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Startup Guides Published:  Sep 8, 2023 5 min read
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What does a CFO do and when should you hire one?

We see these questions asked all the time: What exactly does a CFO do? When do I need one? How much do I pay them?

To get answers, SeedLegals co-founder and CEO Anthony Rose and Aarish Shah, tech CFO and founder of EmergeOne, sat down to discuss the various myths and misconceptions around the CFO role.

To catch up on their conversation, watch the webinar recording or skip down to our summary.

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    Anthony

    So hello everyone. I’m Anthony, founder at SeedLegals. I love doing webinars where we’ve got interesting people to solve the problems that you’ve got that SeedLegals is not solving. So when I come across somebody who knows about CFOs, or about sales teams, or about building a team, or hiring, or whatever it might be, anything that helps you grow your business, I’m delighted to tag team with the expert.

    And in this role, I’m the naive founder asking the same questions that you’re probably thinking and handing over to our expert. So today, we’re going to talk about something that I see many founders asking in chat groups, which is, what does the CFO do? I keep hearing I need to hire one.  When do I need to hire one?

    How does it compare with the bookkeeper, oh my God, or the head of finance? Who’s doing the accounting? Who does my R&D claims? Am I paying more for a CFO? How much should I pay for a CFO? So, and do I need one, of course, full time or fractional? So with that as the intro, Aarish today is going to do most of the talking, so I’m going to hand over to Aarish to introduce himself, and then we’ll tag team on some of the questions which I might add in.

    If you’ve got any questions, put them in the chat, and we will look at that periodically and get to them. Alright, so Aarish, over to you.

    Aarish

    Amazing. Thank you so much, Anthony. I think that’s covered off pretty much everything. We could probably go home and have a nice cold beer. Um, so I’m Aarish. I’m the founder of Emerge One.

    We provide fractional CFO support to venture backed tech startups and scale ups from seed to series B. We work predominantly with ventures that are backed by the likes of Hoxton, Stride, Playfair, Octopus, Founders Factory, Outlier Ventures and many more. As Anthony says, this is a question that comes up again and again, when we’re talking to founders, when we’re talking to investors, even about what their portfolio companies need in terms of finance, their whole finance stack. 

    I think there’s a lot of myth and mythology around the role of the CFO, what a great CFO is, how they work and how best to get utilisation out of the CFO. So I thought it would be a great idea, exactly as Anthony said, to maybe try and bust some of those myths or at least shed some light on them. And I’m really looking forward to this conversation. 

    Anthony

    All right, let’s crack on then with the very first question, which is, what does the CFO do? And what is the role that you should be looking for? So let’s start with what is the CFO and how do they differ from other roles? 

    Aarish

    So first of all, obviously a CFO is a Chief Financial Officer. It’s a very American term. It’s also a finance term. So it’s something that you find in a lot of banks and it’s typically someone that is responsible for the capital stacks of the debt and equity management of a bank.

    And that sort of moved its way into startup world. And it’s a relatively new term here in the UK in traditional businesses, where you’d normally find a finance director – as opposed to a CFO, But the role of the CFO, in a startup or a scale up, I would say is a bit of a jack of all trades, but on the strategic side.

    So a CFO really is someone that helps manage the capital, understand what the debt and equity stack should look like. Plan the strategic finance operations of the business, understand when you need to fundraise, how much you need to fundraise, whether you should be raising debt or whether you should be raising at all.

    They are someone that manages the more strategic side of planning, along the lines of hiring or compensation. What sort of EMI scheme should you put in place?  Are we recovering the sort of R&D that we should be, or is there something that’s being left on the table? When should we plan for an exit? Should we look at a trade sale or an IPO? 

    So they’re really kind of sitting there at the very senior level of the business, helping founders think through those critical areas of finance, which, otherwise, those founders may not have the experience of. That also includes things like what are the KPIs that we should be reporting on? What are the sorts of reporting standards that we should be following? How do we recognise revenue? What should we be doing when we’re expanding geographically?

    These are all questions that a CFO would tackle. And frankly they aren’t necessarily questions that a CFO has the answer for. But CFOs know what to look for and who to go to, to solve some of those bigger questions. Often what you’ll find, at more junior levels, is that they just don’t have the experience or understanding necessary to go out there and really help a founder solve those problems.

    So a CFO at the end of the day is a strategic senior leader within finance, helping the founder grow the business. That’s probably the best way I could, I could describe it. 

    Anthony

    So thank you for that. So let’s take a step right back to the beginning of the business. I always say that to have a great startup or company, you really need three roles met.

    Role number one: the founders. Number one is the domain hustler, the expert, the person, doctor, dialysis machine, mother, problem solver, someone on a mission to solve it. But they don’t necessarily know anything about finance or anything about  technical product development.

    So role number two is the person who can help make it happen. That may align with the CTO or product role. 

    And the third role is the Mr. or Ms. Money, the person who’s going to make sure the company is a viable operation, it gets to profitability, it can fundraise and excite investors and so on. 

    So now, the big question to me, going back to the beginning, is look within yourself as a founder. If you think that you cover more of these roles, one or more, or all of them, great, you’re potentially a sole founder, solo founder. 

    But, if you think you’re the tech guy, as I am, you might want to complement yourself with others. And that then leads to, I think, where the CFO comes in or not.

    There are two initial positions for a company.

    One, the founders sufficiently cover the CFO position themselves. And then, as soon as the business has some number of employees and is generating revenue, you need a finance person to help. Of course, to do your budget planning, do your books, do your accounting, do all the other things, make sure everyone gets paid.

    But separately, if it turns out that you are not the finance-inclined person, then, you’ve got the CFO role who could be a joining founder or a later joining person. You could just get started with your business. That’s what we do at SeedLegals. Between the founders, we kind of cover this base reasonably well, and we’ve got a Head of Finance.

    But at some points, it might turn out that we want to focus a lot more energy on things and the founders just run out of time. So it could be that exit scenario planning. It could be strategic planning. It could be market planning that sits outside the product team. 

    So, for example, you know, should we launch in the US? In a sense, it’s just a product decision, but it’s also a question of what’s the market size? What are the risks? What is the opportunity by doing it? Does it strategically position the company in a particular way? 

    And the founders might own this and ultimately do, but it may turn out that, Hey, dude, we’re just too busy on other things. Let’s find someone to entrust. And maybe the difference is  that the Head of Finance is a bit more of a reactive role: they’re doing the budget planning, they’re making sure the ship is running nicely. 

    Whereas maybe the CFO role is looking towards the future more, asking should we develop these new product opportunities? What’s the strategic exit planning and so on? Would that be a sort of fair background and differentiation between the roles? 

    Aarish 

    Yeah, I should get you on my client pitches.  I think you’ve described it very well, but let me dig even a bit deeper.

    Because the reality is with founding teams, you typically have a solo founder, maybe two co founders. You occasionally have multiple co-founders in a business. Often when I’ve seen that happen, one of them leaves within the next 12 or 24 months, let’s face it. And for a lot of founders, they won’t have had experience of running a business or owning a P&L.

    You, as an example, will have had that experience in your past roles, either at the BBC or as a founder yourself. So you kind of come into it already having learned some of those critical lessons. And I would say it’s less about finance and more about just overall business. I often say that we as CFOs are often the first grey hair into the business.

    And the reason for that is that becoming a CFO is not a title that you can earn through getting a qualification. To be a great CFO, you need to have been through the various experiences that lead up to it. So I fully agree that typically at very early stages and even at later stages, the founders kind of either muddle through or get enough of it done to keep them going.

    But there comes a point where it becomes really critical for them to focus on what they’re good at, which should be selling and/or building the product, because those are the two things that typically co founders will be involved in. And they don’t necessarily give the finances enough time.

    And I’ll give you a great example. I had a conversation with a founder, literally an hour and a half ago. This business is doing high seven figures of GMV. Decent revenue, decent take rate, decent metrics all around. But the founder by his own admission says, “You know, I’m a six out of 10 CFO if I were giving two days a week to the finances of the business. But I’m only giving a couple of hours a day, a week to the business in terms of finances.”

     So he recognised that actually he does need that person that can lift the business from a finance perspective, act as that really strong advisor and sounding board for some of these strategic decisions. But also work with the internal team to make things more efficient and to make sure that as the business scales, the finances scale. 

    And that leads me to your second point around the difference between a Head of Finance and a CFO. The way I would describe it is there are sort of two roles in finance or two departments, if you like, in finance.

    There is finance operations and there’s strategic finance. Finance operations is everything that’s happening inside the business and is typically looking backwards.

    Strategic finance, which is where the office of the CFO sits, is everything that is looking outside the business and looking forwards. 

    So if you think about a Head of Finance – they’re a controller, a management accountant, a bookkeeper, all of those sorts of roles. They are making sure payroll is done, that you are getting monthly reports on what’s happened in the business, that you are chasing creditors, or rather chasing debtors and paying creditors, or at least holding off creditors as, as many startups have to do. They are looking at the day to day cash flow. They are trying to figure out who I delay paying and who should I be chasing up to make sure that I can make payroll this month, which, you know, no doubt is a problem.

    A lot of founders have gone through, especially in the current market conditions. Your CFO, on the other hand, yes, they will have some remit and ownership over those numbers, but they are also looking at the leading indicators of the business. What are the metrics that show us where we’re going, how we’re growing? What are the milestones that we’re trying to get to when we look at our next fundraise? Do we raise on a platform like SeedLegals? Do we raise via a CLN or an ASA (a SeedFast) or a rolling close? Or do we go for a priced round today? Do we look at institutional venture capital or do we look at angels?

    All of those sorts of questions.  The CFO role looks outside, sniffs the market, right? A good CFO is really great at looking outside and seeing what’s actually happening. Is the market down? Are the investors we would typically go to investing right now? Who’s raising money? Who isn’t? What are interest rates doing?

    If we have operations overseas, should we be looking at foreign exchange movements and booking in forward contracts or options? Should we be using some sort of treasury management tool to make sure that some of our cash is parked in interest bearing deposits so that we’re actually putting that capital work rather than letting it sit idle?

    What happens when SVB goes under, what should we be doing? What bank should we be talking to? Do I have relationships with those banks so that I can pick up the phone and say, “Hey guys, we’ve had a bit of a snafu here. We really need you to help support us because otherwise we’re going to be in real trouble.”

    So finance operations takes care of the day to day and is critical. Let’s also be very clear. Finance operations is critical to the smooth running of a business. If you don’t have good finance operations in place and put a CFO in, you’re just going to struggle because the CFO is going to be swimming  in a sea where everything is falling apart around him.

    If the hygiene of the business is not taken care of, then it’s very difficult to then look at doing the more strategic things. And that is things like building out the financial model so that instead of looking at the day-to-day or week-to-week cash flow, you’re looking at 12, 24, 36 months ahead and understanding the milestones that you’re going to have to reach,  the cash that you have to play with, the runway that you have to manage,  and the funding scenario to figure out. Asking do I need to extend that out now by another six months because it’s going to take three months longer to raise our next round? Or if  we haven’t hit the metrics that we hoped we’d hit, what do we do then? Do we go for a down round or do we try to bridge across a convertible note or do something different?

    At the moment, I’m having lots of conversations with founders who raised at extraordinary valuations in 2020 and 2021. We’re talking about 2 million pounds raised on a 10 million valuation with a pre-product business. They now have 50 users and 300 on the waitlist and are trying to raise 5 million at a 30 million valuation.

