Shownotes
Pablo Martell
Bio
Pablo Martell is a Fort Lauderdale–based CPA and the founder and CEO of Alpine Mar, a tax strategy firm that focuses on using technology and experience to deliver industry-leading results, service, and guidance to individuals and businesses of all sizes. With experience at global powerhouses like EY and Goldman Sachs, Pablo set out to redefine the accounting industry, bringing Big Four–level expertise with the personalized service of a boutique firm. Pablo is also a real estate investor and host of the Roads & Riches podcast, where he explores the future of business, entrepreneurship, and personal development. A devoted family man, Pablo enjoys spending time with his two young daughters and unwinding on the golf course.
Intro
The conversation with Pablo Martel illuminates the myriad complexities that startups face, particularly concerning tax strategies and financial structuring. At the outset, Martel, a CPA and fractional CFO, emphasizes the critical importance of avoiding common pitfalls that can jeopardize a startup's equity value. He elucidates the often-overlooked significance of the 83B election, a document that can profoundly influence a founder's tax obligations and potential financial success. Throughout our dialogue, we explore the various ways in which startups can secure their financial future by adopting prudent tax strategies and ensuring their legal structures are sound from inception. This episode serves as an essential guide for budding entrepreneurs, equipping them with the knowledge necessary to navigate the treacherous waters of startup finance effectively.
Conversation
The dialogue between Jothy Rosenberg and Pablo Martel elucidates the myriad of challenges that startups encounter, particularly emphasizing the often-overlooked tax implications that can prove detrimental to emerging businesses. Martel, a seasoned CPA and fractional CFO, highlights the critical nature of establishing a robust legal and tax framework from the inception of a startup. He elaborates on the importance of the 83B election, a strategic maneuver that can significantly affect equity compensation and tax liabilities for co-founders and early employees. By prioritizing these elements, startups position themselves to avoid common pitfalls that can jeopardize their financial viability and long-term success. Furthermore, Martel discusses the nuances of qualified small business stock (QSBS) and its tax benefits, urging founders to seek informed guidance to navigate these complex considerations effectively. Through this conversation, we glean invaluable insights into the foundational steps necessary for fostering sustainable growth within the competitive landscape of entrepreneurship.
Takeaways
- Startups must prioritize establishing a robust legal and tax structure from the outset, as decisions made during initial stages profoundly influence future operations.
- Understanding and correctly implementing 83B elections is critical for founders and early employees to optimize their tax advantages when granting equity.
- R&D tax credits represent a significant opportunity for startups, allowing them to offset payroll taxes during periods of financial loss and encouraging innovation.
- It is essential for founders to maintain a constant awareness of their cash burn and available runway, as these metrics are vital for the sustainability of their venture.
- Engaging with qualified professionals, such as CPAs and attorneys, early in the startup journey can prevent costly mistakes and facilitate informed decision-making.
- Founders should be aware of the nuances of QSBS qualification, as it can provide substantial tax benefits upon eventual sale or exit of the business.
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- Our YouTube channel
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Transcripts
Foreign.
Speaker B:Hello.
Speaker B:Please meet today's guest, Pablo Martel.
Speaker A:Love, you know, being able to be a small part of success stories.
Speaker A:I also really enjoy being able to see all the different things that people are doing out there.
Speaker A:You know, we have some really cool things and, and that cool projects and companies that we get exposure to and we get this little inside peek and this little glimpse into that are very unique.
Speaker A:They're very different new concepts.
Speaker A:It's, it's in, you know, really, it's invigorating, right?
Speaker A:And it's a, it's, it's a lot of fun.
Speaker B:Welcome to Designing Successful Startups.
Speaker B:I'm your host, Jothi Rosenberg.
Speaker B:Here's a sobering truth.
Speaker B:Most startups fail not because their product wasn't good enough, but because they made critical mistakes in areas they never saw coming.
Speaker B:Today's guest, Pablo Martel, is a CPA and fractional CFO who's seen it all.
Speaker B:From the brilliant tech founders who built amazing products but nearly lost everything due to tax missteps, to the savvy entrepreneurs who structured their companies correctly from day one and saved millions.
Speaker B:Pablo works with startups from Silicon Valley to Spain.
Speaker B:And in our conversation, he reveals the hidden landmines that could destroy your equity value, the tax strategies that could save you hundreds of thousands of dollars, and why that 83B election you've never heard of might be the most important document you'll ever file.
