Hiring a CFO at the right time can be a guessing game. If you hire them too soon, you may not be able to support the overhead, but if you hire them too late you’ll miss out on key financial strategies that will help your business grow.
A Chief Financial Officer brings a level of insight, reason, and strategy to your company that helps every department fire on all cylinders, but how do you figure out when it’s right for you to hire one?
The answer might surprise you…
Earlier this spring I was attending an event at Silicon Valley Bank, and one of their speakers said something that startled me so much it took my attention away from the open bar. Someone in the audience had asked when they should hire a CFO, and the speaker’s answer was, “don’t.” He went on to explain that startups shouldn’t spend money on a CFO and should instead, recruit a CFO for their board and hire an FP&A (Financial Planning & Analysis) instead.
As someone working with startups and CFOs on a regular basis, I couldn’t get what he said out of my mind. Was he right? Were CFOs unnecessary in startups? I decided to dive in and see what some of the experts had to say about the subject, and this is what I learned …
Feel free to skip ahead:
- What’s Your Range?
- Do You Need a Coach or a Player?
- The Basics
- Why do I need a CFO?
- When do I need a CFO?
- What does a CFO bring to the table?
- Is an accountant enough?
- What about an outsource CFO firm?
- Is Equity Enough?
- Our Take
… Basically, everything depends on everything. Sigh.
If you’re like me, you probably went to the all-knowing Google for an answer and found a couple articles attempting to answer the question of when to hire a CFO. The outcome? The guessing game went into overtime.
One article claimed you need to reach $25 million in Annual Recurring Revenue and another said you should make a CFO one of your first hires. And then still others advised bringing on a CFO when your pain points are causing you sleepless nights. There was no consensus.
So, instead of relying on random articles from years ago, I went straight to the experts and reached out to my network of founders and CFOs, all of whom have worked in startups for many years. The most important thing they told me was to learn your range and decide whether you need a coach or a player. Here’s what that means…
One of the biggest questions you should ask yourself when hiring a CFO is, “What’s my range?” Simply put, your range is how far your skills can stretch, particularly into areas you are not necessarily prepared for. Knowing your range is the single most important concept to keep in mind when you begin this process.
When hiring a CFO, determining your range depends on your financial skills and the financial skills of your team. It’s easiest to explain using a quick story…
Now, on the other hand…
In both of these examples, you have smart teams with a lot of promise, but in terms of organizational financial range, Alecia’s company can stretch much further than Ben and Sophia’s startup.
Alecia’s group can likely wear multiple hats and adapt quickly to changes without hiring a CFO for quite a while, while Ben and Sophia might consider hiring a key team member or using an outsourced CFO firm much earlier in their company’s life. The point is to figure out what your range is and build around it.
Ask yourself these questions:
- Can you take a company to or past a Series A without a CFO?
- Could you handle corporate tax compliance or annual revenues over 10 million?
- Would an accountant be enough for you to breathe easier?
- Do you have the skills to plan for the future while staying compliant with the past?
- Do you understand things like cash flow, run rates, profit and loss, etc.?
If the anxiety is setting in just from reading that list, then you probably need to invest in a team member who can help you. Maybe a bookkeeper, controller, an outsourced CFO firm, or perhaps even a CFO. Otherwise, you could outsource work to a CFO firm. We’re going to get into these options again in a second, but before we do there is another critical concept to review.
The CFOs and founders I spoke with also pointed out the importance of hiring coaches or players in startups. You need to ask yourself if you need a coach or a player, and more importantly, if you can afford someone who is just coaching.
Coaches and players are both important to the success of your team, but only one of them is essential from the start. You forfeit the game if you don’t have enough players…
Most startups are working with very small teams that are pulling long hours. Everyone is working in the trenches. Some employees might be fulfilling multiple roles or job duties because the company needs versatile and hard-working players who can adapt.
Startups usually can’t afford the overhead of someone who isn’t playing and coaches don’t play. Now, that’s not to say that coaches aren’t important. On the contrary, the right coach can lead a team to the championship!
It’s the same story when it comes to hiring a CFO. A CFO is the ultimate coach. They can help you strategize, be the voice of reason, and lead your business forward, but they’re not going to handle the books or manage your payroll. When you consider hiring a CFO, you will have to ask yourself if you can afford to hire a coach rather than a player with a strong range, in this case an FP&A or Director of Finance.
To help you figure out your range and who you need on your team, let’s go over the basics.
Let’s quickly walk through a few questions you’re probably asking.
We’ve already discussed a few reasons why you might need a CFO, but there are a lot of other triggers that could signal the time is right. For instance, if you’ve outgrown your outsourced CFO firm or you’re about to expand your market or you raised a large new round and need help steering the financials, you might look to a CFO to guide you.
Instinctively people look at two things when thinking about hiring a CFO. Either they’ve reached a specific amount of ARR and now need a CFO or they’re approaching a financial event, like an exit, and need a CFO. Neither of these instincts takes into account your range or your team’s’ range, and they both overlook the necessity to get ahead of the ball.
The reality is there’s no textbook, black and white rule to follow for hiring a CFO. However, here’s a good way to gauge it.
At the point you no longer feel confident in your finances or don’t know what the next step is, you need a CFO. Another way to think about it is in terms of pain. If not having a CFO is causing you pain, taking up more than 20% of your working time, or causing you undue stress, then it’s time to hire someone.
