This Week in Startups - How to ace diligence & avoid common mistakes with Scott Orn | Kruze Consulting Startup Finance Basics

Episode Date: January 22, 2021

Check out Kruze Consulting: https://kruzeconsulting.com/twist FOLLOW Scott: https://twitter.com/scottorn FOLLOW Jason: https://linktr.ee/calacanis

Hey, everybody, welcome to this week in startups. One of the things we're doing in 2021 as a service to the founders who listened to this program is startup basics. Why are we doing this? Because startups ask me the same questions over and over and over again. And these are questions about legal issues, accounting, HR. These issues come up over and over again. And I can tell you that if you get your accounting issues wrong, your finance issues wrong, your legal issues wrong, your HR issues wrong, my God, the cleanup work, the downstream issues when you do diligence with a venture capitalist can be colossal. I've seen deals fall apart because somebody didn't do their IP assignment. That's why we had Wilson Suncidi. My friends over there,

my attorneys over there help us do a startup basic series around legal issues. I've seen deals fall apart because somebody made an HR claim because they were unfairly fired and the person didn't have insurance and they got sued and they didn't have the right liability insurance. My goodness, the stories I could tell after 200 plus investments. Well, one of the things that you have to have to have to get right is due diligence. Most people don't know what due diligence is. It's essentially a process of making sure all the representations you made about your startup are correct so that the person who's going to buy your company or invest in it feels comfortable and they've done their due diligence. They've checked the boxes they're supposed to check.

And so today, we're very lucky to have Scott Warren here. He is the C-O-O-O-O-R-C consulting. That's K-R-U-Z-E. And they work with a ton of our startups and a ton of other startups. And we're just going to go through it in a very concise way, right, Scott? Absolutely. And thanks for having me on, Jason. I appreciate it. Yeah. No, I mean, I appreciate you taking the time. to do it in partnership with us because I don't I have a cursory knowledge of all this stuff. I know the best practices, but I don't do it every day for a living. You do. The goal of the startup basic series is to actually give advice. And a lot of times what people do is they do these

kind of things and like, oh, my best advice is that you hire a good attorney. My best advice is you hire a good CPA. My best advice is your, that's not what we're doing here. We're going to actually go through step by step by step. And you've had a number of clients that have had successful fundraisers recently, perhaps even, and two of your customers happen to be com.com and density. Yep. Which I know you have a, you're an early investor in both, I believe. Oh, yum, yum, Scott. These are two of my favorite words in the English language, calm and density, right after

Uber and Robin Hood. These are my favorite words. Com, we did the seed round, put in $378,000 when it was a five-month. million dollar company. You might see me on that cap table. Yum yum. And density was at our launch festival. They launched at the conference. They've done incredibly well. Klinear Perkins did the last round. Founders funded the round before that and before that Mark Suster from upfront, upfront ventures. And we, of course, did the seed when it was a $4 million company. So in both these cases, you have been tremendous returns for us. But these are companies that you helped with their

diligence when they did successful raises. Absolutely. And, you know, I think just even just getting into like my best point is you kind of touch on this a little bit, but do not procrastinate. Like that is the single biggest error that founders make. They say like, oh my gosh, I am going to, I'll take care of the financials. I'll take care of all the legal due diligence later. I don't have to worry about it. And then, but I know this happened with calm. I know this happened with density.

Deals, VCs came out of nowhere. They weren't expecting to raise money. And all of a sudden, boom. That's right. Like Insight. inside ventures wants to talk to con. Yum, yum. And if they hadn't been prepared and had everything buttoned up before that conversation

happened, they would have never been able to catch up. It would have actually, like, dinged their valuation. It would have made it a lot more difficult. And could have killed the deal. Totally, totally. Because what happens when you turn over the books and they're a mess? This reflects on you. Totally.

