Launching Your Startup? Consider Your Costs
This article was originally published in IPWatchdog on November 12, 2024, and is republished here with permission.
You’re embarking on a new business venture with a strong business plan. That’s exciting. A strong business plan can guide your business, define business goals, and outline objectives and risks. Part of those risks are unexpected expenses, which can be overwhelming and surprise founders who are not prepared. For venture-backed startups, there are intellectual property (IP) risks to start with, which is why it’s essential that the company, not individual founders or employees, owns the IP.
IP is often the core asset of a startup. If a founder or employee retains the rights to key IP, they could leave, taking these vital assets with them and potentially ending the business. Venture capitalists avoid startups that haven’t secured IP rights because, without clear ownership, the risk to the company is too great.
By understanding and strategically planning for the costs associated with IP and many other startup costs, you create a realistic financial foundation and significantly increase your chances of profitability.
Let’s start by looking ahead. Forecasting your startup costs requires a pragmatic approach to help align your business goals with your financial resources. Having accompanied startups on the journey from inception to formation, financing, and beyond, I have seen too many startups fail because they run out of cash before they have the chance to establish product-market fit.
The costs and how much you need to start your small business require answers from the get-go. Calculate your startup costs before you start to know what you will need when you look for funding.
Let’s examine the different costs and some key financial elements to consider.
Differentiating Between Costs
For startups to prudently budget and plan, they need to get a grasp on one-time and ongoing costs, as well as fixed and variable expenses. Ongoing costs, such as payroll and vendor payments, are anticipated costs. One-time costs such as set-up fees or repairs can alter your budget and lead to unexpected financial strain and potential delays in your business operations.
Rent for office space is a fixed cost. It remains consistent each month. In contrast, utilities and marketing expenses can vary and are considered variable costs. Your goal should be maintaining predictable ongoing costs, anticipating one-time expenses, and monitoring variable costs so you can allocate resources efficiently.
Registration and Legal Fees
When starting a business, costs will vary by location, size, type, and other factors.
Costs are also tied to the chosen business structure. The structure you choose in turn affects day-to-day operations, taxes, and risk.
Consider a business structure that provides a balance of legal protections and benefits. Incorporating a startup as an LLC or a corporation as opposed to a partnership or sole proprietorship will increase costs. Business registration expenses can include filing fees for incorporating your business.
Depending on a variable of factors, such as your industry and state, there may be a need for special licenses and permits to operate legally. Whether it’s Food and Drug Administration approval for commercialization of a medical device or licensure from a state medical board to deliver a behavioral health service remotely, ensure you’ve budgeted for these regulatory costs before you launch.
IP Costs
You should be aware of several kinds of intellectual property rights: patents, copyrights, trademarks, and trade secrets. Which IP protection you need to protect depends on your unique business model. For example, tech startups want to protect their ideas with extensive patent filings. For patent consideration, you need to have a novel invention and a patent application filed with theU.S. Patent and Trademark Office (USPTO).
Other businesses may seek copyright protection for original works, including software source code. Trade secrets provide valuable intellectual property rights as long as they remain confidential. At the same time, trademarks protect a variety of things such as names, logos, in the case of fashion, colors as well as other identifiers.
Talent and Benefits
Startups’ most weighty assets are their talent, who subsequently make up the largest part of the budget and can even escalate past 50% of forecasted expenses. Every company wants to attract a talent pool of the highest quality and keep them. Whether you start with a small team or hire a handful of freelancers, payroll is a significant recurring cost for your startup. Offering equity is an option and a way to trim the out-of-pocket cash cost. Also, consider the related expenses, such as paychecks and processing costs from payroll platforms. Additionally, while benefits such as health insurance, 401ks, and other perks go a long way in attracting and retaining top talent, many come with high costs, and there are increases annually.
Tech and Tools
Every business, be it a startup or a behemoth, needs technology tools and software like project management platforms, cloud computing power, or CRM systems to run. These are critical to product delivery and sales actualization. They can also be costly. Luckily, several good tools, such as Google, Slack, Microsoft Teams, and Zoom, have free essential components. Consider tools that streamline processes.
Marketing and Branding
Building your brand is directly related to the success of your startup. Your brand should protect trust; it’s your promise. Tactics, such as digital ads, public relations, social media, and SEO, can all be used in this effort and allow you to target customers. These costs, however, can quickly add up. Your company may also want to create business cards, brochures, and other branding materials.
Additionally, you may hire a professional to design your logo, marketing materials, and other collateral. This all needs to be budgeted. Your initial marketing budget can ensure your startup sets the stage, and ongoing marketing can focus on sustained growth.
Office Space and Equipment
Many workers are remote, but you may need a physical office space depending on your business model. Office space expenses can be costly, including rent, utilities, furniture, and supplies. Remote teams also have costs, from laptops to monitors to collaboration software to do their jobs. Equipment is a big and critical investment for startups. It directly impacts your team’s productivity and growth.
Account Management
Tracking finances should be done regularly, both retrospectively (paying expenses) and prospectively (forecasting cash requirements). Perhaps you or someone within the group have these skills, but if you don’t, an accountant or bookkeeper can help manage cash flow, payroll, taxes, and other financial obligations. These are ongoing expenses, and having a professional handle the company’s finances can prevent costly mistakes and ensure you’re on top of your tax obligations.
Are My Startup Costs Deductible?
To understand what startup deductions you can take, you must understand deductible expenses and how to take them at tax time. Certain expenses, such as legal and accounting fees and organizational costs, are deductible. Furthermore, the IRS allows a deduction of up to $5,000 in the year you started the business.
Your unique business, industry, location, and model will dictate your costs. Utilizing your business plan and creating a detailed budget that considers all the potential costs will make you better prepared.