    Well, that just doesn’t stack up in today’s environment. So, you know, a CFO will understand what a market is looking for. SaaS valuations have dropped from 20 to 30 to 40 X in the heyday of 2020, 2021 to six X to eight X in today’s market, right? What does that mean for businesses? What does that mean for when they go out and raise that capital and how should they think about it?

    And should they even be raising at all? These are all questions that, with all the will in the world, someone who has spent the last three or four years doing operational finance is not going to be able to answer because they just don’t have the experience, and that’s where your CFO steps in and assists.

    Anthony

    I love your characterisation of the Head of Finances as the rearwards-looking (the operations) and the CFOs are forward-looking. 

    And it seems to me most businesses very rapidly sort out the operations, right? Because you have to pay people at some point. The founders go, “Stuff it. I’m not doing this myself. We’re going to hire somebody.” And it’s hopefully an easier role to hire for, because it’s going to be the opposite of what the founders are looking to do themselves. 

    But with the CFO, I’m guessing that many people on the call haven’t sorted that, and it remains an open issue.

    And I think that’s really the value of this call because firstly, there are a lot of issues that don’t have to be sorted by the 25th of the month to make payroll, but they remain open issues. There may also be quite a lot of overlap between the CFO and what the founders want to do, because if it is now getting into the business model of the company and looking at the pricing model and subscriptions, this starts getting into product as well.

    And there, it may turn out that the founders go, “You know, the finance piece isn’t really us, but this is actually becoming strategy and product. And this is us.” So let’s dive into that because it seems that we’re going to get into asking when should I get a CFO. But the prelude to that seems to be that slowly, slowly as the company grows, you start finding without even realising that there are a bunch of things that perhaps you’re not doing or you’re doing partially.

    And then that’s the point at which you go, “We need a person for that” and hopefully you look back and say, “Oh, my God, how do we ever exist without that role?” 

    Let’s then jump into when you might think that you need a CFO and clearly it’s going to depend on the capabilities of the founders. Some of them might be an ex-McKinsey person,  and do that themselves. Sometimes they are coders and have no clue in the space. 

    Aarish

    When to hire a CFO is the perennial question, right? Just as an FYI, I’ve typically found that the ex McKinsey,  ex PWC types – if they haven’t been in a startup before  – really steer clear.

    And I don’t say that with any negative feeling or ill will to either of those businesses. The reality is you have to have been through startup life to understand what is required. And you and I both know this: when you’re scaling a business, you are juggling a million and one plates. And you know, there is always going to be one that is falling.

    Which one do you prioritise picking up? When you are part of a big organisation, it’s very hard to understand how that works when you have a whole machine behind you. But to answer that question of when, I think there’s a few things I would say, right? So, as I said when I introduced myself, we as a business work with post seed businesses, post revenue pre series B, and there’s a really specific reason for that.

    That’s because until you’ve raised a seed round and are post revenue, you probably don’t have much capital to manage. And that’s the main role of the CFO, right? It is managing that capital allocation, understanding how that runway should be managed, and understanding where that capital should be deployed.

    When should we hire? Should we rent our office space? How many people do we need? If we’re growing into this country, what are the compliance issues that we need to worry about? It’s all those scaling problems. 

    Pre seed and pre revenue, you have less need for a CFO. Now, what you probably have need for, and often this is what I see with founders that don’t have that business/finance background is that one of your investors, who comes on board as a bit of an advisor, gives you that sort of heads up as to, well, these numbers look a bit odd or why don’t you think about about showing your numbers in this way or that way.

    And they act as a good enough foil, to those inexperienced founders, to keep them going at those pre seed levels.

    The second reason is quite frankly, CFOs cost money. Pre seed, you shouldn’t be spending your money on a CFO. That’s a reality. Equally, however, and this is the point I, I think I should really make is, do not hire a junior finance person and call them a CFO just because they happen to be an accountant. 

    Being an accountant, understanding debits and credits is the most basic, lowest end of the scale of being a CFO. In fact, it’s something that most of the CFOs that work with us certainly don’t really do on a day to day basis. It’s maybe where we started. It’s certainly not where we are today.

    This is the problem with that sort of title inflation that you see in startups is very junior people being called CFOs. I’ve been brought into lots of businesses where they’ve had an FD in place. I was in one business where the FD actually came from a legal background, was not trained in this country, had left a £250, 000 hole in the financial model, had not budgeted for something specific that was happening.

    The business had probably 25 percent less runway than it thought it did and was in trouble as a result. So you’ve got to make sure that when you bring in a CFO, you are ready for them and you are ready for them when you have, I would say over a million of,  cash, raised in the last round and you are starting to generate.

    Decent, not necessarily significant, but decent amounts of revenue somewhere in the region of 100 to 200 to 300 ARR plus. Essentially, even then your needs for a CFO will be on a sort of sliding scale in terms of the amount of time, and requirement that you need from them. And we’re going to talk about that kind of fractional versus full time,  a bit later.

    But the reality is that you’ll need someone strategic to help guide you in some of those things, formalise some of the processes, make sure that you are doing things in the right way, reporting to the board in the way that they would expect. Once you take on institutional capital, you’re often going to be having to report to them on a quarterly basis – and I can tell you, if you get those quarterly reports wrong, it’s not great.

    And as a founder, you need to be more on top of your business and therefore spending your time doing something that you aren’t an expert in just doesn’t make a huge amount of sense.

    Anthony

    Let me dive into hiring a CFO and the job titles. I think most people would have familiarity with CTO and tech lead and developer. And one of the first hires in any company is going to be someone to head up the tech development. And there, your problem is, and this is the standard one everyone has, is, do I call this person a CTO or not?

