A topic I find founders get a bit or often a lot wrong is … When To Hire Your First CFO. We’ve got a guest post below from OnlyCFO on this very topic! If I had to summarize all my learnings, it’s that you can’t really hire a full-time head of finance too early, but many of us go to hire a “CFO” around $10m-$30m ARR, when we really need a VP/SVP of Finance. Per OnlyCFO’s point below. And I’d even bring someone full-time in as early as $1m-$2m ARR if you can find someone great. Especially once the renewal cycle heats up and once you have a ton of customers to invoice. That has saved my bacon several times 😉 — jason, ed.
When to Hire Your First CFO: A Guest Post from OnlyCFO
We all know that hiring the right people is critical for success, but what folks often forget is that it’s hiring the right people AND hiring them at the right time.
I have seen LOTS of companies fail at one or both of these when hiring for a finance leader. The right person to lead finance at a Series A company looks very different than the right person to lead finance at a true pre-IPO company (that is near an IPO).
My general rule of thumb for title and when to hire various finance leaders for a typical SaaS company is below:
There are a lot of roles that will go under the top finance role, but getting the right top finance person at the right time is the crucial first step in building a successful finance team.
When to Hire Executives
But there are three other factors that I tell companies to consider when hiring finance leaders (or any other department leaders):
- Leader’s cost
- Capabilities of current leadership
- Complexities and needs of the business
These factors will help you determine when you need a “true” CFO.
1. Leader’s Cost
True executives can be REALLY expensive so cost certainly is a factor.
But…just because you can afford an experienced executive doesn’t mean you need one (yet). A true exec level hire may not be the best person for what you need. There is a time and place for experienced executives, but early stage startups often aren’t one of them — especially true for experienced CFOs.
If you hire an experienced and expensive CFO to do bookkeeping then not only are you WAY overpaying, but the CFO probably isn’t even doing a very good job at it since bookkeeping probably isn’t something they have done in a long time (if ever).
Let’s say you have decided you need an experience executive…how costly are they?
Median by Role: Looking at the median by role is interesting as it shows what roles cost the most. As you might expect, the CRO is typically the highest paid person at the company on a cash basis, but the CFO is close behind.
CFO Cash Comp by Capital Raised: Segmenting compensation by amount raised (like the chart below) will be less meaningful in the future as companies raise less money, but it demonstrates the right theme. As a company grows the “CFO” comp increases a lot.
The larger, more complex the business the more experienced executive you will probably need (and the more you will pay for that person)
Median Equity Grants: The equity cost of executives isn’t cheap either. The dilution impact can be very large for all executives. If you hire wrong and/or too early then you may have a lot of wasted dilution.
2. Capabilities of Current Leadership
What are the skills and experience of existing leaders? Can they fill gaps?
For example, if you have a COO with a finance background then you can probably hold off on hiring a more experienced finance leader for little bit longer.
But if you have a very inexperienced leadership team (young founders, lack of SaaS experience, etc) then maybe bringing on a strong finance leader earlier makes sense. A strong CFO leader will bring more financial rigor, but also trust/confidence from employees, the board, potential investors, etc.
3. Complexities of the Business
Higher complexity companies will need more experienced leaders earlier.
This is where following standard advice can be bad. Some companies are so simple that they don’t need a CFO for a really long time. While other businesses with <$10M in revenue may need a “true” CFO because of their complexity. Some things that might make a company more complex include:
- Highly regulated industry
- High revenue growth
- Significant M&A
- Physical inventory and/or heavy Capex
- Multiple products and pricing complexities
- Early to go international with multiple entities
For example, a company growing revenue 150% YoY while also doing M&A has VERY different finance needs than one organically growing just 25% YoY.
The Finance Leader’s Team
The more experienced the leader, the bigger the team they are expecting to get. This is where costs can really explode if you get level and/or timing of hire wrong.
It is an expensive mistake MANY startups make — they go for the big experienced executive (or they inflate someone’s title) and then that person wants to hire too big of a team for the company’s stage. It gets expensive fast!
So how big of teams are usually expected at each stage?
Below are my rough guidelines for a typical SaaS company today. The “Other Team Members” section is cumulative with the prior headcount mentioned.
What does the CFO own?
The CFO can own A LOT of really important areas — many of which are outside of what you may think of as “Finance”. And the scope might be even larger at an earlier stage company, but the scope/importance of most of these responsibilities dramatically increase as a company scales.
So when do I need a “true” CFO?
It depends. Consider the factors I laid out above for your situation.
As a company scales, founders/CEOs need to determine if their current finance leader is still meeting the needs of the business or if the role has outgrown them. I do believe leaders can scale with a company and grow into roles of a bigger company, but I rarely see the finance leader of a $5M business being able to scale all the way to be the best leader of a $250M revenue company.
Frequently founders/CEOs think they need a CFO when really they just need a strong (S)VP of Finance. A strong (S)VP of Finance can take a company a really long way, but most companies want to have an official CFO title at the company once they have significant revenue.
There are dangers in bringing on a “true” CFO too early and too late, so take your time and review the criteria above carefully before making a decision.
A related post here:
