of hitting on all cylinders. So how many are Course 15? OK, maybe about a
third, or maybe 40%. So this is going to be
a little bit boring. This section is going to be a
little bit boring for you guys, but I want to make sure
everyone's on the same page here. So when we talk about the income
statement, we start at the top. And it's your sales number,
also called your revenue number, and that's the products that
you're shipping out the door, or the service that
you're providing, and the dollar number that
you're putting on that invoice. So it's after any
discounts that you give. It's after any
kickbacks or anything. It's the number– when
you send out an invoice to that customer, what's
the dollar on that invoice, and what's the check
that you're going to get from that customer. Your cost of goods sold
is the material costs, the labor it costs to
build your product, it's the facilities in
which that product is built, but it's also your support cost. So if you ship a product, and
you have a one year warranty, or you have a tech support
line that people are calling, that's part of your cost, too. So you've got to staff
that tech support line. You've got to man
it, maybe it's 24/7. If you've got a
hardware product, and it breaks within
the warranty period, you've got to fix that. You've got shipping costs. You might have to send
someone out into the field, if you've got a big machine
like we had at Reveal that weighed two tons. So those are all
the things that go into your cost of goods sold. It's not your R&D. So it's
not your programming cost. Your product development
costs go down in R&D. Then, you have your
three main departments. Sales and marketing
is self-explanatory. R&D would be all of your
programming, product development, any
material that gets bought as part of your
product development process. Then, your general
and administrative is kind of everything else. Your CFO is in there,
your CEO is in there. HR, IT, your facilities,
your facility staff for the non-manufacturing
facility. And at the bottom is
your operating profit, or EBITDA, earnings before
interest, taxes, depreciation, and amortization. And I like to use that as the
yardstick, because it gets really complicated adding
in capital expenses and depreciating stuff, and that
kind of obscures what's really going on in your business. So I would urge
you in your plans don't depreciate
anything, and also don't start allocating your
general and administrative expenses across
other departments. Just let them sit in your G&A. So I get a lot of
business plans. I'm happy to look at
anyone's business plans. My email is at the end
of this presentation. Any time, whether it's part
of this class, or any time in the next 10 years, you want
to send me a business plan, say, I'm getting ready
to make a presentation. I want someone to
look at this and just make sure it's
not totally crazy. So I get a lot of
business plans. And the first thing that I do
when I look at a business plan is I look at the
top line, and say, how big is this
business going to get? What is the market
opportunity here? So here's an
opportunity, they think it can grow to $75 million. The next thing that I
look at is, in year four, kind of the happy times, once
they've reached critical mass, what does this
business look like? What are the gross margins? I've worked in
companies that have 80% gross margins and companies
that have 50% gross margins, and I can tell you it's
dramatically easier to make money and
run a business when you have 80% gross margins
versus 50% gross margins. It's dramatically different. And then, where are the
big expenses down here? What are they spending on R&D? Particularly, what
are they spending on sales and marketing? Because most firms end up
at about the same place in R&D spending once
they reach critical mass. They end up about the
same place G&A spending. But the sales and marketing
wildly varies, depending on is it a consumer product, is it
a business to business product, is it a luxury
product that you have to do a lot of advertising,
is there a lot of trade shows. So it depends on your whole
sales strategy and distribution strategy, and that shows up
in your sales and marketing. The last thing that I look at
is kind of the operating profit over the this four year period. Because that gives you
a pretty good yardstick for how much cash
this company is going to take to get
to profitability. It's not perfect, but it's
probably within 20% or 30%, which is a good– you
know, it at least says to me this company, $3.5
million plus $2.5 million is $6 million, maybe it lost a
little bit here in year three, so it's $7 million. It's not a company that's
going to need $20 million. But it's also not
a company that's going to need $1
million or $2 million. So it gives you just a sense
of what this company needs. Now, let's say you're looking
at your business plan. I would urge you to
look at the same thing. Start at the top line,
and say, do I really think this business can
do this kind of revenue? I would also urge you to look
at year four or year five, whatever it's going
to take you get to that place, the
critical mass, and say, does this business model
look like other companies in my space, or is it different? And if it's different, that
doesn't mean it's wrong. It just means that you better
understand why it's different. Maybe you're doing something
dramatically different. Maybe you've got
some tremendous cost of goods sold value that
other companies don't have. But you've got to