Speaker B:Whether you're bootstrapping in your garage or preparing for your Series A, this episode could literally be worth millions to you.
Speaker B:Let's dive in.
Speaker B:Welcome, Pablo, to the Designing Successful Startups podcast.
Speaker A:Thanks for having me, Josie.
Speaker B:I always like to start with this fundamental setting context of where are you originally from and where do you live now?
Speaker A:Yeah, I'm a South Florida native, born and raised in South Florida, actually in a little city just north of Miami, Dade County.
Speaker A:So I grew up in Broward county in Hollywood.
Speaker A:So that was my stomping ground growing up.
Speaker A:I actually was.
Speaker A:I was a big baseball player growing up.
Speaker A:That was my thing.
Speaker A:I played for a long time.
Speaker A:I ended up going away and played in college, which was wonderful.
Speaker A:So that took me to Alabama, and then from there I made my way back to down to South Florida to start cutting my teeth as a CPA in the Big four.
Speaker A:So I worked for EY for some years before getting to the other side of the table.
Speaker A:Left EY and then went to work for Goldman Sachs.
Speaker A:That took me all the way out west.
Speaker A:I moved out to Salt Lake City for a while and eventually made my way back to South Florida.
Speaker A:And so I'm, I'm back in my, I'm back in my hometown, raising two little girls here with my wife, which has been great.
Speaker A:And this is where really Alpine Mar started.
Speaker A:And as you saw, I'm a cpa.
Speaker A:Run a, run a CPA firm that's based out of South Florida.
Speaker A:Work with some incredible clients.
Speaker A:But yeah, here in, in South Florida.
Speaker B:What is Hollywood?
Speaker B:I've heard of Hollywood, Florida.
Speaker B:It's, I, you said it's a smallish town, but for some reason I've heard of it is.
Speaker B:What is it famous for?
Speaker A:You're right.
Speaker A:I guess it's not really a small town.
Speaker A:But when you compare it to, let's say people usually will put it in the mix with Fort Lauderdale and Miami, we're sandwiched in between both those.
Speaker A:But it's known for its beaches really.
Speaker A:I think we got a great boardwalk we're lucky to live and the environment that we do, we probably being a native and living here, we probably take it for granted quite a bit.
Speaker A:I definitely don't get out to the beach as much as I wish I could.
Speaker A:I know growing up my dad liked to say, yeah, people don't actually think anybody actually works here but, but yeah, the truth is a lot of work gets done and we don't get to be on the beach as much.
Speaker A:But we do enjoy all, all one season, I would say for all 12 months.
Speaker A:All right.
Speaker B:You do CPA tax work.
Speaker B:What is your, what is your service?
Speaker B:What do you do?
Speaker B:How do you work with startups?
Speaker A:Sure, yeah, we're a full service CPA firm and my background in particular, I was never like, for lack of a better term, a super technical tax guy.
Speaker A:CPAs usually range different range of niches.
Speaker A:Right.
Speaker A:There's very many different areas you can go in.
Speaker A:I was always very operationally and finance focused.
Speaker A:But as far as our firm goes, we work with many, many startups and all kind of different shapes and sizes, VC backed and whatnot.
Speaker A:And so we work with them in various different capacities.
Speaker A:So we've got our tax team that will work in a structuring frame.
Speaker A:They'll, they'll do a lot of structuring, planning and actual compliance work.
Speaker A:And then we've got a bookkeeping team that'll do the books for the business.
Speaker A:We've got fractional CFO work.
Speaker A:I get more involved on the fractional CFO side just naturally that's where I, I, I'm most effective and that's where my skill set oftentimes takes me a lot.
Speaker A:There's a lot of crossover between a lot of these things and then we've got an attest function and we also do transaction advisory, some M and A work.
Speaker A:But as far as startups are concerned, we get in on the ground floor usually and it usually starts with the structuring conversation.
Speaker A:And a lot of times it might be alongside, let's say, their legal team or some attorneys that we may recommend that we bring to the table.
Speaker A:But usually when it comes to the world of startups, when we're usually working with founders or investors, it'll usually be just on the very ground floor of starting from the overall structure.
Speaker A:And I can talk a little bit about how those conversations go and where those lead to making those decisions.
Speaker B:Are you dealing with startups that are fairly local to you or have you gotten a chance to get plugged into areas that are hot for startups further afield?