Some people throw out numbers, but again, this depends on your range. You might say around a Series B or if you have more than 10 million in ARR, it’s time to look for a CFO. Some articles say to wait until you have as much as 100 million in ARR or not until you’re ready to IPO. We say that’s way too late, and here’s why …
CFOs are incredibly smart and they can certainly bring a huge amount of talent to your team. Like I said earlier, A CFO is the ultimate coach. They’re going to develop a forward-thinking financial vision for your company, a strategy to guide you and your business into the future.
They’ll bring a long career’s worth of insights, wisdom and reliability, and they’ll be a critical aid to the CEO and board when facing decisions like key hires, expansions, product markets and more. A CFO is also going to analyze and understand your financial data and use that analysis to make critical adjustments that will help your company be better and stronger down the road.
Another key benefit a CFO will bring to your company is their network. Again, we need to consider range. If you or members of your team have years of experience in the startup world, this may be less of a factor, but if you don’t have those connections, a CFO could be a game changer for you. They bring with them a network of meaningful relationships and access to capital that can help your company thrive.
For a time, sure. But accountants aren’t unicorns. Eventually, you’ll need to hire onto the accounting team and give them the resources to help you scale and grow your business. Accountants typically focus on the past, while CFOs typically look to the future, an important difference to keep in mind. Key hires before the CFO can include a controller, an FP&A, and even a VP or Director of Finance.
Again, they can carry you a certain way and they’re gonna be great as an interim CFO if you don’t have much range. However, the time will come to bring your financials in-house and hire someone to take your company further than an outsource firm can. Why? Mostly bandwidth.
CFO firms are helping many clients at a time. Once your company takes off and needs more guidance with financials, you’ll probably need someone who can dedicate all their time to supporting you. That means a CFO.
Ok, now that you have a good idea what you need. You may realize that it’s time for a CFO, and you’re probably asking yourself “how can I afford a CFO?” The answer lies in your company.
We all know CFOs command high salaries that many startups just aren’t prepared for. So how can you be competitive? You can offer them equity and cash in on your culture.
I’m sure a lot of people are rolling their eyes right now, and I get it. How could equity and culture be enough to supplement a salary that certainly isn’t at the top end of what a CFO could negotiate? The answer is simple – equity and culture are not going to be enough for everyone.
I read an article once that said equity in a small company isn’t worth much and it reminded me of a job posting from 1914, which reads…
"For hazardous journey, small wages, bitter cold, long months of complete darkness, constant danger, safe return doubtful, honor and recognition in case of success.”
Working in a startup is a lot like that job posting. You’re working towards a destination you may never see. You’re taking risks and holding out for the big win. And what it boils down to is finding people who are willing to take the risks and adventures in exchange for the potential prize. If a job candidate’s values don’t align with your company’s values, (i.e. taking equity as part of compensation) then you’ve got to find a better fit.
So, to answer the question “is equity enough?” you won’t know until you have a candid conversation with the person applying to be your CFO. Make sure they are onboard for the journey, and if they are, then grant them an appropriate amount of equity.
If you’re unsure how much that is, you can reach out to a service like Shareworks Compensation, which offers compensation data, including a mix of salary and equity, from private, venture-backed companies.
We work with thousands of CFOs, and our leadership team has decades of experience in startups and venture capital. We’ve got a unique take on this subject because we’ve seen both sides: the startup that can’t onboard an expensive CFO and the benefits a CFO brings to your company. So here are some of our do’s and don’ts.
Go with your gut. Figure out your range and the range of your team and plan accordingly. If you know you have the range to lead your company past a Series A or through the troubled waters of compliance, then lead them. But, if you know it’s not your forte, don’t become the master of none. And, make sure you know your stopping place. When you’ve run out of range, look for someone to take the reins.
Hire right. There’s no need to leap from an outsource CFO firm to onboarding a CFO. There are key hires in between. An accountant or controller can help expand your range while putting off a more expensive hire. Then when the time is right, hire a VP/Director of Finance or a CFO to coach your team and take your finances to the next level.
Use what you’ve got. Don’t sell your company short just because you’re a startup. Maybe you can’t pay a quarter of a million dollar salary yet. You don’t need to. CFOs aren’t new to this game. They understand very well the balance that startups strike between direct compensation, equity, and culture.
If they’re applying at your company, they probably already know the role isn’t going to command the high end of a CFO salary. Use your equity to your advantage and find the person who aligns with your company’s values.
Don’t wait too long. Some articles say to wait for more than 25 million in ARR or until you’re close to an IPO. We think that’s probably too late for a lot of companies. A CFO can help you position yourself for that IPO or strategize how to approach your next round. You don’t want to miss out on the benefits a CFO brings to the table because you waited too long.
Don’t worry about potential investors. Potential investors might look twice if you’ve got dead weight on your cap table, but that weight is probably not from a CFO. They just don’t come on board earlier enough to pose that problem. Hiring a CFO isn’t going to hurt your investment rounds, so long as you’ve scaled up appropriately from an accountant to a VP of Finance and then a CFO.
Don’t expect software to fill the gaps. We’ve all reaped the benefits of software, especially our platform, which helps CFOs and finance professionals every day. However, that doesn’t mean you can replace key team members with software. Rather, you should use software to arm your team with incredible data and functionality that saves them time and headaches. That way, they can spend more time taking care of your company and clients.