understand that. Then, I would urge you to
think about a year one, because thinking about
expenses in year four is a very difficult exercise. Because you can't even–
I mean, here you are, you're getting your
business off the ground. It's hard to think about if
I had $75 million in revenue, where would that money be spent. But it's very easy to think
about the next 12 months. And who are my key hires? And how much are those
people going to cost? And what are the
stuff that they're going to need to buy to
help them do their job? And you're probably not
going to have a lot of sales, so you don't really
need to think too much about cost of goods sold yet. OK? But you need to
start thinking about what are my staffing
priorities, and what are the things that we need,
and where are we going to locate our business, and what we don't
have to spend on facilities, and that kind of thing. And then, while year one
should be fairly easy to do, year two is not that much
more of a stretch, because you are ready have kind of thought
about where I am in month 12. And so you just kind
of extrapolate that into what are we going to do
once we start having revenue? OK, so what is my support
team going to look like? What is my sales team
going to look like? And put some numbers on that. And then, once you've
done that, look at where your percentages
are out here in year two. And you already looked at
where they are in year four. And kind of make year three as
kind of a blending process, OK? Now, you're not going to
do this on an annual basis. I'm going to urge you to
do it on a quarterly basis. And we'll get into those
specific spreadsheets and talk you talk you
through that in a bit. So the business model in terms
of this percentage of income, or percentage of
revenue, exercise helps you think about what your
business is going to look like, and how you're
going to get there. It's going to show
how your business is going to make money. So let's look at a number
of different companies, OK? This is a number in
the retail sector. You guys all know them. Walmart, the low cost
leader, Target's kind of a middle market, and
Nordstrom is more high end. What has categorized
these businesses. They all have crappy
gross margins, right? 24% for Walmart, 34%
percent for Target. They spend nothing
on R&D. Target should probably spend a
little something on their IT department, though, right? Now, all of this information is
available from the Securities and Exchange Commission, or you
can get rid of Yahoo Finance now. So just going to
Yahoo Finance, you can pull up the annual reports. You can get all this
information off of there. Most companies do
the lump sales, general and administrative
expenses together. So I don't have a
breakout on what they're spending on sales
and marketing versus G&A. But you can see
the sales, and SG&A comes in kind of
across the board here. But not tremendously profitable. But very high annual revenue. I mean, look at Walmart
at $344 billion. So 6% of a big number
is still a big number. One of the things that's
useful to look at, not comparing yourself
to these companies, but comparing yourself
to your peers, is going to be looking
at revenue per employee. So I just threw this
on here so you could– it does tell a lot how companies
within similar industries have very similar
revenue per employee. And in retail, it's in the
$150,000 to $200,000 range. Let's look at the
restaurant business. It's probably even worse, right? Again, terrible gross margins,
but actually the profitability is a little bit better
than the retail stores. But look at the revenue per
employee, $45,000 per employee. So think of this. The cost of goods are 68%. And a lot of that's
got to actually be meat and potatoes, right? So how much money is
actually left over to pay– if your average
employee is $45,000 per person, you can't pay that
person $45,000 a year. So this idea that
they're going start being able to pay fast
food workers $15 an hour, which is this big
argument, there's just not enough money there. It's a crazy
business here, and I suspect that there are a
lot of part-time workers. But it is an
interesting fact here that all these businesses have
such low revenue per employee. Let's look at some
interesting companies now. Cisco, very good
gross margin, 64%. We see R&D is at 13% and
operating profit at 25%. These might be a
couple years old, but they're in line with this. And revenue per employee
is $573,000 per employee. Think of that versus
$45,000 per employee, OK? So you can afford
to pay your Cisco employees $100,000 to $125,000. You can't afford to do
that at McDonald's, right? So again, these
are characterized by R&D spending of kind
of the 10% to 15% range. Except for Dell. And Dell is really
just a box manufacture. They're just an assembler. They're just a
supply chain story. They're not an R&D story. And it comes out
in their numbers. Medtronic is a
medical device maker, but it really has all the
characteristics of a technology hardware company. Let's look at some
software companies. Again, even better
gross margins. Say R&D is in that
same 10% to 15%. And the revenue per
employee at Microsoft is about the same as Cisco. Oracle and SAP,
which are more peers, have very similar
revenue per employee in that $250,000
to $300,000 range. The internet companies
are all across the board. I mean, Apple's not really
an internet company, but they are kind
of interesting here in that they have $2 million