Speaker B:Like for example, up here in Boston, there's a lot of startup activity.
Speaker A:Yeah.
Speaker A:Thinking about the portfolio, there's no.
Speaker A:There's one small, I'd call it VC fund that we're starting to do a little bit of work with.
Speaker A:No, I would say startups in particular out of Boston.
Speaker A:We've got a few out of the Miami market, Austin, Texas and San Francisco.
Speaker A:We work, I would say, across the United States.
Speaker A:We actually have a very interesting startup that we do some work for that's based on.
Speaker A:Based out of Spain.
Speaker A:And so that's an interesting one.
Speaker A:A lot of international component there.
Speaker A:They're working both in the European market as well as the US market.
Speaker A:So some interesting nuances there.
Speaker A:Some things from that international component that, that we've had to really sharpen our pencils on.
Speaker B:And I'm very interested in the fractional CFO side of things because in each startup that I created, you don't want to get a CFO in the early days.
Speaker B:It's just, it's too much, it's too heavyweight.
Speaker B:But you need someone who's got a lot of skills and a lot of experience who can guide, maybe an accountant who's working for you part time.
Speaker B:That's how I usually cover that function.
Speaker B:And then maybe you graduate to a controller after a year or so and you still don't need a cfo.
Speaker B:But a CFO can help make sure that things are all being done correctly, neatly organized, all of that good stuff.
Speaker B:Are you diving into startups to do as a fractional CFO to do that?
Speaker A:Yes.
Speaker A:Yeah.
Speaker A:Yep, we are.
Speaker A:So I like to look at and you know this, I'm sure from your background.
Speaker A:Founders and co founders, right.
Speaker A:They have different skill sets that complement each other and a lot of times we're able to come in, especially when it is very technical founders maybe in, in the tech field, right, as an example, where you know, we may be filling a void per se and where they don't need something quite full time in that role and the role of the cfo, kind of the way that I look at it is it's.
Speaker A:You really have to understand all the different components that do spread into the tax field.
Speaker A:Right.
Speaker A:And it's not having to know everything, but it's.
Speaker A:It's having to know where I don't know enough and the type of person you need for various different things.
Speaker A:So maybe you do need a third party vendor for something very niche or nuanced that that might have some overlap with either the industry that you're developing in.
Speaker A:Anything maybe that's very particular to the cat, to the tax code that's in a certain niche.
Speaker A:But spreading more into the kind of finance side of things, the way that we'll work with a lot of our clients and the way that I like to really approach the CFO work, other than like the macro view of making sure that all these different things that need to be going on between tax, the basic bookkeeping and accounting.
Speaker A:Right.
Speaker A:Are all getting done and they're getting done.
Speaker A:Right.
Speaker A:Is then being able to come in with on the strategy side.
Speaker A:And so a lot of times it may be prepping for a fundraising round, it may be needing to report to two VCs that already have an investment in and certain things that they're looking for from a reporting perspective that are required maybe monthly or quarterly or biannual that we're really able to take off their plate.
Speaker A:But where we're really effective though also is having really engaging but usually brief is where we try to keep it touch points with founders or management teams to make sure that number one, we're stopping them in their day or in their cadence of whatever it is they're doing to say hey wait, let's look at the financials.
Speaker A:You guys like just take a pause, 30 minutes.
Speaker A:Because it's one of those things that I think a lot of times founders, co founders, operators, they're going a million miles an hour.
Speaker A:And sometimes it's not something that they just take a step back and they stop to just hey, let's take 30 minutes, review this real quick, make sure everything is in line with expectations.
Speaker A:Right.
Speaker A:And so that's part of it.
Speaker A:The other part of it is I like to always have deliverables ready to make touch points as valuable as possible.
Speaker A:And so that might be on the front end creating things like a cash flow model.
Speaker A:Right.
Speaker A:That's going through.
Speaker A:That is going through, but also has certain metrics for them like their cash burn understanding when we're forecasting out, when they maybe need to start thinking about that series B raise or that series C raise, depending on what's going on in the business.
Speaker A:And there, there may be other things from just an overall projection standpoint where you're starting to look out two, three, four years.
Speaker A:That's a different type of modeling that, that we need to look at to say, okay, what assumptions do we want to scope in here?
Speaker A:What are the things that we're, that you guys are looking to achieve from, from the businesses direction that we really need to start scoping in here and starting to consider and that you guys maybe want to start thinking about to show to prospective investors or current investors.