The other thing that people don't think about is the amount of stress that founders are going through at that moment. Like, this is your baby. You've spent, like, I think Com probably spent four or five years by the time they got to insight, right? Like, they've probably been, right? So, like, Alex and the team, they've been working on for a really long time. You do not want your baby to look ugly at that critical moment.

And you're stressing about it, right? Like, you do not, you just, even if your stuff is all buttoned up, you're stressing about it. So just de-stress yourself a little bit and just take care of it when you raise money the first time or when you start get going. It's a lot easier if you spread this workout. over years and you check in on it quarterly as the leader of the company, as the co-founder. It really is your job to make sure the stuff is buttoned up.

That doesn't mean you ignore your customers or hiring, you know, or these other things that are super important in your company building the product, but you got to get the stuff right. Of course, you've worked on acquisitions, companies that have been bought by Apple, Cisco, Fox, so we'll get into that a little bit. But due diligence can start at any time. and great companies, correct me if I'm wrong, they, Scott, have their diligence folder, you know, their shared drive, whatever they're using box or Dropbox or Google Drive.

They have that set up and ready to go and they maintain it on some cadence, correct? Totally. And your financials should always be up to date. Like you should not be doing like quarterly or every six months or think like your financials should be up the day every single month. and what we say like, hey, have your financials be due diligence ready every single month, which means closing the books, which means, you know, someone on the executive team answering all the accounting questions, making sure everything's booked correctly, and then doing a debrief once a month with your controller or your outsourced accounting firm like us. But having that conversation every month really keeps things tight and it keeps

big, small things from snowballing into big things. And so if you're doing that monthly close, if you're having the conversations with your accounting firm, your financials will be due diligence ready. And that's probably the biggest thing. The biggest mistake I see people making is not doing that, procrastinating. And then they try to cram in, as you said, like, it's easier to spread this work around. They try to cram in six months of work in two weeks or five days or something like that. Inevitably, the financials will be wrong. You know, the revenue recognition will be wrong. The expenses will be, something will be wrong. And venture capitalists, by the time they're doing due diligence on you,

they already kind of want to invest. Like no one takes the time to do due diligence for a company they don't care about. And so you're kind of in this like, hey, now I've bought into the vision. I've bought into what you're doing to change the world. Now just prove to me that you can run a business, that you're organized, that you will spend my money wisely when I put money into your company. And so these are like just kind of table stakes for the VC. Again, they bought into the vision.

You just need to prove to them that you can actually spend their money wisely. It's like they bought the house and now they're moving on to inspections. Totally. They've already put the offer in. They're going to buy the house. Now we just got to check. There's no mold. We got to check that.

You said the HVAC system was, you know, you upgraded it two years ago. Okay. What did you upgrade it to? Let's take a look. Oh, okay. You've gotten your air conditioner or your hot water heater has been cleaned. Let's make sure it's clean. And if not, maybe that changes the price, et cetera.

What are the things that? are most important when this diligence happens, what are they going to be looking for on a finance side? We know on the legal side, they're going to be looking for things like, have you been sued by anybody? Are you incorporated? Do you have IP assignments or all that stuff? We go over that in our legal startup basics. But on the finance side, what are they going to be looking for? And what's at the top of the list when, you know, the partner at a firm, you know, says to the associate, you know, hey, manage this. Get through this diligence process. What are the three or four things that they're most, most, most interested in seeing and confirming.

It's basically three big buckets. The first is historical financials and making sure those are up to snuff and they accurately reflect what the executive team has told the VCs in the lead-up, you know, in the kind of the sales process. The second bucket, and I can dive into these in a second, but the second bucket will be kind of forward-looking like financial model. And it's not so important that your financial model is perfect or no one's expecting you to be like an analyst from Goldman Sachs.

What they're doing with the financial model is really kind of using that as a map to judge your expectations, judge where you think you can take the business and essentially sell that to their partners and say, like, this is going to be a really exciting business in a couple of years. This company has an opportunity to IPO eventually. And then the third bucket is tax compliance. And I think people generally understand that like just should have good historical financials and a model.