of revenue per employee. Mind-boggling. I mean, Google is at $1 million. I started putting Google on
this after they went public. And I said, well, they
can't sustain that. They were about $1
million when I first did it I think three years ago. And they've actually increased
their revenue per employee as they've grown. So they've become
more productive, which is kind of– few
companies are able to do that. Usually, companies
have a decrease in revenue per employee
as they get bigger. Google's been able
to increase it. Again, here, R&D spending. I mean, Apple is so big that
that 2% is still a huge number, right? But if we look at
the rest of these, it is a little bit
across the board, and it's part of where a company
is in this stage of their life cycle. But this gives you kind of a
sense of where companies are. Another thing that's
interesting here is the two companies with
the lowest gross margin are Apple, which is
selling hardware, and Pandora, which
is selling music. So just because you're in a
intellectual property business, or in a– I don't know what you
would call music, if you're not calling it hardware. But it's kind of interesting
that their cost of goods are actually as high as Apple's,
because of the royalties that they have to pay. And that creates some
problems for them. I think they're now
starting to show a profit, but it's still a
very tough business. Looking at business models
over a period of time, they evolve slowly. I've been doing this
talk since at least '98. And just looking at Cisco,
it looks like the same. I mean, yeah, it goes up
and down a little bit. But companies do
not dramatically change over a period of
time once they kind of hit that critical mass. So as you're
building your model– I know the talk yesterday was
on your product and pricing your product– what's the value
that you bring to the customer? And how is that value
going to be split between you and the customer? I hear a lot of
people say, well, we have a product that will
save our customers $10,000. So we think we should
charge them $10,000. Well, at $10,000,
they're indifferent whether they do it manually
or whether they do it with your new
piece of equipment. So you've got to
price that product to where it's compelling for
the customer to take that risk and make that change. And if it's a $10,000
value to them, you've probably got to price
that at $2,000 or $3,000, and let them capture the
majority of that savings, because they're taking the risk. And so you've got
to figure out how, at a $2,000 or
$3,000 price, you're going to be able to sell
that and capture enough value yourself, OK? Your distribution strategy. So think about the price, and
then your cost of goods sold should be pretty
straightforward. I mean, you know the
material that goes in there. Again, it's not how
long is it going to take to develop this product. That's part of your R&D, and
that's a whole other exercise. But it's, if I sell a unit, how
much material goes into it, how much labor goes into
it, how much overhead in the manufacturing
facility goes into it, how much support am I
going to have to provide? These are all questions that,
if you sit there and noodle away at it, you can come up with
a pretty reasonable range, and come up with your
cost of goods sold. When you think about your
distribution strategy, how am I going to
sell my product, that could have– I have an
example of that in here– that could have a huge impact
on everything involving your business, in both your
revenue all the way down to your sales and marketing
and your operating profit. So that's a huge decision
you're going to have to make. R&D, I would argue, should
end up at the 10% to 20% range generally. As we've looked at
a lot of companies, that's where they end up. That doesn't mean you shouldn't
be at 30%, like Zynga was, depending on where you
are in your life cycle. But if you're a
technology company, and you're not spending
10% of your revenue on R&D, you're yourself short for
tomorrow's products, right? Because you've always
got to be evolving. G&A is going to end
up at 5% to 15%. The lower you can
get that, the better. That's where the CFO is,
so just squeeze that down. And make sure you build
in an operating profit. Now, you're operating profit
shouldn't be 40% to 50%. There's a few companies
that can get away with that. But to think that your
company is one of those is probably unrealistic. So if you're putting
together your model, and you keep coming up with a
40% to 50% operating profit, you should really question
some of your assumptions. Do I really, am I
missing anything here? I'm not saying it's wrong. It might be doable. But you're going to get
some pushback on that from people who've looked
at a lot of business plans. So I talked about how
your distribution strategy is going to impact
your operating profit. So let's look at an
example here where you're selling it through
your own direct sales force. You have $100 million in
revenue, your cost of goods is $40 million, leaving
you with $60 million, or 60% gross margin. You have $23 million in sales
and marketing, $12 million in R&D, and some G&A,
bringing your total expenses to $40 million, and an operating
profit of $20 million, or 20%. So let's say, instead
of that, you say, I'm going to bring
in a distributor, and give him a 20% discount off
of our list price or selling price. And in return for that 20%,
he's going to go out and sell it to the customer. He gets to keep the
20%, but he frees me up of all the sales and