Speaker A:It's a lot of different areas, but on, on the fractional CFO side to be most effective in the way that we like to approach it.
Speaker A:It's, it's being able to get that high level of engagement that albeit it might be brief, with a founder and a management team getting their attention, looking at very clear certain deliverables and making sure that we're keeping them on track, we're staying within certain KPIs and parameters that they want to be tracking, that sort of thing.
Speaker B:That all sounds really important and really great.
Speaker B:You made an allusion to helping them remember what their Runway looks like and how, when they need to be thinking about things, which there's no reason that they would know for sure how long it takes to raise a round of certain sizes.
Speaker B:One of the mistakes that I made and I was, it was early, it was in one of my first three startups, one of the investors was asking me, hey, what's your cash burn today?
Speaker B:And it was a, it wasn't meant to be a trick question, but it was a trick question.
Speaker B:And since I fumbled on it, I never ever failed to know exactly what was my cash burn and how many months of Runway I had.
Speaker B:And that's the kind of thing that, that it would be natural for you to ask and to.
Speaker B:And you're going to be a friendly asking it as opposed to an investor who's trying to decide whether they really want to invest in you.
Speaker B:On the tax thing, for the first few years, hopefully not too Many years the company is not profitable.
Speaker B:And so their taxes are obviously a lot simpler.
Speaker B:They still have to file taxes.
Speaker B:From your perspective, what are some of the mistakes that early stage founders make with respect to tax?
Speaker A:Yeah, yeah, this is such a good topic because this is where we'll run into working with clients that they didn't work with us at the start or they weren't maybe getting great advice at the very start that could put them in, in, in bad shape.
Speaker A:Maybe not bad shape.
Speaker A:Makes the situation a bit more challenging.
Speaker A:So in the startup environment, typically you know that you're going to be raising capital.
Speaker A:You want to make sure that you have a structure from an entity perspective, legal entity perspective, that's going to leave you the flexibility that you want to be able to adjust that cap table as you continue to grow, as you need to be able to take capital on.
Speaker A:So number one, and the most typical thing is that you see C Corp, right?
Speaker A:And you also hear from other folks, whether it be in tax or other, we'll say industries that, wait a second, C Corp has double taxation, right.
Speaker A:And it's not a pass through entity.
Speaker A:And it's very important, I would say, on the ground floor, especially when we engage with founders, to understand what their intent is, what is the goal of this business, what are they developing, are they going to be raising capital, are they self funded?
Speaker A:Those are all important questions because it could be that, you know what, hey guys, you maybe should just, you guys should just be a pass through envy, an llc.
Speaker A:We don't need to overcomplicate it now.
Speaker A:And at the point in time where it makes sense, we make that election to then become a C Corp.
Speaker A:So there's definitely nuance there.
Speaker A:And the very start of the conversation is always understanding what are the goals and objectives here?
Speaker A:What are the, what is the five, ten year plan look like?
Speaker A:What, what's going on here?
Speaker A:What are we going to be raising capital?
Speaker A:And so typically you see a C Corp and to your point, usually in the startup environment, you usually see that there, there's losses for a long time and okay, wait a second, I don't really have tax exposure from this entity level.
Speaker A:But there's other things when it comes to tax that you really need to be keyed in on, especially in the startup world.
Speaker A:So number one is, I would say incentive comp is a big thing.
Speaker A:You may have a great idea, you may be, you have this hot startup, you have this hot idea that you're super bullish about, passionate about.
Speaker A:You've got folks that are in the network that are around you that are going to be joining your team, you want to get sharp, really highly qualified people.
Speaker A:And a lot of times you want to incentivize them with equity early on.
Speaker A:That's a common thing that you'll see.
Speaker A:And one thing to be thinking about there is, and one conversations that we always have is 83B elections.
Speaker A:What is the value of that equity that you're giving away?
Speaker A:This is a little bit of a nuanced topic and a lot of times what you'll see in cap tables is you'll see maybe you're granting equity, but there's a vesting schedule, right?
Speaker A:There's a couple things to think about here.
Speaker A:Number one is QSBS is a popular term right now, qualified small business stock, which you may be familiar with.
Speaker A:And there's a great tax incentive to having this QSBS election, right?
Speaker A:If you have originally issued stock, you hold it for a certain period of time, there's a pretty large gain that in the event you exit down the road, you're going to exclude a large part of that gain from your tax bill.
Speaker A:At the end of the day, you're effectively not going to pay any tax on a big portion of that gain.
Speaker A:So as long as you need to meet certain qualifications early on, right?
Speaker A:There's, there's a net asset test, there's a series of tests that need to be met.
Speaker A:There is a period of time for which you need to hold on to that stock before you exit, for which you get the benefits of that QSBS status.
Speaker A:And so with that being said though, and this kind of goes back to that 83B election, a couple little things here is, okay, you bring on a key employee, you want to give them a little bit of equity, right?
Speaker A:Do they participate in that QSBS status?
Speaker A:And if you just grant it and you don't file this 83B election within 30 days, their time clock for QSBS is not going to start for a later date.
Speaker A:This is getting into the weeds a little bit, but very relevant here.
Speaker A:If you file this 83 election, what you're effectively telling the IRS is I want to be taxed on the value of the stock that I'm getting right now, not at the date that it bests, which is when it may be worth more.
Speaker A:And therefore you'll get some capital gains treatments potentially down the road on that stock.
Speaker A:So that's a, that's an important thing to, to hit on is the incentive comp that you typically see in the startup community in the startup environment.
Speaker A:And the pin that I would put in that is take a look at 83B elections for your key employees.
Speaker A:Do they make.
Speaker A:Does it make sense to have those elections?
Speaker B:Hi.
Speaker B:The podcast you are listening to is a companion to my recent book Tech Startup Toolkit how to Launch Strong and Exit Big.
Speaker B:This is the book I wish I'd had as I was founding and running eight startups over 35 years.
Speaker B:I tell the unvarnished truth about what went right and especially about what went wrong.
Speaker B:You could get it from all the usual booksellers.
Speaker B:I hope you like it.
Speaker B:It's a true labor of love.
Speaker B:Now back to the show.
Speaker B:I know you're going to go on with your list and I, while we're still on the 83B, I've used them, but I may have always used them in a more limited way than what's possible.
Speaker B:So I've only used them for founders.
Speaker B:And then the founders get all the shares that, that we're granting them, but they're on reverse vesting.
Speaker B:If they buy some for some reason, they leave before the full four years is up, but they go ahead and file the 83B right away and, and they got the stock, they paid for it.
Speaker B:The par value, which is a ridiculously small number.
Speaker A:Right.
Speaker B:540,000 shares cost them $540.
Speaker A:Right.
Speaker B:That's just that weird number I use is just what happened to my five co founders at the current company.
Speaker B:And so then they all stayed for the full four years.
Speaker B:So they owned it all.
Speaker B:If there's a, if there's a sale, they will pay capital gains because they kept it more than a year.
Speaker B:So that's the simplest, probably the simplest model.
Speaker B:And I can tell from just some of the things you said, there's other ways you would more maybe more broadly use the 83B.
Speaker A:Yeah, and you bring up a good point.
Speaker A:And this goes back to valuations, which is from what you described, what you typically see is you'd see the founders that are taking advantage of making this 83B election because to your point, at that time they're paying for the stock and it's virtually worth nothing.
Speaker A:Let's say at that starting point, a lot of times you may already have one fundraising round or maybe an angel round or something.
Speaker A:Right.
Speaker A:That has already taken place before you're starting to bring on other employees, especially if it's not some sort of other kind of like heavily bootstrapped or self funded venture.
Speaker A:And so the reason that's important though is because you may be bringing on, you may be bringing on key employees.
Speaker A:And at the end of the day, to your point, you're paying for the value of the stock.
Speaker A:So if you've already had, let's say a round, right, that values the company at, you know, whatever, whatever that post money valuation, maybe it's 50 million, 80, 90, $100 million, right.
Speaker A:You're talking about now becomes very difficult for you to justify any other type of value to any other shares that you're giving out.
Speaker A:So that's a, that's another important part in the startup, I would say, community that you want to be careful with.
Speaker A:And what I mean by that is, and we see, call it aggressive and maybe bad tax advice given, which is, hey, these 83B elections are great.
Speaker A:We want you to take advantage of them.
Speaker A:But wait a second over here, I just had this fundraise that's valuing the company at whatever value it is.
Speaker A:You want to be careful there.
Speaker A:You know what, it's something that the IRS could pick up on.
Speaker A:It could get you in hot water in the event that there's an inspection where they could challenge the value that, let's say an employee is paying on those shares.