But I think tax compliance is somewhere where we see people fall down quite a bit. And so I can dive into those three buckets if you like. Yeah. And where does the cap table fall in all of this? Is that something the lawyers or the accountants or does it fall between those two groups? Where does the cap table fall most often? Cap table is usually the domain of lawyers. We always joke when Carter came along, there was a lot of lawyers who made a lot of money managing cap tables. And you will take that from my hands when I die kind of thing. Now lawyers have adapted and they're actually. actually very comfortable using Carter. And Carter does save a lot of time and other cap table

management. But that's usually where they live. Now, this is a little micro point, but your accounting firm should be reconciling your cap table when you do a new fundraising. I don't know if you've seen this, Jason, but there's been so many times we reconcile the cap table against what was actually deposited or wired into the company versus what the cap table says. And we routinely find like $50,000 missing or $200,000 missing or things like that. wires bouncing. Someone forgot to send a wire. Someone maybe times got a little tough for that. Like an investment wire. Like it bounced or something. Yeah, exactly. And founders, like, they're so happy to get the money and they've been working so hard in the lead up to that that they don't really

reconcile the cap table. And the lawyers don't reconcile the cap table. They have a, they're looking at the wires, but they're not actually to the dollar the way we are. So that's, cap table is the lawyer's domain, but reconcile it. This happened to me in Vegas, Scott. I literally am in Vegas. I go to the cage and I say, hey, I want to, you know, like cash in these chips. And the woman goes, okay, do you want to put that with your front money or do you want to take it in cash now?

I was like, what do you mean? She's like, well, you have $23,000 in front money here. I'm like, oh, no, I wired that back. She goes, no, I never got wired. There was some issue. I was like, two years ago? She's like, yeah, that was two years ago. I was like, they said they wired it.

I did all the paperwork. I never checked. It's $23,000 sitting in the cage at the Aria. I was like, oh, my Lord. Thank goodness you go to the same place. Give me that money now. Well, and then I just put it on black and I lost it. No, I didn't. Sometimes little details like this fall between the cracks. Totally. And then you can have a major issue because that money didn't come in. Maybe they didn't put that person on the cap table. Now this comes up in diligence. Oh, my Lord, what a disaster this could be. And then how stupid do you look to the venture capitalist or the seed investor who put the money in? That's what I was going to say. Totally. Like imagine going to your lead and being like, oh my gosh, two years ago, we didn't collect $200,000 of our seed wrap. I'm so sorry. You know, and like, what do you do? You go back to that person and try, you know, like it's a mess, right? So that's my biggest like accounting finance thing on cap tables is reconcile the cap table and then use a good system like Carter or if your lawyer is more comfortable using, you know, except. So that's totally fine.

There's plenty of great companies that have an Excel-based cap table. You just have to make sure someone's on top of it, issuing options correctly, all that kind of stuff. How does this stuff get certified? So said another way, in our industry, if all of this stuff is put into a folder, how does the investor know that what's on the P&L, the profit and loss statement, your audited financials, whatever it is? how do they know that that's actually true? How does it all get certified? And what level of certification are people looking for? Self-certification, an audit, a review. Are they drilling down into the bank statements? Explain how that worked for somebody who's going through diligence for the first time. Yep. Well, there's two things. There's a reputational certification.

And then there's like a legal certification. So reputation, it's like one of the reasons, like venture capitalists like working with accounting and C-Services. F.O firms kind of on a continuous basis because they know that if something's wrong, they're going to get, they're going to get a nod or a tip, right? Like, there's no incentive for an accounting firm to ever try to hide something from a venture capitalist. You do not want to like, because that's a reoccurring relationship. And so a lot of the work is getting everything set up done correctly. And then being able to say to you, Jason, when you're investing in a launch, like, hey, books are good, rev rec good, expenses are good, all the balance sheets.

schedules are good. We're good to go here. And that's the reputation. Like, so you know if Cruz has done the work that we've did it, we stand behind it. We'll go through it on calls and kind of show you. But like our reputations at stake. The second part, which is a legal representation is what's called reps and warranties in an actual, you know, stock versus agreement or an M&A deal. And those are very, very official. Like you are going through those one by one on legal calls with the opposing council and what's become really kind of prevalent lately in the bigger rounds is venture capital firms will actually hire like a big four accounting firm to lead the financial diligence. These are like rounds or like $20 million and up, but that used to never happen.