marketing activity. Well, not entirely. Because even the
distribution channel needs some care and feeding. So you can't completely get
rid of your sales force. You can't completely get rid
of your marketing efforts. But you can cut those back. And in my example, I said,
well, you could cut it back from $23 million to $8 million. Now, your R&D is
still going to be the same, because
you've got to keep feeding the machine with
new products, right? And your cost of goods is
going to be exactly the same, because you're shipping
the same number of units. But because you have
fewer employees, you probably don't need
quite as many people in HR, you don't need as
many bean counters. Your G&A is going to
be a little bit less, and so that's going
to be $4 million. So in this example, your revenue
is reduced from $100 million to $80 million, and
your operating profit is reduced from $20
million to $16 million, but you're still
getting a 20% profit. Now, I don't know whether
one is right or wrong. I would say that the
distributor model is going to be great if it
can get you to market faster, or if it can take you from
$80 million to $160 million faster than you could grow
organically from $100 million to $160 million. You're still getting
the same 20%. And whether that 20%
came out at 15% or 25%, the more important number
here is the $16 million in operating profit
versus the $20 million in operating profit. So as you're
building your model, there is some business
planing software out there, kind of like a TurboTax. It asks you a
bunch of questions. It asks you the questions,
you answer the assumptions, and it spits out a plan. Do not use that software,
because the beauty of this exercise, the
benefit of this exercise, is understanding exactly
what's going into your model, and building it yourself. And when something doesn't add
up, figuring out what's broken. When you start getting
50% operating profits, start saying, let's look
at my revenue per employee. Oh, my revenue per employee
is $1 million per employee. Well, Google does that,
and Apple does that, but there are not very
many other companies that have $1 million in
revenue per employee. So maybe I need to add more
employees to my staffing plan. And where am I going to
deploy those people in order to build up my organization? So it's doing it, it's
working the exercise that is the real benefit. Build your sales projections
from the bottom up. Anyone watch Shark Tank? OK. I gave this talk
about two months ago, and everyone said, no, it's
on Friday night, I go out. You know, I'm not waiting
at home Friday night. So someone was on
Shark Tank last week, and they said they're
selling a product that went into school lockers. And they said, why are
you valuing your company at $5 million? And he said, well, there's
50 million school lockers in the country, and we only
need to get 5% of them. I mean, it's a crazy– that's
wrong on so many counts. Because it doesn't
talk about how you're going to get into each
school, how many are going to sell into each school, what
is your distribution strategy to get there. So instead of saying,
the market is huge and we're going to
get a slice of it, what you said need
to say is, we're going to have five sales guys. And each sales
guy is going to be responsible for a
territory in the country. And each territory has–
I'm kind of making this up about the school
lockers as I go here– but each territory
has 25,000 schools. And I expect each sales
guy to higher 10 reps. And each rep is going to
go to two schools a day. And we expect a closure rate of
10% when they go to a school, and each school that buys these
is going to buy 50 lockers. And you put that
all in, and it'll come up with a model for how
many you're going to sell. And that may not be–
it will not be accurate. Because as you put this
together, it's a crystal ball. And when you get
out there, you're going to find out a sales guy
can't go to two schools a day, and he can't close 10%,
and they don't buy 50. But when you get a guy
out there selling stuff, he's going to be
providing data, and you're going to start getting
feedback to say, we can visit three
schools a day, but there's only
a 5% closure rate, but each school that does
buy is going to buy 75. And then, you can
adjust your model. But since you've
built your model, now you can adjust
it, and figure out where you're going to go next. The last thing is that
there's spreadsheet overload. So never do a best
case, worst case, and present three
different models, and say, if everything goes right,
here's what we need. I'm not saying don't
look at contingencies. But just put your
best foot forward. Put your best
estimate on the paper. Say, here's what we
think we're going to do, and leave the best case,
worst case for someone else. I might give you some rules of
thumb on the next spreadsheet. These are focused on making
your investment interest attractive to investors. Just like your $5
million business might be a great
business, it's not going to be attractive
to investors. So I may say, don't put
together a business plan that only gets you to $5 million. That could be a great business. OK, so don't let me
discourage you from that. It's most relevant for
technology companies. So if you're going to
start a fast food chain, these metrics are not
going to apply to you. And like I said, it might
not apply to your industry. Staffing is what's going
to drive your expenses, OK? Most technology companies,
staffing is 50% to 66% of your expense. And your average