    And the problem is sometimes when you hire a CTO, CTOs in later stage companies don’t actually do any development. They might be the head architect, or they might simply, you know, coach the team and mentor, or maybe they just go off to conferences and talk about the future of the internet and not do any real work, or that is the real work they do, but in an early stage business, you want everyone to be doing stuff.

    So the challenge is if your first hire is a CTO, their goal is not to write code, which is what you want them to do. Their goal is to build a team. And likewise, if you hire someone as a CFO, the first thing they might do is to go, “ Great, I’m going to hire a Head of Finance. I’m going to hire a bookkeeper and I’m going to hire a talent team.” And you’re going, “Dude, I’ve only raised like 500 K. I need to spend it on tech dev.” 

    So, you know, don’t give someone a CFO role too early. You might, if you think this person is the future CFO, you might give them a Head of Finance role or something related, and then offer that it grows into that. Likewise, with a CTO, if you give this junior developer, or even a senior developer, a CTO role immediately, you create two problems.

    One – they might get a bit ahead of themselves and go on a hiring spree because they think, as CTO, I need to build a team, whereas in fact, dude, you need to code. 

    And the second thing is, you then give yourself a real problem later when you find that they have reached their limit and you really do need the next level CTO. You now have a serious issue of how you get rid of this person. Can you downgrade them? Do you need to terminate them? And the whole thing becomes complicated and likewise, if they’re a co-founder with equity, that becomes even harder. So finding a person who you might hire as a finance director or similar with a growth path, if it works out, if they and the company grow, but be cautious about calling someone the CFO way too early,  because the role is going to change with time and the team they’re going to have is going to change with time.

    So let’s jump quickly into: What are the signals that it’s not working with the CFO? So you’ve hired somebody. When is it working and when is it not working? With a CTO role, it’s generally kind of easy. We’re not shipping code, the site’s down half the time and we’re full of bugs. We’re forever doing technical debt and never building anything new, whatever it might be.

    Walk me through where the red flag is flying for a CFO that’s not quite working out. 

    Aarish

    A great CFO should be an advisor as much as anything else. If you aren’t able to have a conversation with a CFO, where they know certain elements of your business better than you do, that’s a problem.

    If the CFO isn’t able to tell you what is going wrong in the business and you are pointing out issues to them,  that’s a red flag that either they aren’t embedded enough in the business or they aren’t competent. If you’re constantly finding material errors in the numbers that they’re putting together, that’s a red flag. Material is a wishy washy finance phrase, but it means big. Material in a pre seed business may be a 10K error. In series a business, maybe a 100 K error, or more. 

    If you are having junior finance members telling you that this person doesn’t really know what they’re doing, that is a red flag as well.

    The hiring pattern that you should look for in finance is that you probably start with an administration bookkeeper type person. And that person is potentially just an executive assistant or PA,  who is just helping out with some of the invoices.

    And really all you have is an accountant, that sits outside the business and does VAT and tax. As you progress in the business, you may then hire in someone more senior, a Head of Finance, a controller, someone like that, who brings some of the accountant’s role in house. The CFO should not be focused on that stuff.

    Another red flag is if the CFO is spending all of their time on operational matters, something’s gone wrong because really the value of the CFO should be strategic. And again, it’s sort of, you get what you pay for and you should question if you’ve given the wrong title to the wrong person?

    But a true CFO should be like,”If I come into a business and I spend a month doing the books, that’s fine. That helps me understand the business. If I’m spending three months doing the books, I’m going to get pretty annoyed. And if that’s your expectation as a founder of me, then that’s problematic.

    “If as a founder you’ve hired me and are expecting those books to be done, that is a mismatch. But if I as a CFO am more interested in doing the books than anything else, that is another mismatch.”

    It just shows a lack of understanding if they don’t know who the VCs in the space are, what sort of multiples rounds are being raised on. Those are the things that very easily and very quickly should be able to signal to you that this person actually is good at the CFO role or isn’t.

    And the one last thing I would say is that the only sort of business structure in which you probably need an actual CFO relatively early doors is anything within the FinTech space. And especially within banking, because obviously there are regulatory and other compliance issues that you need to deal with. That’s where it becomes critical, but you know, for most businesses, you know, you can go pretty long without bringing in a CFO at any sort of regular level, for sure.

    Anthony

    Okay. So one thing I want to go back to, which you mentioned, which was super interesting and surprising, is presenting to the board. In early stages, most companies don’t realise they’ve got a board. A board is simply the directors when you incorporate it on Companies House. You probably don’t actually do anything except get on SeedLegals occasionally and do a board resolution for issuing shares.

    But later on, once you’ve had a seed round, then you might have an investor director, and once you’ve had a VC round, then you can have an investor director and they’re going to expect that there are going to be board minutes and board packs produced and sent to them three days or seven days or whatever, before the board meeting.

    So now let’s dive into who you bring to the board meeting. As the CEO, would you expect the CFO to provide you with the board financial materials and you present it or actually do you want to bring them along, have them present the financials and then stick around the rest of the board meeting or disappear as you talk about other things?

    Clearly it’s going to vary depending on the founder themselves or the CFO, how involved they want to be, how much they want the buck to stop with them versus somebody else. But do you see a particular pattern and then once people understand that, then that also may indicate the kind of person that you want because presenting to the board then becomes a job attribute as well.

    Aarish

    Yeah. So it’s rare that at earlier stages, and I’d say anything up to seed, and even post seed,  it’s rare that the CFO will be at the board. They’ll feed into the board pack exactly as you say, they may present to the board. Typically the business isn’t that complex that they need to have a seat at the table. Where I typically do see CFOs coming onto the board is post A,  potentially B.

    So it’s series A, series B, your CFO comes to the board. Why? Because the operations now become so complex that actually investors want to see that senior finance person sat at the table, making sure that risks are taken care of making sure that the capital is being managed wisely, et cetera, et cetera.

