Local partners. Find a local partner that can help you navigate the country compliance, filings, tax, pensions, accounting, etc. If you go the Professional Employment Organization (PEO) route, where you use a third party to co‐employ your employees, and provide benefits and payroll, a lot of these issues will be taken care of for you in one place. This is usually cost‐effective until you get to more than a handful of people. Once you expand operations beyond that handful of people, you'll want to make sure you have partners for accounting, audit, payroll, compliance, and legal. For audit, if you are using a large audit firm with a global presence, you can often use their local office as the audit firm. But it is typically treated as a separate agreement between you and the audit firm and it is almost certainly going to be more expensive than going with a small local firm. Although there are some efficiencies in partnering with a big audit firm, the choice of firm typically comes down to a tradeoff between the extra money you'll pay and the number of efficiencies you'll get.
Corporate organization. Creating a corporate entity in a new region creates all sorts of complexities. This is an area where you definitely need to have guidance from your primary corporate counsel on your overall corporate structure and you will want local guidance in setting up the entity in that country. You will also need to have an idea on how to recognize revenue and treat intellectual property (IP), because these two areas can differ from region to region. You will want to have solid documentation that can show how cash flow moves across entities and how the transfer pricing agreements treat intra‐company loans, dividends, use of IP, etc.
Intercompany documentation. Other than the official corporate documents, the most important item to have ironed out early on is the company's transfer pricing agreements. Roughly, this agreement will detail how the different corporate entities transact with each other in terms of products, IP, and people. You will definitely want to work with counsel in order to put this together but here are a few things to keep in mind.If you have more than one transfer agreement across multiple organizations, you will want to have a consistent approach in maintaining these agreements.You will want to clearly state legal ownership of any pre‐existing IP and how to handle the creation of new IP.Often employees may travel to or spend significant time at the office of the foreign entity and the transfer agreement should have clarity on how this is treated.Ultimately the transfer pricing agreements are important documents for the different global tax authorities, so keep this in mind as you scale.Transfer pricing agreements will be required in any due diligence process so make sure they stay current and have a clear renewal process so that they are always active.
Revenue attribution. If you end up creating a new entity and have to produce financials, you will need to determine how you are going to treat revenue. This is obviously a complicated problem, and you'll have to work with an experienced advisor. Your options will be different by country, but at a high level, the two common approaches for technology startups are cost‐plus‐percent method or a directly invoiced method. With the cost‐plus‐percent approach, you are simply taking all the costs you are recognizing for the entity and then having revenue be some percent higher. So, if you were cost‐plus 6%, you would have a 6% profit and you would pay the corporate tax to the local tax authority on that 6%. The benefit of this approach is that it is very simple and allows you to continue to bill your customers out of the entity in the United States. But you cannot do this in all countries and it may not be optimizing your tax situation. Another common approach is to simply bill the clients sold and serviced in that country directly from that entity. This means you will need to build invoicing and collection functionality and follow the revenue recognition rules by country.
Cash management. Companies will need to fund international operations by sending money to those entities to cover payroll and other expenses, assuming that the new entity is not billing and collecting itself. It's important to consider timing and how much cash to leave in the foreign bank accounts. And depending on how you are doing revenue recognition and customer billing, you may also have to build in sophisticated transfer pricing agreements and corporate business unit dividends in order to optimize your cash.
Chapter 16 Strategic Finance
In the early days of a startup, your role as CFO is mostly about establishing the systems I've outlined in Chapters 12–14, finding the right partner for bookkeeping, and making sure everyone is getting paid, and has some benefits. That's a tall order for anyone, but those are the basic things that you'll have to set up if you don't want to be a blocker in your company's growth. Once revenue starts, you'll have to add more services and functions, things like billing, collections, sales taxes, and other back office and foundational items. If you just do that—build the basics, hire for roles within that structure, and add functions as you need them, you'll create a capable finance organization. But you won't create a great finance organization, you won't be able to improve productivity or make a big impact in the company. To create a great company, you'll need to think strategically about how Finance can be a partner to the organization.
For example, here's something I wish we had done from the very beginning at Return Path: develop consistent naming for products. Sounds like a little thing. And as a startup, it is simple because you might only have a couple of products. But the number of products grows rapidly and if you don't set up your systems for automation and scalable data classification, and link those to your accounting system, you'll run into problems as you grow. Product and Sales team members love (for good reason) to create new packages and products and try and invoice them as one basic price. Often Finance will either just accept whatever Sales or Product tells them OR they will go to the other end of the spectrum and create a roadblock or friction on making the changes. Instead, the best thing Finance could do is work with Product and Sales early to create a product code nomenclature that can scale as new products are added and that can be useful and scalable in your accounting systems, too. The mindset shouldn't be “No” or “Do whatever you want,” it should be “Let's figure out a solution so we both get what we need to grow the business.” The business will have much better reporting 12 months from now if the product naming follows almost an algorithmic nomenclature rather than following the naming whims of a Head of Sales or CEO.
In one early stage company we had well over 100 product “names” with active revenue attached to each. While that by itself may not technically be bad, there was no logic or grouping, and it was nearly impossible for a new hire to make sense of any of it. To create useful reporting by product, we had to manually create a table organizing these product names in a way that made sense, and it was always a bit tenuous as new names were created. Compare this to a naming system where, depending on what part of the product code you looked at, you could quickly understand revenue on a number of dimensions like region, service level, or high‐level product name. This is just one example of where Finance has a unique view (in this case, corporate reporting) that will be useful to another function (in this case, Product) while they are doing something core to their world.
In a startup there are many areas where the CFO will be able to add a lot of value as a partner, and I've highlighted a few important contributions the CFO can make to each functional area. Overall, the key is to think of Finance as an enabler of better decision making using data and analysis.
Sales
In the beginning, when sales first start happening, the key as a CFO is really just to be close to sales data and processes, and to help ensure that the “interest to order” process is clean and understood. This is also a good time to build a close relationship with the Head of Sales so that when there are challenges to overcome in the future, there is trust on both sides. You want to be able to know that when there are questions that pit the sales teams vs. what is best for the company, that the Head of Sales is considering long‐term company issues like precedent setting and fair payments. And you want the Head of Sales to know that you are able to strategically understand the role that Sales and sales compensation structures have in effectively running a sales team.
One way to start building a relationship with Sales early is to help the sales team