Like it used to be like an associate, right? Like an associate at a BC firm would dig into the numbers, right? Yeah. What they've found is that they can hire like an E&Y or KPMG or Deloitte to actually get in there and really dig in. And so a lot of times we actually see the big four accounting firm actually rebuild the financials from scratch because they don't really want to trust what's inside of ClickBooks. Got it. And so then you have a meeting where you sit there and you got one screen is what your financials look like and one screen what the extremely talented big four person did.

And you need those to match up. And so that's the type of scrutiny you're under. When you get through all the diligence. And again, little things like, you know, prepaid here, prepaid. prepaid there or something like that isn't a big deal. But you get to a point where they're satisfied, they're willing to sign off with the VC firm. And then you actually sign the reps and warranties. And almost always the lawyers are looking for a verbal rep and warranty from us on those calls as well. So the founder is signing the paper as a representative of the company. But they're also like,

hey, Cruz, you are agreeing to all these reps and warranties. That's especially important on taxes, which you can talk about in the second, but like it is part of the game. And so you need to have, you want to have a financial partner who can be on those calls, who can answer everything, who has all the documentation. A lot of people don't know this, but there's a lot of supporting schedules that go behind the financials. You may see something in QuickBooks, but every one of those balance sheet schedules like, you know, fixed assets, prepaid, you know, accrued expenses, all those things have exports that we give the other accounting firm who's doing the diligence. And so they're coming through all that.

And so that's really how it happens. But it's your reputation. It's interesting. You say that the reputations in the early days, there's less money at stake. So when I'm putting money into Com and they're doing at that time, I think they had $10,000 in total revenue. I really, I mean, back in those days, I wasn't doing really any diligence. I was just saying, I like this company. I like the founder.

I've used the product. And we weren't doing like too much diligence. But as we started to put in 500K, a million dollars, now we started putting somebody on it. But what you're saying is, hey, when they start putting in $20 million for 20% of the company, then they start getting into sign off on these. And they might even use a price waterhouse or one of the big four. Totally. And that happens pretty consistently now.

Correct me if I'm wrong here. The diligence is commensurate with the amount of money at stake. So in the early days, it's going to be lighter. it's going to be less complex, but then the diligence scales with the check size. I agree 100%. With the caveat that even though those check sizes early are small, they're so important to the founders. Of course. Like that is your lifeblood at that moment. And so in a weird way, the stakes are just as high for the founder at that early stage. Because like say you did like your rev wreck is completely messed up or things are just, things look so odd to the investor.

if that investor walks away, you are really in trouble. If you're at a late stage, you're talking big dollars and things are messed up, you fire that accounting firm who did a really bad job. And you probably, you might let someone go internally who's managing that and say, like, we got to do this over. It's our bad. And come back in two months. But like, even at the early, I don't, I want the early stage founders to just grasp the

importance of this because if you can't close that money because things are wacky or you're just not right. Like, it's just such a. it's such a bummer, you know, it's, this is again, it's your baby. It's self-inflicted. That's the thing that makes me crazy. It's a self-inflicted wound. It's like turning the ball over because you walked on the court and forgot to pass it

when you were doing an inbound pass or something. Totally. You accidentally mucked your cards and didn't realize you had a flush and you didn't notice it because you just weren't paying attention because you were having drinks while you're playing poker. A lot of gambling references here. But it is true that you do need to really keep this tight. it's a good observation on your part, Scott, that in the early days, really in the early days,

even though it's a smaller amount of money, that first $500,000 or $400,000 going into density was really hard for Andrew to get the first 350 for me or 378 in Com for Alex and Michael. That was hard money to raise. By the time they get to the inside money or the Kleiner Perkins money, the company is so established. They've got five years of revenue. You can look at it. You can see bank statements, I've got taxes, everything's really buttoned up. You can swap out a lot of those investors. There are typically five investors who've put in offers. And so it really is super important to get it right from the beginning, work with a great firm, obviously, and try to pace it, right? Do a couple hours a week. And don't be afraid to get on a phone call. This is the other thing.