    And of course, the current environment is very different to where we were two years ago. There is just that much more scrutiny. And therefore having that finance person sitting at the board with the founders is a real value add.

    Now, that doesn’t mean that the CFO should be running the board. It just means that for financial matters, they are there to provide extra and additional context to whatever it is that the CEO or the founder has already presented to the board, because ultimately, should your CFO raise a round?

    No, your CEO should always raise a round. The founder should always raise your  round. Why? Because you ultimately, as a founder, as the CEO, are responsible for your numbers. The CFO puts them together, advises, debates, challenges, has all sorts of arguments with you for sure. But ultimately you, as the founder, are the person that has to present those – be it to external investors for a round, be it to your internal board.

    Where I’ve seen it done best is where the CFO is really that kind of right hand person to the founder of the founding team, and they work seamlessly, in lockstep with them,  with investors, and with the board, because ultimately, you should all be pulling in the same direction.

    And finance is such a critical part of  any business. Obviously cash is what makes a business run or helps a business run,  without which you cannot run a business. Having your CFO at the table, as long as they aren’t replacing you as a CEO or replacing what you should know as a CEO, can only add value.

    But it really depends on what the board is looking for and what they’re not. I’ve worked with businesses where, whilst I’m heavily involved on the finance side, the board is only interested in very highly product related matters and are less sort of concerned about what’s going on from a financial perspective. Because again, the business isn’t that complex and it doesn’t need that extra voice at the table. 

    It absolutely does depend, but I think as a rule of thumb, the more complex the business, the more complex the financial flows, the more likely it is that you probably want your CFO at the table.

    Anthony

    Good points. And I must say, it depends on the board and the business. Some boards are just fixated on growth and future potential and some are fixated on your SaaS numbers this month and that your recurring revenue’s been down 4 percent or not up 8 percent or something. So, you know, you may need to adapt or you may need to drag the board and the investors to the place that gives maximum value all around.

    Okay, so now let’s jump on to: can my CFO reach out to investors? So this is one that is a bugbear for every founder. “Dude, I hate fundraising. It’s such a waste of time. Can I just focus on product development? Why am I spending all my time chasing investors and reaching out to investors? Can I just hire somebody to do that?” 

    And of course, it’s everything that we wish to do. But the problem is investors see it the other way, and when they have an advisor reach out to them, or your EA reach out to them, that’s like a big no. I don’t know if it’s investors being completely unreasonable in a power game, because sometimes it’s their junior associate reaching out to you.

    They generally expect that fundraising is a founder attribute because founders need to sell their business, their vision, their product initially to consumers. And then they need to sell it to team members to join them. And they need to sell it to investors. And if you’re trying to palm off that responsibility to someone else, it’s seen as a failure of the founders to be able to do that themselves. And therefore, the business is going to have a hard problem selling itself to its customers.

    But I think here we might put things into two categories. One of them is: “I don’t like this fundraising, but I’m going to hire an advisor.” 

    And number two is, “One of the founders is the CFO, or the CFO is close to the founder – can they reach out to investors?”

    I think the answer there is: put yourself in the shoes of the investor. If it feels that the company’s hired this advisor to reach out to you, then questions will be asked. Is it that the founders really are so deep in their AI stack, and they’re just such introverts that they never could reach out, but it’s so amazing that you’re going to take this person’s call? Or could it indicate that they’re not really the founders you like to invest in as entrepreneurs because they should be doing this and it’s a negative.

    If it turns out that the CFO is part of the founding team, then that’s probably okay, because it’s part of the founding team and maybe very quickly you get on a call together with the other founders. It’s just that’s the person who did the outreach, but it’s not like you’ve palmed it off. So Aarish, what are your thoughts in that space?

    Aarish

    I think it’s a great question. You’ve sort of answered the question yourself to some extent. There’s nothing worse than seeing an investor director send an email to an investor, saying, “Hey, I’ve got this great startup that you should look at. Do you want to have a call with our CEO?”

    It really feels like the CEO is not putting in the effort that they need to be putting in. As someone that does a little bit of angel investing myself, it is definitely a red flag. You do want to see that sales ability in a CEO. Ultimately a CFO should be able to back up the numbers, but the CEO has to be able to sell the vision.

    The vision is owned by the CEO, the vision of the founder, right? The vision of the business, where it’s going, the direction, the outcome, how they’re going to attract people. Are they going to be able to sell themselves to employees? Are they going to be able to sell themselves to clients, to customers, to investors that has to come from the founder, the CEO

    What a CFO can do is leverage their network. You’ve been on my podcast. I speak to angels, investors, VCs on a daily basis and I have built up really great relationships with them. So if I reach out to a VC and say, “Look, I’m working with this business. I think it’s worth you taking a look at them.” They’ll take a look at it, right? That doesn’t necessarily mean they’ll invest in it because ultimately the CEO or the founder is still going to have to sell that business to that investor – whether or not I’ve made that initial contact and referred the business, right?

    I, as a CFO, can’t sell the business. I don’t own the vision. I own the numbers and actually I don’t even own the numbers. The reality is that the founder always owns the numbers. The buck ultimately stops right at the top. It is the CFO’s role to leverage their relationships, open those doors where they’re able to, where it might have been harder for the CEO to get through the door themselves, but they can’t sell the opportunity to an investor in the way that a CEO can. 

    So the simple answer is your CFO should be opening doors, but they should not be the ones to push you through them. That is your job as a CEO, as a founder. 

    So to wrap up on the investor intros, the problem is that finding investors is hard. If you can get someone to do warm intros for you, that’s fantastic. All investors always talk about warm intros. The question then morphs into if you’ve hired somebody to do the outreach for you, that’s often seen as a negative. Again, if you don’t know investors, then getting help is always useful and it may not be an option to not do that, but the hiring of an advisor to intros is often seen as negative.