Speaker A:So that's also something to keep in mind.
Speaker B:So later on, when you've got a real employee stock option plan and you've got options, then once a year you've got to get a 409A done by somebody independent.
Speaker B:And that used to be expensive.
Speaker B:Now if you are using Carta or.
Speaker A:Right.
Speaker B:Or Fidelity private shares, it's free once a year.
Speaker B:And that's the only way we'll set a strike price once it's based on the 409A.
Speaker B:And that's something every founder should be made aware of right at the beginning because it's the law.
Speaker B:You have to have a 409A done when there's a material event or once a year.
Speaker A:That's right.
Speaker A:That's exactly right.
Speaker A:And so you bring up a good point with Carta and something that we work in quite a bit, you have cap tables, especially if you're giving out incentive, incentive options, let's say, that is moving, right.
Speaker A:It's ever evolving.
Speaker A:And something to also keep in mind there.
Speaker A:And this kind of reverts back to this QSBS concept, which is a lot of the conversations that, that I find that we have is that, oh, we're going to be a C corp, we want to take advantage of QSBs.
Speaker A:What does that mean?
Speaker A:I think there's this misconception that it's, oh, it's this box that I'm electing that I check and I send it in to the irs and I'm telling them, hey, I want this QSBS status, I qualify and whatnot.
Speaker A:And it's not that simple.
Speaker A:There are a series of tests and rules that are, that you need to be looking at on an ongoing basis.
Speaker A:It is not just a box or something that gets checked to notify the R S. It's something that in the event that there's an exit, in the event that there's this liquidity event that, that you may be disclosing.
Speaker A:But in terms of having originally issued stock, which is what it really applies to, you may have founders, for example, that they qualify for qsbs.
Speaker A:But then you may find that five, six years down the road you are bringing, you're issuing new shares, but you no longer meet that company, no longer meets tests to be able to give other key employees, let's say at that time, QSBS shares.
Speaker A:Because again, it's a move.
Speaker A:It's always moving.
Speaker A:This test needs to be looked at on an ongoing basis.
Speaker A:And so that's an important thing to also keep in mind.
Speaker A:Something that we do is we're keeping records.
Speaker A:That's really what it is that we're keeping support.
Speaker A:We're keeping records for, you know, that stock that's getting issued and whether or not it qualifies for a certain status.
Speaker B:So when do you think that, in general, when should a founder bring in the sort of the tax professionals like you guys to make sure they.
Speaker B:Is it like right at the very beginning?
Speaker A:I would say right at the very beginning.
Speaker A:It's always good to at least make sure that they've got the, that they're having the right conversations, that they're getting the right guidance.
Speaker A:I think something especially with professional services and everything that you look, they're in startup mode.
Speaker A:They don't want to be spent.
Speaker A:I think there's this perception of, hey, I don't want to be spending a lot of money on attorneys or accountants or things that I maybe don't need at this point.
Speaker A:Because you're also, you're, you've.
Speaker A:You've got a new startup, you're maybe bootstrapping this venture until your first raise.
Speaker A:But the last thing that you want is to do something on, on the ground floor that is going to end up hurting you or becoming a bit of a challenge a few years down the road maybe, especially as you're starting to get momentum.
Speaker A:And so I definitely recommend that Starting to have those conversations as early as possible with a qualified professional is super important.
Speaker A:And it doesn't have to be something that is going to be super expensive, especially in those early stages.
Speaker B:I 100% agree.
Speaker B:My model for the last 5 or 6 has been to have a law firm.
Speaker B:Yes, they are going to be expensive, but to get all that bylaws and formation documents and all that stuff done.
Speaker B:But also to make sure that things having to do with the fact founders, which is part legal and part tax, is done.
Speaker A:Right.
Speaker B:Because the founders are a group of people.
Speaker B:Assuming you have at least one founder, it's someone that you spend more time with than the person you're married to.
Speaker B:And things can get acrimonious and very expensive if they, if you have a founder that decides that they're not happy.
Speaker B:So getting that stuff and getting all the things set up so that it's correct from the beginning.
Speaker B:One thing I you mentioned round of financing.
Speaker B:But what I would recommend to people, I always recommend to people is to have a friends and family raise, which is easier to pull off than you might think.
Speaker B:A lot of people who know you well and related to you are rooting for you and they'll put some money in.