Don't be afraid to get on a phone call and say, I don't know what accrual-based accounting is versus cash-based accounting. I don't know what a cash flow statement is. The support people you have are there to explain it to you. So tell them, I don't understand. If they explain it to you twice and you still don't understand, say, I'm sorry, I'm really dumb. I don't understand legal issues. I don't understand accounting issues. Can you explain it to me one more time? Because you will get it eventually, right? The stuff isn't that complicated. I totally agree. And we actually do a lot of videos to, so the founders can have that conversation with me, but then watch the five-minute video while they're sitting on the couch, you know, and like watch it a couple times because they're usually

an amazing engineer or an amazing salesperson or someone like an amazing product vision. No one wants you to be an amazing accountant. They just need you to be able to speak the language a little bit. There's one other thing I just want to touch on, which is if you feel like things are a little bit funny and they're not as accurate or you're not getting those questions answered, like talk to some other firms because I still remember with com, like they had closed. I think they probably closed one of the checks with you. And I remember meeting with Alex and he was just like,

things feel off. Like my, I don't know what it is. I don't know what's going on in my income statement, but it just feels weird. And we dug in and we fixed a bunch of stuff and got it to where it's steady state. And once you do that, we call it cleanup work.

But once you do that cleanup, it's so much easier to do it consistently. It's accurate. And again, it de-stresses your life. It's like you go to your garage. You take everything out. You purge half the stuff.

You organize it. Now it's organized and cleaned up. You got everything on shelves labeled. Now maintaining it is easy. But you sometimes have to take everything out of the garage, give it a good scrub and clean, throw some stuff away, and then put it back. I just went through this in our house over the summer. It really does make a huge difference. And that's this accounting work or legal work sometimes.

You've got to just rip everything apart and understand it. And it can get complicated with these subscription businesses. You must be seeing this over and over now. our industry moved from selling a contract one time every three years to all of these people putting their credit cards in and invoicing and some people are paying monthly, other people paying yearly. It's gotten super complicated in many ways, right? Absolutely. And you're touching on it. Like, that's why I keep mentioning rev rec, revenue recognition. What does it mean revenue recognition? Explain what that means in plain English

while we're here. It basically means you recognize revenue during the time period where you deliver the service, not when you actually. book a sale. So the old way used to be able to sell a license. Yeah. And recognize it that quarter, like Oracle and PeopleSoft and those companies. Nowadays, you typically sell something and you deliver the service over 12 months, like a SaaS company or like a comm subscription, superhuman's another company you work with. Like, these are all subscription companies. Oh, I was the second investor in that company. Yeah. I mean, it's another, that's another J-Cal Yum. I know, Scott. We're lining nicely here. So, you know, superhuman is one of my favorite words in the

English language as well. Yes. They're pretty amazing. Well, so crushing it. Speaking of reoccurring revenue. And so when, when a com or superhuman or some of density is a SaaS-based business, you only recognize essentially one 12th of the revenue for that annual contract every month. And so keeping track of that, like we've built a bunch of automated templates, which you pop the contract you've sold that month. And sometimes it's paid up front. You pop that number in. And then it spits out an amortization schedule for you. And when you're dealing with like someone like com where they're, you know, the app store is a major revenue generator for them, that it gets even more complex because unfortunately the iTunes store is not the greatest at

reporting and they typically pay on a pretty big lag. And so there's a lot of complexity here. You might know your top line revenue from iTunes, but the money is not coming in for another three weeks and it comes in spiky. And it's just the recognition of this revenue, there's a lot of moving parts. And you got to get it right. I had one company, I'll obscureify the name here, but they were selling subscriptions for a nice, you know, $300 a year, whatever it was.