    And there’s just a quick caveat to that as well. I would have to be working with your business as a CFO, having run the numbers for the last three, six, 12 months, before I would be comfortable reaching out to that investor.

    Because there is a credibility issue that comes into play as well. As a CFO,  if I’m endorsing “a business” and if I’m suggesting to an investor that they may want to take a look, there is some sort of an implicit kind of understanding that I’ve had a look at, I understand what the business is.

    And if there isn’t, I would make it very clear. “Hey, this person asked for an introduction. I am introducing you. I don’t have any skin in this game. See you later.” I think the problem with those advisor introducers is again, they don’t have skin in the game. Right. They are just a brokerage almost for a lot of those scenarios and situations. And I think that’s why a lot of investors shy away from taking those sorts of introductions.

    In fact, there are some VCs that I know very intimately who tell me, “I’m never going to look at a deck that comes via scout or an introducer or anyone else. Because all that tells me is that I’m not doing my job.” If as a VC, their job is to source deals, that literally is their job. Source and invest in great deals. If they can’t source great deals, then they’re in the wrong job. And that’s the way they look at it. 

    I would definitely think twice before using your CFO as an introducer  to investors., unless they’re in the business  and have a real relationship with those investors where they understand why that investor might be attracted to working with that business. 

    Anthony

    All right, cool. So now let’s switch to the £64, 000 question. Although I think the answer is a bit higher than that.

    How much should you pay a CFO? And then we’ll get on to fractional CFOs after that. 

    So, in your experience, what’s the sort of salary range for Head of Finance, FD versus CFO and so on? What should people be looking to pay and how do you tempt people to earlier stage companies and can you give them share options and so on, as part of that? Of course it’s a super broad question, but any ranges would be hugely helpful for everyone.

    Aarish

    So look, I mean, at the very junior levels of finance, you know, bookkeepers, et cetera, you’re looking at 20 to 30, 000. It depends if they’re kind of bookkeeping plus operations – it’s whether they’re doing a few different roles. Junior levels, 20 to 30, 000, slightly more part qualified – maybe 30 plus.

    For Head of Finance, 50 to 60, 000, 40 to 50, 000, 50 to 6, 000, again, depending on where they sit in terms of experience, whether they’re keen and hungry and eager to get going.

    A really great controller is probably about 80, 000 pounds in today’s money.

    An FD of any decent nature is going to be knocking at the door of a hundred thousand. Possibly a hundred to 120, 000, I would say for a very good FD.  

    CFOs, really great ones, 150, 000 plus.

    That’s also one of the reasons why startups should just not be bringing in CFOs too early, because they are a significant cost to the business. I always say, a great CFO will add value to the business. I can do more damage with a 30 minute phone call than I can in two weeks or two years of working with a business.

    But the point is they’ve got to be able to prove that value. And I think if you’ve got them on 150, 000 pounds a year, there’s not that much that you’re going to be doing in a pretty early stage business that is going to require that sort of time. 

    Very broadly, that’s kind of the range that I would suggest from a full time equivalent perspective.

    And yes, absolutely options are always up for consideration. I’ve seen CFOs take anywhere between 1 and 3 percent in an early stage business. That would probably be on the higher side, but you know, if you are looking at an exit, the CFO is going to be the difference between an extra zero on the end of that check or not. It may well be worth it. 

    As  with all staff in an early stage business, you’ve got to be compensating them appropriately and incentivising them in the right way. The salary package in and of itself is only one component of that. You do want to look at how you can mix that up with options. Obviously, if you do mix that up with options, you may be able to scale some of those numbers back, but don’t forget that that’s just going to cost you something further down the track.

    Anthony

    Right. Well, thank you. That was hugely helpful. 

    So when it comes to the number of options, the thing I always suggest is: think of the options as a pound value, because otherwise the numbers are arbitrary – you know, 1%, 3%, 0.1%, who knows? But, perhaps at the time you’re hiring a CFO, let’s say your company valuation is 20 million pounds. So 1 percent is 200, 000 pounds. 

    So if you were to give them, let’s say, 2 percent equity, that’s 200, 000 vesting over four years. That’s the equivalent of 50, 000 a year. So they may see that the difference between what they would earn at a larger company on 200, 000 of salary is 150 K of salary and 50 K of options.

    Of course, options get diluted with time, but the value goes up. It helps to think of it as a  pound number, based on a valuation that you know. Given that they’re the CFO, it’s a number that you and them should be able to agree on. It may come from your last round and maybe you’re using that money to now hire a CFO amongst other things.

    Okay, so now given the cost of a CFO and the fact that you may not need them all the time, let’s jump to fractional CFOs. Tell us, what is a fractional CFO? What fraction is it? Is it like a day a month, a day a week, three days a week? And when would you use that to fill the gap? What are they going to do? 

    Aarish

    I was hoping you’re going to fight me on this whole fractional issue because I know you’re not a massive fan of fractional team members. But look, a fractional CFO is just a CFO that works on a part time basis in your business. And the reason for that is you have a need for some strategic support on the finance side, but you need to have the time, money, or inclination,  or need for a full time resource, right?

    Because let’s face it, five days a week in a typical startup, you’re working 10 hours a day on average, right? Minimum. And then during a fundraise, maybe a bit more, but let’s say 50 hours a week,  as a minimum. Is there enough meat on the bones in your business to keep someone occupied for that time?

    Are you just paying someone to tread water or are they going to find themselves busywork? You know, they’re going to be basically doing the bookkeeping. 150, 000 to do what Xero, HotDoc and a bookkeeper out in the Philippines could do for about 50 quid a month. What is the purpose of that?