Speaker B:And if you do that in what's called a safe note as opposed to a priced round, then the issue you were talking about a minute ago doesn't come up because you don't have a price yet.
Speaker B:Yeah, and that's something I would just throw out there to add to what you were saying.
Speaker A:Yeah, no, that, that's exactly right.
Speaker A:Usually you'll have a price in there for.
Speaker A:Upon conversion or something.
Speaker A:But in, in that immediate near term where you're standing up and you venture, you get the best of both worlds.
Speaker A:You can get capital in the door through a safe note, which is very popular.
Speaker A:It's typically what it is, typically what we see as the call it the first funding mechanism that is used.
Speaker A:And sometimes it's even we see founders that are putting it in.
Speaker A:Right.
Speaker A:It's maybe it's a second act for somebody.
Speaker A:Maybe they've already had an exit and they're looking to, to start a new venture.
Speaker A:And, and that's exactly how they put their capital and they do it, through a safe note.
Speaker B:Yeah.
Speaker A:Another topic I think to cover on the tax side of things, which again is super important because we go back to this.
Speaker A:Hey, startups are running at a loss a lot of times for the first few years at least.
Speaker A:Right.
Speaker A:Especially in the tech industry.
Speaker A:And what other advantages are there out there.
Speaker A:And so we touched on the incentive comp, which is more so of something to make sure that they're very aware of structuring things correctly, but something where you can get an actual tax advantage that is super hot, super important are R and D credits.
Speaker A:And this is something that I think there are a lot of founders there, there are a lot of folks out there that they, they're just not aware of it.
Speaker A:And this is very important.
Speaker A:And this is one of those things too, where if you have a, if you have a founder that's maybe been through it before or you have a seasoned cfo, they at least know to ask the question, but you can get some really nice benefits, especially as you start hiring for R and D credits.
Speaker A:And in the new world, this new legislation is passed.
Speaker A:And by the way, what I would always kind of recommend is this is one of those things that is a very niche topic, right?
Speaker A:For example, our firm, like, we have a specialist that we work with.
Speaker A:That's who we trust, that's who we go to.
Speaker A:But we know when to bring these topics up to say, hey, listen, there's an advantage, there's an opportunity here.
Speaker A:Let's have that conversation.
Speaker A:Let's see if there's, there's an opportunity here with these R and D tax credits.
Speaker A:And in this scenario, when you're running what you have a startup maybe that's running at a loss for a while, it's something that you're going to be able to use to offset your payroll tax in the early years, which is, you know, great.
Speaker A:Look, every little bit helps.
Speaker A:You're looking at possibly up to a 10% credit on the things that qualify for R and D expenses.
Speaker A:So that's something that again, you may be running at a loss, you may not have income tax exposure, but there is tax opportunity there.
Speaker A:And that's one of those key items with those R and D tax credits.
Speaker B:Is that are these R and D tax credits always through federal legislation or are there some that are available state by state?
Speaker A:It's a good question.
Speaker A:Federal for sure.
Speaker A:Now what you need to look at is whether there's any nuance at the state level.
Speaker A:And so it's a good topic that you bring up.
Speaker A:And that's actually something that we have a lot of conversations with startups and a lot of the startup founders that we work with, once they get a few years into, into their business and they're generating revenue, they're getting some momentum, which is, hey, let's now raise the question about whether or not there's any state implications here that we need to start talking about.
Speaker A:There are states that just follow federal law, right.
Speaker A:And there are states that have caveats to that and there's nuance there.
Speaker A:And it is a state by state thing that you, that you really need to look at and you need to analyze and sometimes you need to bring in maybe an additional specialist, depending on the state that you're operating in.
Speaker A:Some years ago, I think the classic case is the Wayfarer case, which was establishing where a business has what's called nexus or where they have, we'll call it, presence.
Speaker A:The Internet really changed things.
Speaker A:And people doing business over the Internet really changed things from a state perspective.
Speaker A:It used to be if you had a physical presence in a state, that's really what qualified you as doing business in that state.
Speaker A:And again, I think it was the Wayfarer case that if you go back and look at, that's basically what established what's called economic nexus.
Speaker A:And now what's interesting about that is state on a state by state level, they have their definition for what is economic nexus, right?
Speaker A:You may have a state that says, hey, if I'm a multimillion dollar company and I sold one little thing in this other state, do I have economic nexus?