cost per employee is going to be about $90,000. I know it sounds crazy,
sounds crazy high. But the reality is,
in Boston, first off is, who has administrative
assistants anymore? Unless you have like a
large manufacturing staff that's doing kind of
assembly and stuff like that. But in most of the companies
that you guys are going to be starting, it's going to
be a lot of technology workers, it's going to be a
lot of programmers, it's going to be a lot of
sales and marketing staff, it's going to be a
few finance people. I mean, the finance
and HR are probably going to be the cheapest
people in your company. I mean, really. A programmer these
days, especially if you want to get a
algorithm engineer, algorithm engineer is
probably going to cost you $125,000, $150,000 a year. OK? Just a programmer's
going to cost you $80,000, $90,000, $100,000. And these folks are going
to want raises every year. So salaries are going to
come in at about $90,000. Employee benefits are going
to add about 15% to that. So I know you've all heard
horror stories about General Motors pays their
guys $25 an hour, but they're true
cost is $50 an hour. Ignore all that
accounting mumbo-jumbo. You can add in 15%, and that'll
be a pretty good yardstick to cover their FICA
expenses, which is Social Security tax,
and their health insurance. OK? As I said, salaries are going to
be about 2/3 of your expenses. And sales staff is really
industry dependent. So I've got some
yardsticks on here, but it really
depends on– if you got a guy who's selling
lockers to a school system, OK, you can probably get that
guy for, I don't know, probably $50,000 a year, and maybe
give him a 10% commission or something. Or maybe $40,000 a year. So you know, this
is not a guy that's selling complicated
software sale, OK? But someone who is selling
something like that is going to need $150,000
to $250,000 a year. So I don't have time to go
through a case study here, but a couple years ago,
I went in when OpenTable went public, and just looked
at some of their publicly available information. And this first page is all
of the publicly available information. But I was able to really
uncover a lot of things about how they ran
their business, and how they were
generating revenue. And I would just urge you to
look at these next few pages. This presentation will
be on the website. In terms of cash flow, it's
critical to understand it. But producing a
cash flow statement is really complicated, and
it's really prone to error. And the reason is
that you have to put in all of these
formulas, and then the plug number that makes
all the formulas work is cash. So any error in any formula, or
anything that you fat-fingered wrong shows up as cash. And sometimes it's
to the negative, sometimes it's to the positive. Every time I do
this, I say I'm going to put together a cash flow
just so people can look at one. And maybe I'll chastise myself,
and I'll go home and do this. And if I do, I'll
send it to Joe. But a good proxy for
cash flow is just looking at your
cumulative operating losses over the period of
time, and adding in any capital expenses that you had. And while that's
not perfect, it's a pretty good number
for how much money this business is going to need. So a lot of people ask me, well,
how much should I pay myself? And venture catalysts, they
don't want their entrepreneurs to starve, but they
want them to be hungry. So what I would urge you
to do is think about maybe what you made before
you came back to school. I mean, I assume a lot of
you are graduate students. Or think about
what your peers are going to make as they're
going out into industry. Now, if you're in a very
specific discipline, and your peers are going out
to work in that discipline, and because– let's say
they're geological engineers, and they're going to
go up to North Dakota and make $250,000 a year because
they're helping drill for oil. Well, you can't
say, well, look, I could be drilling for oil
in North Dakota for $250,000 a year. Therefore, that's what
I need to pay myself. So that's kind of
an extreme case. But think about what
your peers are making, and generally you
can argue that that's what you ought to be paid. Or what you were getting
paid in your prior life, unless you were an investment
banker in your prior life, right? Your investors want you
to earn a living wage. They don't want you to be
worried about paying the bills, or getting your car fixed. They don't want you
to work 23 hours a day with as few distractions
as possible. But they want to make sure
that you're still hungry, and increasing shareholder
value every day. So here's what we want to
get to is our profit and loss statement for four years, OK? And so I've got this
color coded spreadsheet, and here's the code here. Anything that's in blue comes
from another spreadsheet. And I've got a
little column here that you would take out when
you actually presented this to anyone that says, here,
this is coming from the P&L by quarter spreadsheet. And so this spreadsheet's got
about 12 pages on it, right? So here's your summary page
here, and as you can see, everything comes
from another page. So nothing shows
up on this page. But as you're putting
together your spreadsheet, you're going to keep
coming back to this and say, how does this look? Does this make sense? Do my sales go like this? Or do my expenses go like this? Or is everything kind of in
a nice, smooth trend line? Or if it's not,
can I explain it? So for example, I might have no