    So a fractional CFO basically comes in, and helps in those initial stages as the business is starting to show those sorts of signs of growth and value. They start streamlining those strategic finance pieces and making sure they’re all working the right direction.

    As an example, I once came into a business. It was doing very well, and that business has since exited for a significant nine figure amount. I changed their revenue recognition policy and was able to argue with the auditors, which suddenly changed their revenue profile from low hundreds or hundreds of thousands to a million to several million on an annual basis.

    Now that may just sound like playing with numbers and to some extent it is. But actually it’s the difference between raising a round at this valuation versus that valuation. Right. My point now is that it isn’t an ongoing role. It’s something that maybe took me half a day to figure out and half a day to argue with the auditors.

    But the intrinsic value of that over the course of the business lifestyle proved itself.

    A fractional CFO is, from our perspective, we would say anywhere between half a day a week to two days a week. Once you’re starting to get to anything over three days a week, you’re starting to look like you might need someone full time because the reality is a fractional CFO doing three days a week with any one client is very unlikely to be able to context switch to another startup that they’re working with. They are probably going to be spending even 40 or 50 percent of those extra two days during the week thinking about that startup. 

    A fractional CFO typically comes in and works on a series of projects over time with the founders and tackles them one after the other. Whether that is EMI, R&D, fundraising,  capital management, building out your financial model, building out your KPIs pack, building out your reporting pack, doing the board reporting, doing the investor management, investor comms, building out the next deck,  going out and looking at the market, understanding what’s happening, doing the research around geographical expansion, all those things that we talked about earlier.

    Those projects tend to be ongoing and roll into each other. They never really end. Well, once you’ve done an EMI round this year, yeah, great. We’ve done it. Well, what happens when you hire that next team member. You’re going to have to do that again. You know, R&D happens every year. Your runway changes every month. Every time you bring in new revenue or your metrics change, your CAC grows and your LTV shrinks. 

    Those are things that as a CFO, you’re going to be sitting there going to the founder, “Well, okay. Maybe we need to figure out what’s going on with our marketing channels. Do we need to change things up?” So it’s an ongoing thing, but it’s not a full time ongoing thing.

    Anthony

    It’s task-based really – with recurring tasks rather than truly ongoing. 

    For example, if you’re a software developer, it’s constant. Or with your customer support, people keep calling. You can’t say that person is back next Wednesday – it doesn’t work.

    But when you’ve got something like writing content or perhaps doing board packs and things like that,  there’s no pressure on a daily basis and instead you might say, “On Mondays, we’re talking finance and our part-time CFO is there to discuss that.”

    Aarish

    And not only that. The way that we tend to work is that I will say to you, “I’m working with SeedLegals on a Monday, and therefore if you call me on Thursday, I’m going to ignore your call.”

    In fact, what we tend to say is that we try to spread our time out throughout the week. So there are regular ongoing touch points. It isn’t a case of we’re only there when we want to be there. We know what it’s like in a startup. We know that you are going to have things crop up at odd hours and at any time of the week or the month that need to be dealt with.

    If you get an investor who’s super interested in your business, rocking up and saying they want to have a look at your last quarter’s numbers, you want someone who’s on hand to be able to kind of pick that up pretty quickly. Fractional doesn’t mean discrete. It just means that it’s not full time. 

    The last thing I would just say is, be very wary of a lot of the platformised CFO companies out there, who suggest that tech will solve your problems. It’ll help, don’t get me wrong.

    But the whole point about CFO work is that sort of knowledge work, which comes with experience, which a digital product at the moment isn’t able to provide. A digital product is only as good as the information that flows into it. It is a tool to be used, but the real value of a CFO is the knowledge and experience and the relationships that they have that are going to help you grow and scale your business. 

    So do be wary of those things. I’m not saying they’re all awful. I’m not saying they don’t have a place, but they certainly aren’t the be all and end all that some people expect them to be. 

    Anthony

    Interesting, I’d always assumed the CFO role is the sort of human intelligence, based on experience rather than, you know, we’re using Xero for our books, which is definitely the platform piece on the operation.

    So you could have a platform for operations and people for high level things in general, which is kind of like SeedLegals. Our team are there to help you with the high level things and the platform builds the documents in seconds for you. And I think that’s the way it should be. All right.

    So let’s wrap up. Thank you. That’s been amazing and a brain dump and learning for me as well. Where should people reach you, Aarish, how can they reach you and what things should they reach out to you for? 

    Aarish

    I’m pretty accessible on LinkedIn. Follow me there. Or if you are going to connect with me, I’m going to be a little bit annoying and say do write SeedLegals webinar at the top of your connection request, so I know where you’ve found me, and give me a reason to connect. Because I always want to help. And if I don’t know how I can help you, then it just makes that conversation a bit harder. So do follow me on LinkedIn. 

    There’s also the podcast, Nothing Ventured, which you can find on YouTube, and on Spotify and Apple, and I’ve just recently launched a newsletter Off Balance, which covers a lot of topics around finance startups, tech and venture in more detail.

    All of those sorts of links are in my profile on LinkedIn. As I say, probably the best place to find me and if you really want to get in touch with us directly is [email protected]. uk or go to our website, emergeone.co.uk. Drop us a note over there, and we’ll get back to you as soon as we can.

    Anthony

    All right. Thank you. And you can reach me on LinkedIn, Anthony Rose or anthony@seedlegals. com. And that is a wrap. Thank you all so much.

About the speakers

Aarish Shah, founder, EmergeOne

EmergeOne provides fractional CFO support to venture-backed tech startups from Seed to Series B and beyond. To hear more of Aarish’s conversations with industry experts, subscribe to the Nothing Ventured podcast and newsletter. Nothing Ventured sees Aarish talking to VCs, angels, founders and operators and discussing topics at the intersection of startups, tech, finance and venture.