And we invested and then they started going into diligence. They were getting some interest from investors. And they had to pause on raising money because they were doing cash-based accounting. Yeah. So $300 a yearly subscription income in or people would pay $500 for two years. And they were not doing accrual-based accounting. They were doing cash-based accounting. So they would just count that sale in that month, even if it was a two-year deal.

And oh, my Lord, then we found out, you want to talk about archaeology and how disastrous this can be. Then we find out they never sent subscription renewals to anybody. Oh my God. So they're in month 16 or 17 on the $300 deal. I'm like, so what happened? Like, well, we're giving them six months free. I'm like, do they know you giving them six months free? Have you ever talked to them?

No. I was like, oh my God, this company's got, I mean, they were literally bumping up against seven figures in revenue. They had crossed it when we were invested. And, you know, we had to go clean it up. And, you know, it was a bit of a, maybe it took four or five months. And that means those investors who were going to invest, they went away. Yeah.

Well, and the other thing is it, and that's when you're getting the benefit of the doubt from the investors, but there can be times where investors might interpret that as like hiding the ball or being untruthful. Like a very common kind of revenue metric is ARR is 12x, 12 times your monthly recurring revenue, MRR, right? So if you're doing cash-based accounting and counting all that annual revenue up front and you tell an investor, hey, we're doing $2 million of ARR, but really you're not. No.

Like, how can they trust anything else you say? Right. Right. Like, it's, it's, it's really difficult for them. Essentially, you don't ever want, correct me, if I'm wrong here, to ever bend or exaggerate the truth in any way. And you want to be conservative and transparent because nobody is expecting these companies to be perfect.

If you put in an accidental expense or you should have amortized something over. 24 months or 12 months or not at all. Those things happen. They're not looking for perfection, but they're looking for a process that is something they can believe in that's trustworthy. I totally agree. Like they're not looking for perfection. In fact, they're not even expecting anything close to perfection. They're expecting a good honest try. They're expecting you to have good judgment in hiring a service provider who can actually do this for you. And definitely do not hide anything. That is where deals go to die. And that's where reputation is going to die. Like if you found out that one of your founders

You already invested in. Take out the names. You can obscureify it a bit. But give me the story of where like all of a something, you find something and you're like, oh my God. And the deal just blows up. I think the big like.

You can obscureify it obviously. Yeah. I've got to think about it for a second because this is, this is going to sound a little funny. But like we do things the right way so we don't have a ton of these blowups. We have companies come in. But certainly you've been brought into a company that's been blown up and they say clean it up. Yeah.

So give me that example. Something had blown up. Very routinely, very routinely we have companies coming in with like two years of financials, completely messed up, never did taxes, never did anything. And they're sitting on a term sheet from a Sandhill Road VC and they're like, I'm scared to tell them, you know, kind of thing. And so. They haven't done their taxes for two years. Oh, yeah. Yeah. Oh, yeah. Yeah. So I always kind of tell founders if you're in that boat, don't feel bad. Just fix it. Like the founders are the, are the, VCs are looking for someone who fixes problems. And all you need to say, like, sometimes I just write the VC, they, they, they talk to the founder and I write the VC an email and say like, hey, we just got engaged. We're going to fix this. Give us two weeks. Boom. VC is happy.

Like they, they, again, they want to invest in the company. Worst problem ever saw. Founders are taking a 3K a month draw, three founders from the company and paying for their apartment as office space. No taxes. $12,000. dollars in cash coming out of the bank account for, you know, two years or for 18 months. And I'm like, IRS is not going to think highly of you expensing your entire apartment where you sleep.

