At whatever phase you are in your business, more likely than not you are going to need the assistance of someone in the financial services industry. Whether that is an accountant, bookkeeper, controller, or ultimately a CFO uniquely depends on the given situation of each and every business. Whereas an accountant or bookkeeper may review your previous financial statements, a Controller and more importantly a CFO can help you plan for the future of the business.
Sometimes, the term “capital raiser” seems to be interchangeable with the term CFO when I speak with founders of a startup. Even I on occasion have been asked to help startups raise capital and take on the CFO role. This does not mean that I am a qualified to be a CFO of a company, nor does it mean that I should be taking the place of an aggressive founder who hits the road and looks for any investor she can find.
The job of a CFO can be as various as the job of a startup founder. In fact, some startup CFO’s are actively involved with the initial stages of a startups existence, whereas other startup CFO’s only focus raising a Series A round of capital from investors. Whatever the ultimate role of the CFO in your startup, it is pertinent that you clearly identify what your needs are before considering a candidate.
At SME, our CFO has been with us from the very early stages. As we were seeking to raise our first outside capital, it was important to bring in someone who not only had the experience raising capital, but was committed to our current and future success. We also had to ensure that we were not considering a candidate who could not raise capital for the financing round (seed) we were seeking For example, raising capital for a Series A or Series B round is very different than raising a smaller Angel Investment Round.
When choosing a CFO, below are some good guidelines that can serve you well as you narrow you’re your CFO candidates.
Guideline #1 – Do they have a finance background?
Just like you would not get surgery from a doctor who does not have her license, you should not hire a CFO candidate who does not have the requisite skill set to build a financial model or has never seen a cap table. This does not mean that everyone who can build one of these is qualified as a CFO, but it gives some credence to the individual’s ability to process mathematical formulas and numbers. And believe me, the days of an investor believing in an entrepreneur based upon the idea alone are long gone. They will definitely want to see those numbers (and they better be accurate).
Guideline #2 – What is the quality of the candidate’s network
In life, your network only extends as far as your friends, family, and immediate circle. This is one of the reasons I why like crowdfunding, the network possibilities are infinite. Over 80% of the people who are going to be donating to your campaign will be complete strangers outside your immediate circle. This does not mean however that every single person who donates to your next Kickstarter fundraising campaign should be counted as someone you can rely on in the future or part of your permanent network .
Here, the CFO’s permanent network is what you should be interested. Is there a group of trusted colleagues that the CFO can call upon and with one phone call can fund your company based on the trust established? If so, get that candidate onboard now.
In all seriousness, this candidate most likely already has a few job solicitations and is getting paid pretty well. If you have an amazing idea or such a unique project then perhaps this is possible, but don’t bet the farm on that miracle worker.
Guidelines #3 – Has the candidate raised capital before?
Simply because a candidate has raised capital before does not mean that they will be able to raise capital again. However previous successful capital raises indicate that the candidate is more likely to understand the startup capital raising process and can help navigate the company successfully when raising capital seed capital.
It is important to keep in mind here the type of previous capital raise (Series A, Seed, Series B) is just as important. If the candidate has raised capital, but in an industry total unrelated to your own, that candidate may not be of much help to you. If the candidate is used to raising a round of capital around 10 million for example and all you need is $250,000, most likely the candidate is less likely to be able to help you.
Guidelines #4 – Is this an equity or cash position?
Now this question is rather tricky given the nature of cash versus equity positions. To reiterate, a cash job is one where the candidate is paid for her time and services in cash. This cash can be performance based or it can be a retainer. In general, I am a fan of performance based and equity only positions. The truth of the matter is that most companies are not set up appropriately to deal with the legal ramifications of an equity only deal. Always consult with your company lawyer as well as your personal lawyer – yes you should have two separate counsels.
In my experience, a performance and equity based positions bring out the best candidates. The difficultly here is that most people will not take on an equity or performance based role as the risk may be too great. However for the one or two candidates where an equity based position makes sense, I advise you to really test the commitment level over the first few weeks or even months. You can do this via something called vesting. While the entire topic of vesting is far too complex for this post, essentially vesting can serve almost like a probationary period where you test the candidates’ commitment to your business or enterprise. If the candidate fails to perform based upon clearly laid out duties and responsibilities then you would have wasted your time. Is your time precious? Of course it is, but wasted equity is even more precious.
These four guidelines can serve well when deciding whether or not you actually need a CFO and how to choose the right candidate.