Anthony Rose, CEO and Founder, SeedLegals

Anthony is co-founder and CEO at SeedLegals, a legaltech platform that lets startups and investors complete the legals needed to build, grow and fund their business, at a fraction of the cost of using a law firm. More than one in four of all early-stage funding rounds in the UK are now done on SeedLegals.

Summary: myth-busting the CFO role with Aarish Shah

What does the CFO do?

The chief financial officer (CFO) is a senior leader who sets the strategic financial direction of the business.

Often, especially in a startup, they’re something of a strategic ‘jack of all trades’. They sit at a senior level of the business, helping founders think through critical areas of finance.

Some questions the CFO might tackle include:

  • What should the debt and equity stack look like?
  • When do you need to fundraise, and how much? Should you raise debt?
  • What sort of option scheme should you put in place?
  • Are you recovering R&D correctly, or is something being left on the table?
  • When should you plan for an exit? Should you look at a trade sale or an IPO?
  • What are the KPIs that you should be reporting on?
  • How do you recognise revenue?
  • How should you expand geographically?

In the early stages of a business, the founding team will take the lead on those questions. As the business grows and becomes more complex, the founders’ time might be better spent on their areas of expertise. In that case, a CFO is a valuable hire to make sure enough focus is being given to financial strategy.

What’s the difference between finance ops and finance strategy?

There are key differences between an operational finance role (eg, a Head of Finance) and a strategic finance role (a CFO). The CFO looks at the bigger picture and helps steer the startup towards the correct place in the market, while a Head of Finance deals with day-to-day cash flow.

Aarish Shah

Finance operations takes care of the day to day and is critical to the smooth running of a business.

Strategic finance, which is where the office of the CFO sits, is everything that is looking outside the business and looking forwards.

The value of the CFO role is that they are looking at the leading indicators of the business. What are the metrics that show us where we’re going, how we’re growing? What are the milestones that we’re trying to get to when we look at our next fundraise? Do we raise on a platform like SeedLegals? Do we raise via a CLN or an ASA (a SeedFast) or a rolling close? Or do we go for a priced round today? Do we look at institutional venture capital or do we look at angels?

The CFO role looks outside and sniffs the market. Is the market down? Are the investors we would typically go to investing right now? Who’s raising money? Who isn’t? What are interest rates doing?

Aarish Shah

Founder,

EmergeOne

At what point do you need to hire a CFO?

You most likely don’t need a CFO until after you’ve raised a seed round. Until then – and until you’re making solid revenue from your business – you don’t have much capital to manage, which is the main role of a CFO. Their value is in their ability to untangle the complexities of capital allocation and understand how the runway should be managed and where capital should be deployed.

That’s why when you’re pre-seed and pre-revenue, it’s often not a good use of the budget to hire a full-time CEO. If you want someone to look at your finances with that strategic mindset, you could ask an investor to come onboard in an advisory role until it makes sense to hire someone into the CFO position.

Anthony Rose

The problem with hiring a senior role like a CTO or a CFO when your company is early-stage is that you need someone who is actually doing the work – not building the team to do the work, as a CTO does in a later-stage company.

If you hire someone as a CFO, the risk is that the first thing they might do is to go, “Great, I’m going to hire a Head of Finance. I’m going to hire a bookkeeper and I’m going to hire a talent team.” And you have to say, “Dude, I’ve only raised £500,000. I need to spend it on tech dev.”

So be careful not to give someone a CFO role too early. You might, if you think this person is the future CFO, give them a Head of Finance role, and then offer that it grows into the CFO position.

Anthony Rose

Co-Founder and CEO,

SeedLegals

What are the red flags that your CFO isn’t working out?

A great CFO should be an advisor as much as anything else. If the CFO isn’t able to tell you what is going wrong in the business and you’re the one pointing out issues, that’s a red flag that either they aren’t embedded enough in the business or they aren’t competent.

Some other red flags include:

  • Material errors in the numbers they’re putting together
  • Junior members of the finance team expressing doubts about their competence
  • If they choose to spend their time on operational instead of strategic matters
  • Lack of knowledge or interest in the market – eg, they should know who the VCs are in your space, what multiples rounds are being raised at etc

How much should you pay a CFO?

CFOs – really great ones – command a salary of £150,000 plus.

That’s one of the reasons why startups should avoid bringing in a CFO too early. They’re a significant cost to the business and you need them to be able to prove that value. But in an early-stage business, there’s not that much that they can do to give the value that £150,000 a year demands.

Before shelling out that kind of salary (not to mention the share options that would most likely go along with it) consider whether the finance function you want could be performed by a more junior hire.

At the more junior end (for example, bookkeepers), you’re looking at £20,000 to £30,000, depending if their role combines bookkeeping with other parts of operations.

For a Head of Finance, you’re looking at £50,000 to £60,000, depending on where they sit in terms of experience.

A really great Controller is probably about £80,000 in today’s money.

An FD of any decent nature is going to be knocking at the door of £100,000, or £120,000 for a very good FD.

What’s a fractional CFO?

A fractional CFO is simply a CFO that works on a part-time basis in your business. It’s useful when you need some strategic support on the finance side, but you don’t have the time, money or need to hire someone full-time.

A fractional CFO typically comes in and works on a series of projects over time with the founders. For example:

  • Working on your EMI valuation
  • Assisting with your R&D claim
  • Fundraising
  • Capital management
  • Building out your financial model
  • Identifying the right KPIs
  • Leading investor management or investor comms

Key takeaways

  • A CFO isn’t a good investment until you’re generating significant revenue
  • Don’t hire a junior finance person and call them a CFO – the skillset and area of focus should be very different
  • The CFO leads the financial strategy of the business and complements the skills of the founding team
  • Hiring a CFO on a fractional basis can be valuable, if you have specific strategic tasks but no need yet for a full-time hire
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