You can expense like the square footage of your desk and that only. You cannot expense your closet with your clothes in it or your bedroom. That's not how this works. And you doing that is really dangerous. I mean, I don't think the IRS is particularly looking to put, you know, founders in jail. but for paying themselves a 3K draw, but you're supposed to take out payroll taxes. You're supposed to do this right. And you're not supposed to expend your entire apartment.

So if it's worth doing, do it right. That's always the message, right? That payroll tax example is so perfect. Vanessa, my wife is a huge writer. She's the Cruz and Cruise Consulting. And one of her most popular posts on Cora is a combination of the no payroll tax and the paying for your apartment because do not do that stuff. And I think people don't quite understand.

They think of like annual tax returns, but they don't think about the revenue the IRS generates from payroll taxes. And that's actually huge. And they're like a dog on the bone with payroll taxes. The minute you start running stuff, not through payroll, not taking out payroll taxes, they will come after you. And it starts this endless chain of letters, penalties, sitting on hold. You don't just call the IRS and solve a problem.

You sit on hold for an hour and a half. You exchange a letter. It's so frustrating. And I feel so bad for the founders who don't know that. Pain and suffering. Yeah. Oh, God. That's a really good one actually. Are you getting a huge, I'm going to ask you one timely issue here as we wrap. And there's been a great segment. When people leave San Francisco and they decide they're going to work from a ski house in Nevada side of Lake Tahoe and they do it for a year. Who gets the payroll taxes now? And where do you file? How is all this going down? This is happening all at tons right now because of COVID. So there's a short-term answer and a long-term answer. The short-term answer is a lot of the states have created safe harbors basically with each other. So like New York, New Jersey.

If you move, if you leave New York and you went to New Jersey to stay with your parents or something like that during COVID, they're not really enforcing that right away. And they're giving people safe harbors. Now, a lot of those safe harbors were scheduled to end at the end of last year. So I got to look and see what's been updated. But that's the short term. what typically is the forcing function to making this more concrete is the people who leave San Francisco or New York wake up one day and they're like, wait a second, I'm living in Nevada.

Why am I not paying Nevada payroll taxes? Like I want to be taxed like I live in Nevada or what at Texas, whatever place people are going to. And so they're telling the company, I don't want to pay California taxes anymore. So switch me over, which then creates a lot of tax nexus for. the companies because all of a sudden, you went from having most of your team in San Francisco or New York or wherever to having people in 10 states or 20 states. Now you got to file. And so it actually, and you have to file and people don't know this, but you have to file to register to do business in

that state and to do payroll taxes in that state. There's two separate filings. And then you input those numbers into your payroll system. And so the good news is the employees are kind of forcing this and saying like, hey, let's let's take care of this because they want to pay less taxes. So that's good for compliance, but it creates a lot of work for the startups. And there's a couple of solutions to that. PEOs have become much, much more popular now with COVID because PEOs can help you manage. Personal employer organizations. Yes, yes.

So Trinet, Just Works, Rippling has a PEO, Sequoia. Those are the big ones. And so they'll help manage a lot of that. And then we also do those filings for you if you don't have a PEO. We're happy to do it. but it's definitely a level of complexity. And you just got to stay on top of that. And I don't want to get too far down the rat hole taxes.

But then that starts interacting with your sales tax if you're in these other states because you now have nexus in those states. And you also have to file a federal tax term. So I don't want to scare any. But like we at Cruz, we hire remotely. So I think we're in something like 20 states ourselves. And we file like a big tax. It's not that hard.

It's doable, but you have to do the work. Exactly. Exactly. You have to do the work. All right. Listen, this has been amazing. Everybody can go to cruise.com, K-R-U-Z-E-Consulting.com. Everybody go to cruz consulting.com slash twist, and the cruise team will help you with anything you need help with. They're awesome. And as you heard, they do superhuman density com and a bunch of other companies in our portfolio.

They do a great job. Really appreciate you taking the time. We'll see you on the next startup basics.