Speaker A:Does that require me to now have to file a tax return in that state?
Speaker A:And so it gets into some nuance there and you certainly got to look and be careful on a state by state basis.
Speaker A:But same goes for these R and D credits.
Speaker A:But I would say in large part it's at the federal level, a lot there.
Speaker B:I want to ask you one final question that's slightly on a different topic, and that is, I think we all know that people in and around startups, including people who help startups, probably have a lot of grit.
Speaker B:And I'm going to ask you, where does your grit come from?
Speaker A:Oh, man.
Speaker A:Between myself and I would say a few of the partners at our firm, and you probably see this similarly with a lot of startup founders and just entrepreneurs in general.
Speaker A:We love what we do.
Speaker A:We're having.
Speaker A:When you're having a lot of fun with what you're doing, it really makes this, makes whatever you're doing relatively easy.
Speaker A:It makes it.
Speaker A:I wouldn't say maybe easy is not the right word because it's work, but I have a lot of fun with what we do.
Speaker A:And I think a big part of that is having a passion really in general for business first.
Speaker A:I love being able to be a small part of success stories.
Speaker A:I also really enjoy being able to see all the different things that people are doing out there.
Speaker A:We have some really cool things and that cool projects and companies that we get exposure to and we get this little inside peek and this little glimpse into that are very unique.
Speaker A:They're very different new concepts.
Speaker A:And it's, it's in really, it's invigorating.
Speaker A:Right.
Speaker A:And it's a, it's a lot of fun being able to watch a little part, or at least not even just watch, but be part of a little bit of that success that maybe some of these companies have.
Speaker A:It's just, it's so rewarding and it is so much fun.
Speaker A:And talking with them and having conversations about their business, being able to just ask them questions even when we're having calls and going through maybe financials.
Speaker A:Financials tell a story.
Speaker A:Being able to get a, being able to bridge the gap between what in the financials.
Speaker A:When we're looking at a business's performance or doing some forecasting, you're able to hear and see the story from a different lens, which is to me, it's a lot of fun and it's very rewarding.
Speaker B:I think what you just said was that your grit comes from passion for your business.
Speaker A:Oh yeah, absolutely.
Speaker A:Yeah.
Speaker A:Yeah.
Speaker B:Pablo, this has been great.
Speaker B:I think this is going to be a very informative and absolutely necessary required episode for startup founders or wannabe founders who are like thinking about doing it.
Speaker B:So thank you.
Speaker B:It's.
Speaker B:I'm sure a lot of people think of it as a fairly dry topic, but.
Speaker B:And maybe.
Speaker B:But it's really important to get it right.
Speaker A:Yep, absolutely.
Speaker A:Thank you for having me, Jothi.
Speaker A:I appreciate it.
Speaker A:This was fun.
Speaker B:Yeah, I, I had fun too.
Speaker B:And here's your startup founder toolkit takeaway number one.
Speaker B:Structure Smart.
Speaker B:From day one, don't wait to get your legal and tax structure right.
Speaker B:Meet with qualified professionals before you even incorporate.
Speaker B:The decisions you make in week one about entity structure, founder equity and QSBS qualification will impact you for years.
Speaker B:A few thousand dollars spent up front with the right CPA and attorney can save you millions down the road.
Speaker B:Takeaway number two, master your 83B elections and know your Runway.
Speaker B:If you're granting equity to co founders or early employees, understand 83B elections inside and out.
Speaker B:File them within 30 days or lose massive tax advantages forever.
Speaker B:And always know two numbers by heart, your monthly cash burn and how many months of Runway you have left.
Speaker B:These aren't just nice to know metrics, their survival data.
Speaker B:Takeaway number three, don't leave money on the table with R and D credits.
Speaker B:If you're developing technology, you're likely eligible for R and D tax credits that can offset your payroll taxes even when you're running at a loss.
Speaker B:This isn't just for big companies.
Speaker B:Startups can claim up to 10% of qualifying R and D expenses.
Speaker B:So find a specialist, run the numbers, and claim every credit you're entitled to.
Speaker B:In the startup world, every dollar counts.
Speaker B:And that is our show with Pablo.
Speaker B:The show notes contain useful resources and links.
Speaker B:Please follow and rate us@podchaser.com designingsuccessful startups.
Speaker B:Also, please share and like us on your social media channels.
Speaker B:This is Jothi Rosenberg saying TTFN Tata for now.
