CFO Basics for Startups

Building a startup is an exciting yet challenging endeavor. Founders often grapple with crucial decisions such as company formation, fundraising strategies, financial stability, and investor relations. In a recent Startup Grind session, industry expert Bob shared invaluable insights on structuring a startup for success. This blog summarizes the key takeaways from the discussion to help early-stage entrepreneurs navigate their startup journey effectively.

Choosing the Right Company Structure

A fundamental decision for any founder is selecting the right business entity. The two most common structures for startups are LLC (Limited Liability Company) and C-Corporation (C-Corp):

• LLC: A cost-effective and flexible option, ideal for bootstrapped startups. However, it lacks scalability due to its limitations on issuing shares and attracting institutional investors.

• C-Corp: The preferred choice for startups looking to raise external funding, especially from venture capitalists. While more expensive to maintain, it provides a structured framework for equity distribution and scaling.

For founders planning to seek investment, starting as a Delaware C-Corp is the best approach. However, those bootstrapping initially can begin as an LLC and convert later when funding needs arise.

Key Metrics Investors Look For

As startups scale, investors will scrutinize financial and operational metrics. Founders should track these critical indicators:

1. Financial Stability

• Rule of 30/40: Startups should aim for a combined revenue growth rate and profit margin of at least 30% (early-stage) or 40% (mature businesses).

• Cash Flow Management: The goal is to establish a negative cash flow cycle where revenue is collected before expenses occur (e.g., upfront payments, annual SaaS contracts).

• M&A Readiness: Strong startups position themselves to acquire competitors or complementary businesses when opportunities arise.

2. Revenue Quality

• Recurring Revenue: Investors value predictable, recurring revenue (e.g., SaaS subscriptions) over one-time sales.

• Customer Retention Rate: A retention rate exceeding 100% is a strong indicator of growth, meaning existing customers continue to expand their spending.

• Customer Concentration: No single client should account for more than 20-30% of revenue to avoid high dependency risk.

3. Cohesive Team & Aligned Stakeholders

• Employee Retention & Happiness: Startups should track team satisfaction and turnover to ensure long-term sustainability.

• Stock Options & Equity Planning: Setting aside equity for key hires ensures future talent acquisition.

• Investor Alignment: Entrepreneurs must tailor their pitch to different stakeholders—investors prioritize valuation growth, lenders focus on repayment, and grant providers emphasize social impact.

Funding Strategies for Different Startup Stages

The right funding strategy depends on a startup’s stage and growth potential.

1. Bootstrapping & Non-Dilutive Funding

• Founders should prioritize revenue generation before seeking external funding.

• SBA loans, grants, and venture debt offer financing without giving up equity.

• Alternative financing options like Mezzanine Debt and Private Credit can provide structured funding for companies not yet VC-ready.

2. Raising Pre-Seed & Seed Funding

• Investors at this stage look for strong founder experience, market potential, and early traction rather than revenue metrics.

• Convertible Notes and SAFE Agreements allow startups to raise capital while deferring valuation discussions.

3. Growth-Stage Funding (Series A & Beyond)

• Companies at this stage must demonstrate scalable revenue, strong customer retention, and clear market positioning.

• Venture capital firms seek 10x+ returns, so founders must ensure their business aligns with VC expectations before pursuing this route.

Common Pitfalls & Best Practices for Startups

Mistakes to Avoid

✅ Mixing personal and business finances – Always establish separate accounts to maintain compliance.
✅ Ignoring financial documentation – Proper bookkeeping and tax filings are essential for due diligence.
✅ Focusing solely on product, not market impact – Investors care about how a product solves a problem, not just its features.

Best Practices

🔹 Track key financial and customer metrics from day one.
🔹 Build relationships with multiple funding sources (VCs, lenders, family offices).
🔹 Prepare a compelling narrative for investors that highlights business impact and scalability.

Final Thoughts

The startup ecosystem is evolving, and founders must be strategic in how they build and finance their ventures. Whether bootstrapping, raising investment, or exploring alternative funding, the key is financial discipline, customer growth, and aligning with the right investors.

By following these principles, entrepreneurs can create enduringly profitable companies that thrive in any market condition.

About Bob Wang

Bob Wang is a seasoned Fractional CFO with deep expertise in scaling tech companies. As CFO of Traction Guest, he helped grow ARR from $3M to $10M, leading to a $100M exit. He’s reviewed 800+ companies at a private equity firm, advising on what drives investor value.

At Tee Up Advisors, Bob partners with SaaS founders to optimize financial strategy, streamline operations, and prepare for scale. Known for his hands-on approach, he’s dedicated to unlocking growth and helping tech companies hit their next milestone.