marketing expenses in year one. I might have a tremendous amount
of marketing expenses in year two as we launch our product. And then those expenses,
maybe not in absolute terms, but in percentage terms,
come down in year three, because now we've already
reached the market. So the next spreadsheet, and
this spreadsheet is actually– I would urge you to,
at least to start with, do for your projections
on quarterly terms. Because there's a
lot of times you're going to be fat-fingering
stuff in here, and when you have
48 cells that you have to fat-finger
something in, you're going to make more
errors than if you only have 16 to put them in. And so this spreadsheet goes
out to about here, which is year 4, Q4, right? But as we can see, everything
from our quarterly statement also comes from
another spreadsheet. So let's look at the
detailed spreadsheets. And the first one is
our sales spreadsheet. So here, in the red,
is input numbers. So I've got my unit
sales in units, and I've just plugged
in some numbers here. Now, you're going to
have to justify these in the rest of your projections
by what's my sales staff, and how much units am I
expecting a salesperson to sell. Here's my unit price, and I've
got a couple different models. And as you can see,
when I launch model two, I decrease the
price on model one, because now it's old technology. And so our product revenue
is simply a multi– you know, the black is a
calculated figure– it's just a multiplication
of those two. And then the magenta
number, that's what goes to our
other spreadsheet. So our support revenue,
here's our installed base, and there's some retention
on our installed base, and then we charge 15% of
what the value of that product is to show what our
support revenue would be. But you're just going
to have to play around with these
percentages, depending on your product
and your company. But I just wanted to show that
there was actually some support revenue in it as well,
and this support revenue goes to the other spreadsheet. So then we have our
cost of goods sold. So we have our units that
are coming from our others spreadsheet, and we've plugged
in our unit cost down here. And so this gives us our
variable cost per unit. We've got the 20 units at
$1,500 per unit, comes down to $30,000 in material cost. But I've also got some staffing. I've got a VP of manufacturing,
I've got a supervisor, I've got a technician. He can build one unit a day. And so I've got to think
about how many technicians I need as I ramp up
that product volume. OK? So we'll talk about the
staffing plan on another page, but those staffing
costs get added up into salary and benefits. We have our variable cost here. We have a facilities cost that
is really a step function, because you can't ramp
up facilities in line with– you can't add
another 100 square feet, you've got to rent 10,000 square
feet, and then another 10,000 square feet if you need more. So we just plugged
in some numbers on our facilities expense, and
that gives us our total product cost of goods sold here. When we look at
the staffing plan, this is a spreadsheet
you're going to keep coming back to over and over
again, because, as I said, this is where 66% of your
expenses are going to be. So first is, you've
got a spreadsheet that goes down to about here with
all of your departments. And I would urge you, don't
create too many lines in here. Don't create a junior
programmer, senior programmer, programmer level three. You know, kind of
glom things together, because you're going to be
fat-fingering a lot of stuff in. And do the same thing
with their salaries. If a junior programmer
makes $80,000, and a programmer makes $100,000,
and a senior programmer makes $120,000, just
put in programmer, put them all in at $100,000. You know, again, this is going
to be your guideline, right? So you've got this for all of
your departments down here, and again, this spreadsheet
goes all the way out to here. So the companion part
to this spreadsheet is actually over on the
right side of this thing. And now you plug in salaries
for each of these staffing positions. And all this spreadsheet does is
take your number of employees, and remember, this
is a quarterly, so we're taking the annual
salary, dividing it by 4, multiplying it by the number
of people in that position, and then we're adding
in our benefits at 15%. So FICA is 7%. And I've done the math, I've
done the math dozens of times, 8% of your total
payroll is usually enough to cover health
insurance for everyone, at kind of a 75% to 25% ratio. Because some people
aren't going to take it. Some people are going to
be on their spouse's plan. If you're a tech
company, you're going to have a lot of single people,
so they cost about a third as much as the married people. And so 8% works out
to be pretty good. But your employees
are still going to want to get
raises in year two. Just because you're a
start up, they still want a little something extra. And as I mentioned,
a lot of companies have problems getting
those expenses up in years three and four because
they don't add people enough. One of the things
that people don't do is they don't ramp
up their salaries. So add in 2% a quarter,
that gives you 8% a year. It's not an unreasonable number. And again, while most payrolls
are going up kind of 3% these days, if you're trying to
hold on to technology talent, you're going to have to give
them a little something extra. So again, this goes out–
just add 2% a year out until year four. And so the math gets
