What No One Told You About Running a SaaS Business

Last week at Work-Bench, we hosted Michael Pryor, the CEO of Trello, for a Work-Bench workshop on the most important operational lessons he learned in scaling Trello. Used by over 8.5 million people and leading organizations such as Google, The New York Times, Tumblr, Freshdirect, and many more, Trello is a visual collaboration tool that lets teams create a shared perspective on any project.

Michael highlighted a comprehensive array of both general and NYC-specific operational tips that startup founders should be aware of as they search for a commercial lease, hire employees, and scale companies. If you weren’t able to swing by, check out some of these tips and see the full slides below!

Equity

  • In order to set the strike price of your option grants to the fair market value of the options at that time, you must pay for a 409A valuation, which should reasonably cost between five and ten thousand dollars. Note that 409A valuations for common shares should initially be considerably less than the preferred shares you grant investors. As your company matures and you start to have secondary rounds or trade common stocks to external investors, your 409 evaluations will nudge closer to your preferred share prices.

  • For a comprehensive guide on granting employee equity, make sure to read Fred Wilson’s post Employee Equity: How Much? Like Fred Wilson suggests, use a formula to increase transparency and reduce the complexity of equity negotiations.

  • AngelList offers an equity calculator that will provide a percentage range on how much equity you should offer, but it is important to phrase equity in terms of dollar, rather than percentage, for those unfamiliar with the nuances of equity. Michael suggests making this approachable as possible, even if that means attaching a one-pager to explain the options.

Commercial Leases

  • Most landlords will ask for ten-year leases. This may sound alarming, but as Michael says, “either you are going to be so successful that you will have to find a larger space in the next ten years and sublet the current one, or you will have gone out of business. Either way, the ten-year lease does not matter.”

  • Do avoid a good guy lease, though, wherein you are called upon to personally back the lease.

  • When comparing spaces, the price per square foot is less meaningful than you think. There is a difference between usable space and rentable space. Your rent includes your share of any common space, such as lobby space. Make sure you understand how much usable office space you are actually receiving, because you don’t want to find out that half of the rentable space is in the elevator.

  • Be aware that many incentives are available only prior to signing the lease, so you must explore these options in tandem with or prior to signing the lease. New York City offers incentives when you appear to be wavering about bringing your business into the city or not. Once you sign the lease, you will not have this leverage over them. If you are considering a lease in Brooklyn in particular, check out Downtown Brooklyn. Kickstarter is one company that saved a ton of money by locating its headquarters in Brooklyn.

  • If your rent is greater than $250,000 annually, you must pay the city 6% of it as rent tax. Note that there are abatements available in certain locations and for certain industries.

  • Your base real estate tax, which is factored into your rent, is the real estate tax rate that you locked in on the date you signed the lease. However, you will pay an additional fee each year that factors in any increases in the city’s real estate taxes occurred.

Taxes and Credits

  • If you’re selling SaaS software in New York, you should be collecting sales tax from anyone you’re selling to in New York state. If you sell to someone in a different sales tax jurisdiction, you should collect a sales tax at the rate of the buyer's jurisdiction.

  • If you're having trouble keeping track of the millions of different sales tax rates, check out Avalara SalesTax, which can help with sales tax compliance. If you prefer not to charge individual customers different amounts due to variable sales tax rates, you can opt to charge everyone at the same rate and then compensate for any extra sales tax through company funds, which is what Github claims to do.

  • If a telecommuter’s income is principally derived from a business located in NY, that telecommuter might have to pay NY income tax. There are ways to be exempt from this law, but you must fulfill a variety of requirements, such as proving that you reimburse them for equipment purchases.

  • Most computer equipment purchases for the company are exempt from sales tax with the ST121.3 form, which you need to give to the vendor at the time of purchase.

  • You can probably receive a federal R&D tax credit for any payroll expense that you spend on engineers who are developing your product.

  • Under the New York Excelsior Jobs Program, you can receive tax credits after having proven that your company has created a certain number of jobs for the city.

  • For a more comprehensive lists of tax credits and incentives, check out the NYC Economic Development Corporation.

Insurance

  • Michael suggests purchasing both short term and long term disability insurance. Short term disability insurance is relatively affordable and will pay 60% of an employee’s salary for up to 26 weeks. Long term disability insurance pays approximately 60% of an employee’s salary and kicks in after six continuous months of disability-induced absence. Short term disability insurance may seem a pain to purchase in the beginning, but it pays off when you avoid the uncomfortable situation of deciding whether or not to give an employee leave with pay after they have fallen ill or injured. These insurance policies can save you some very tough decisions down the line.

Reimbursements

  • Employees can deduct transportation expenses from their pre-tax salaries. To spare your employees the hassle of filling out these forms, simply buy monthly metrocards for them under the NYC Transit Ordinance.

Benefits

  • Check out dental direct reimbursement plans, where you can reimburse your employees dental visits tax-free - they will not be considered a fringe benefit.

  • If you offer a set amount of vacation days and an employee leaves the company, you are legally required to pay employees for any unspent vacation days. You are also required to account for the vacation time in your books as a liability.

  • Offering unlimited vacation time alleviates some administrative work since it does not have to be recorded, but this often negatively affects a company's productivity. As Michael notes, unlimited vacation time often creates the adverse effect, where no one takes vacations. If you do decide to offer unlimited vacation days, make sure your managers are leading by example and encouraging a healthy work-life balance.


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