In this financial model, revenues are arbitrarily assumed to be based primarily on employee headcount. However, this is certainly not an accurate approach for all ventures, and in fact as venture capitalists we prefer companies in which the correlation between headcount and revenues is very low. A separate row labeled “Other Revenues” may be more relevant for modeling revenue projections for your particular company.
The default approach to cash shortfalls is a draw-down of the revolver account. For most early-stage startups, the company doesn’t have a bank revolver, but uses the principal’s credit cards as a de facto revolver. This account has no max limit in the model.
The model utilizes a cash flow sweep. Any excess cash flow after dividends and minimum cash balance is applied to repayment of the revolver account. Any additional cash is applied to the balance sheet cash balance. You can manually make assumptions about dividends as you wish, but we assume dividends are zero in perpetuity.
Any discrepancy in assets vs. liabilities and stockholder’s equity at day 1 is applied to the revolver account.
The model treats all interest rate assumptions as nominal interest rates given this is typically the interest rate quoted by lending institutions to small business entrepreneurs for revolvers (credit cards) and bank loans. As such, we convert the annual interest rate into a monthly interest rate using the formula Rate / 12. If the interest rate being used is an effective interest rate, the monthly interest rate calculation should be adjusted to (1 + Rate) ^ (1/12) – 1.
The model calculates interest income and interest expense using beginning balances for the period only. The formula applied is (2 x Beginning Balance x Rate) / (2 – Rate).
This model assumes standard taxation for a C-Corporation using net operating loss carryforwards and a 40% tax rate. If you structure the company as an LLC, note that LLCs do not pay corporate tax unless they elect to (which is unlikely). However, the owners of the LLC (when combined with the underlying asset) would face a similar financial environment to that of a conventional corporation, so this model is still applicable even if the entity is an LLC.
Straight-line depreciation is based on the average useful life of fixed assets.
Accounts receivable is based on an assumption of days sales outstanding.
Accounts payable is based on an assumption of days payables outsanding.
We have built in an automatic carryforward for tax losses.
Developed by Rodi Blokh in association with ff Venture Capital (www.ffvc.com) based on a sanitized version of a financial model developed by David Teten (www.teten.com) for the startups he has run. Rodi is a Berkeley MBA student (Haas MBA ’13) and former corporate banker at Bank of America Merrill Lynch (firstname.lastname@example.org). David is a Partner at ff Venture Capital, Chair of Harvard Business School Angels of Greater New York, and former Bear Stearns investment banker (email@example.com). Credit to Adam Kalamchi (Columbia MBA ’13) for some initial input on this model.