done, and these go to the departmental expenses. Non-salary expenses. Well, we've got our
salary expenses, and then you've got tech
supplies and miscellaneous. I would urge you to put in
as many formulas as you can. So for like your programmers,
put in $2,000 per person, per month. It sounds like a lot, but I've
worked in a couple technology companies, and it could
be an oscilloscope, it could be some cabling, it
could be some CAD software. Whatever it is, these guys can
figure out a way to spin it. If that sounds like too much
to you, put in $1,000 a month. But the beauty of that is that,
as you change your staffing plan, this number just ramps
up and down in line with that. So you can make dramatic
changes to your staffing plan, you don't have to come back
here and fat-finger anything in. But some of these things,
you are going to have to, especially in the
marketing area. You're going to have to decide,
what trade shows do I go to, and what am I going to
do for sales expenses? And then you could
even put in commissions in here, commissions as
a percentage of sales, if that seems to work. And so therefore, as
your cells ramp up, your commissions ramp
up in line with that. And here's your travel per
person per month for your sales people is $3,000. That seems to be pretty
good number there. I put in telephone and
internet per person, and that just ramps up
as your company ramps up. So use as many formulas
in this as you can. And so that brings us
back to our quarterly P&L, and where it all comes together. I've got a quick example
here on your CAPEX. And so what I did was I
took your total revenues, but I offset revenues
by a quarter, figuring that
customers are going to take 60 to 90 days to pay. So if you bill them
now, assume that you're going to get money 90
days from now, right? And hopefully,
you'll get it sooner. But your other expense
is your employees, which are 2/3 of your expenses. They want to get paid
on payday, right? They don't want to get
paid 30 days from now. So I just assumed–
you know, this is a little bit of a
conservative look at it– but I assume your other expenses
come due in the current period. And so based on that, you plug
in a starting balance here, and you say, where does
this money get us to? This money gets us
to the end of Q3. In that case, I'm going to
need to raise additional money, and how much money am I going
to have to raise there to get us to the next milestone? So in this case, I
said, well, maybe we've hit a milestone here
at the end of Q3, and that's going to
allow us to raise our next round of funding. OK? I've talked about most of these. Showing steady and
consistent growth. And here's some
suggestions in here, in terms of an executive summary
versus a full blown business plan. In reality, the
executive summary is all most people are
going to want to look at, at the beginning, and
then when they really get into due diligence,
they're going to want to look at the rest. So I think I can get through the
rest of this in five minutes, because I've gone
over a lot of it. What I would say, as you think
about equity in your company– you're sitting around a
conference table here at MIT, and you're thinking
about the company, or maybe you've been working
on the company for the last two years and you're really
ready to launch it– all I would urge you is that
the work that is yet to be done is far more than the work
that has been done already. Even though it feels like
you've done a tremendous amount, the work that it takes growing
to a $1 million dollars is hard. But growing from $1
million to $10 million is equally hard, if not harder. And going from $10 million to
$100 million is really hard. So the fact that a lot
has been accomplished, there's still a lot left to do. So you don't want to
reward people for what's been done in the past. You want to incentivize them
to do things in the future. So I'm a big believer
that everyone should vest. I used to be
adamantly against this when I was a member
of a founding team. But I've heard horror stories
where three or four people get together, and one
guy, or one person, gets an opportunity
that they can't pass up and they leave with
their 25% of the company. And then the three
people that are left are now working for
themselves, and not taking a paycheck, for someone
who's actually got a great job. So I think everyone should vest
over some kind of three or four your period. Typically, this is the
ranges that you would see. A CEO in the 5% range,
5% to maybe 10%. VPs in the 1% to 2 and 1/2%. This would be after dilution. Senior managers about 0.25%, and
a senior individual contributor about 0.10%. If you're on the
founding management team, you might get two to three
times this amount, in part because you're going
to get diluted. And if you're founding employee,
you might get even more. So if you have a senior
individual contributor, who's really important
to the company, and he's going to get 0.10%,
that's the kind of person you might give 0.25%
or 0.50% up front. So let's look at
some examples here. You get a sense I always
like to look at the endpoint, and then go back
to the beginning and figure out how I'm going
to get to the endpoint. So my endpoint here is looking
at this whole dilution, and here this is
the same spreadsheet that we had earlier,
I've just add a little more detail
with some names here, and some specifics
about the people. So looking at this point, this
is where we're going to get to. But at the beginning,
