What every developer should know about how their company is financed

Jim Wrubel

@jameswrubel

We're technical staff

  • If we don't like our codebase, we change it
  • If we don't like our scalability, we change it
  • If we don't like our quality, we change it
  • If we don't like our process, we change it

If the company runs out of cash

We might be out of a job

And we can't change that

In this presentation, I'll cover

  • The corporate funding lifecycle
  • Funding sources (their pros and cons)
  • Profitability, cash reserves, marginal cost
  • How to discuss these topics with your employer (current or potential)

Not covered: salary & options

See https://tldroptions.io/ and https://github.com/jlevy/og-equity-compensation for those topics

Venture Funding

  • Seed
  • Angel
  • A
  • B
  • C (& beyond)

Other models

  • Bootstrapping
  • Consultancy/Agency
  • Kickstarter
  • Not-for-profit

Funding Models

The venture lifecycle

Seed/Angel

A Round

B Round

C ( + )

$100k-$1MM

$1-7 MM

$7-25 MM

$25+ MM

Initial Build/Validation

Product/Market Fit

Marketing & Sales Structure

Go To Market

Scale Sales & Marketing

International

M&A

0-12 mo.

12-24 mo.

18-48 mo.

Great overview of VC rounds here

🔑 Implications

  • More likely to continue to exist
    (at least for the length of their runway)
  • More likely to add staff
  • More likely to offer promotion and growth opportunities

Companies that just raised money are:

But also...

  • More prone to territorialism & infighting
  • More likely to require longer hours
  • More likely to feel tense 

It ain't all VC

 

Lines of Credit & Loans

  • Issued by banks & other financial institutions (vs investors)
  • Typically secured against working capital (accounts receivable or other money owed the firm)
  • Rarely involve equity transactions

Venture Debt

  • Only really viable for later-stage startups
  • Capital in exchange for smaller equity levels
  • It's still debt, so it needs to be paid back

Private Equity

  • Tend to buy large chunks of the company (frequently the whole thing)
  • 2-5 year "hold period"
  • Typically invest in larger companies & bigger deals ($20-$50MM + )

That profit thing

"We're a profitable company"

  • That's great to hear!
  • The 😈 is in the details

How many years of profitability?

Total cash on hand?

Debt?

Profitable at the expense of growth?

Margin is a better metric

  • m = cost per unit
  • x = units produced
  • b = fixed cost
Y = mx + b
Y=mx+bY = mx + b
\frac{(Y-m)}{Y}
(Y−m)Y\frac{(Y-m)}{Y}

Gross Margin

Gross Margin varies by industry

  • A Kate Spade handbag is basically 100%
  • A barrel of oil might be 25% (in the UK, -9%!)
  • Software is typically 80-90%

Why does margin matter?

If the margins are strong and the market is large, profit doesn't matter. Funding source doesn't matter. VC Round doesn't matter.

"How do I ask about all this?"

"It would be awkward if I did"

"I don't want them to not hire me"

It's really not that bad!

  • The right company will embrace respectfully-curious inquiry
  • These questions are best asked of HR (but a CTO or CEO interview is fair game) 
  • It's also okay to ask via email as a follow-up
  • You may not get every bit of info, but if you get funding source(s), last capital infusion date and amount, and gross margin, that should be enough

Trust, but verify

Independent Sources

Summary

  • It's okay to ask!
  • Get funding source, type, gross margin
  • Everything else is gravy
  • It's also okay if not everything is 'clean'
  • No company is perfect, just like no codebase is perfect
  • If the funding looks stable, you can help fix the rest
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