we have four founders that have split the equity
$2 million, $1 million, and $1 million. OK, that all sounds
well and good. They have 100% here. As we bring in our
key employees– here we have a VP of
R&D. He's critical. Normally, you'd say a VP
of R&D would get about 1%. Well, in reality, by the
time we get out to this, after all of our dilution
out here, this VP of R&D is going to be at 1%. And some other key
employees here. And maybe a board of
advisors or board members, who would get some equity. We then bring in our angel
investors, who get 10%, and everyone up
here gets diluted. And we then bring in
our VC round at 50%, and, again, everyone
up above gets diluted, including the angels. One of the things that
got brought up– you know, Axel was talking
about $50 for 10%. And my initial reaction was
that seems really onerous. It doesn't seem
like a great deal. But when you realize that
he's coming in at this stage, he's coming in really
as the angel investor, and by the time this all gets
done– well, what's my example? My example actually works out. Just take a zero off of this. His 10% is going to get
diluted down to 2.3%. So if you're getting all that
other value, then that 2.3% doesn't seem to be
too much to give up. I will say that angel investors
are pretty keen on looking at this spreadsheet, too. And while a lot of people think
that angel investors will not be as tough negotiators
as the VC investors, I would argue they're investing
their own money rather than the firm's money, and they have
seen this spreadsheet as well, and the angel investors will
be every bit as tough as the VC negotiations. Now, friends and family
is a different story. And I've had very good success
with friends and family coming in, but I mean they're
your friends and family. You're not going to try
and screw them over. So hopefully you're going
to give them a fair deal to begin with. So it's 9 o'clock on the dot. I can take one or two
questions, but then I know that Joe's
going to shut me off. Any– OK, one here. AUDIENCE: What are the
usual terms on the vests with the original founders? CHARLIE TILLETT: I
think over four years, what you might say– so four
years with quarterly vesting. I mean, you could do
monthly, but I mean it really doesn't matter at that point. So four year vesting
with 1/16 every quarter. Or you what you could
say is, let's say you've been working
together for a year, you say, everyone
starts with 20% vested, and then the remaining
80% vests over four years, or three years. Something like that,
just so that someone doesn't get cold
feet when they going starts to get tough and
bail on the rest the team. AUDIENCE: So if they leave after
two years, would they still get the part they had
before, or would they– CHARLIE TILLETT: Yeah. So let's say you
were going to get 160,000 shares over four years. That would be $40,000 a
year, or $10,000 a quarter. Every quarter, you vest $10,000. So if you leave after two years,
you have your 80,000 shares, and you go, and they're yours. And the $80,000 that
you didn't invest– look, if you thought it
was going to be successful, you shouldn't be leaving. So you've left that,
and those are gone. AUDIENCE: I was
wondering if you could talk a little bit
about the difference between the CEOs and the CFOs? First, the difference, B,
whether a start-up needs a CFO at a very early
stage, and the last part is, you know, who
makes the decision? CHARLIE TILLETT: Well, look the
CEO makes all the decisions. I serve at the
pleasure of the CEO. But the CFO– I
think by the time you take your first
venture money, first off you have the
money to pay a CFO, and it will be money well spent. Because as I showed you, all
those rounds of financing at Reveal, I can't tell
you how much dilution I saved my founders
by thinking ahead about what we needed to do. So I saved my salary and
equity for him, you know, 10 times over. But we did have a deal. For the very first
year, I worked half time for half salary. And then, we agreed that as the
company– I was in a position where I could work half time. And so I think it's
good to have– maybe you have a mentor advisor for that
first year and a controller. But the problem is, is that
you really want someone, especially when you
start raising money, you want someone who's been
through the process before. And they will save
you– you know, an experienced person will
save you a couple percent of dilution right off the bat. So what's that worth? It all depends. So you sell your company for
$200 million, it's worth a lot. OK, maybe one more. Oh, looks like I've
gotten everything. So thank you very much. [APPLAUSE]

6 thoughts on “Session 3, Part 2: Financial Projections

  1. Tell the flippin' cameraman to back the flip up. Trying to follow him was ridiculous! Nearly had vertigo. MIT? Ohhh…. hmmm. Thanks! It took nearly 8 minutes, but you figured it out… may MIT people DO think!

  2. A Pakistani is taking this course as well! 🙂 Thanks for this great course. Hope I can achieve my goals for using this course.

  3. I worked for a company in Iowa and my total employee compensation was worth 89K, about 40% increase from what I was taking home. I certainly don't understand the 15%.

  4. thank you this practical presentation. I don not have much experience but it easy for me to follow.

  5. He is referring at the slides all the times, but the camera is not showing it! Worst videographing of a lecture ever

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