Startup Finance Made Simple

A Finance & Funding Primer for Founders

Startups are businesses that need to create big results with little money.
If you don't have money, you first need to raise funds. Once the money comes in, you need to spend it as efficiently as possible to generate growth. And you also need to continuously monitor whether your growth is on track, while forecasting and planning for the ultimate success -- that's also the founder's job.

The thing that ties all of this together in one language is Finance.
That's why founders need to understand finance at a foundational level, not just products and marketing.

1. Why Should Founders Know Finance?#

Founders are responsible for things like:

• Making sure the company's cash doesn't run dry
• Deciding when, how much, and on what terms to bring in growth capital
• Communicating in the same language as investors while defending company value
• Verifying "Are we on the right track?" with numbers

The core of this is funding and financial planning.

• To raise funding, you need to persuade with numbers: "Our company needs X amount going forward, and here's what we'll do with it."
• When you receive investment, you have to give a portion of equity to investors, and the company's valuation plays a critical role here.
• The higher the valuation, the better for the founder. Negotiate poorly, and you might give up more equity for the same amount of money.

The foundation for all these decisions is financial statements and financial metrics.

2. Three Financial Statements: The Company's Health Check#

Learning finance ultimately starts with reading financial statements.
There are three main ones:

1. Balance Sheet
   -> "Right now, what's the company's financial condition?"

2. Income Statement
   -> "During this period, did the business make money or lose it?"

3. Cash Flow Statement
   -> "Where did cash actually come in from, and where did it go?"

For founders, the most dangerous moment isn't losses -- it's when cash runs out.
So while the income statement matters, you should always be watching cash flow and your bank balance too.

3. Balance Sheet: Assets = Liabilities + Equity#

The basic formula of a balance sheet is very simple.

• Assets: What the company owns
• Liabilities: What the company owes
• Equity: The company's net worth (shareholders' share)

Or you can write it as:

A balance sheet is always prepared in a balanced state where both sides match perfectly.

• Left side (Assets): What assets the company uses to run the business
• Right side (Liabilities & Equity): Where the money to create those assets came from

3.1 Assets: Current and Non-Current

1) Current Assets#

Assets that can be converted to cash within one year. Key items include:

• Cash and Cash Equivalents: Money you can spend right now
• Accounts Receivable: Revenue has been recognized from customers, but you haven't received payment yet
• Inventory
  • Raw materials inventory
  • Work-in-process inventory (items being produced)
  • Finished goods inventory (ready for sale)

Inventory is essentially cash tied up in a different form.
Managing inventory efficiently means you can use that cash more freely.

If we draw an analogy with software:

• Raw materials: Source code, developer headcount, development time
• Work-in-process: Features in development, outsourced development, SaaS usage, etc.
• Finished goods: Launched apps, websites, platform services

As items move through the production process, their value increases.
Finished goods are generally worth more than raw materials.

• Prepaid Expenses
  For example, say you prepaid $60,000 for a year's worth of factory rent in January.
  • Only $5,000 goes on the January income statement as rent expense
  • The remaining $55,000 sits on the balance sheet as 'prepaid expenses' and decreases by$5,000 each month.

2) Non-Current Assets#

Assets that are difficult to convert to cash within one year.

• Fixed Assets (PP&E: Property, Plant and Equipment)

  • Buildings, land, machinery, computers, etc.
  • Recorded at purchase price, which in accounting is called the conservatism principle.
  • Since most assets lose value over time, their value gradually decreases each year through depreciation.
  • Land is an exception that doesn't get depreciated.

• Intangible Assets (IP)

  • Patents, licenses, software, etc.
  • Amortized over the period they generate revenue.
  • A patent with a 20-year term isn't necessarily amortized over 20 years -- it's amortized over the period you actually expect it to generate revenue.

• Goodwill

  $$Goodwill = Acquisition Price - Net Book Value of Assets$$

  Think of it as the excess value the market recognizes, accounting for intangible assets (brand, employees, know-how, reputation, etc.) that don't appear on the balance sheet.

The important thing is that truly important assets like brand, team, know-how, and reputation don't show up well on a balance sheet.
That's why you shouldn't judge everything by financial statements alone -- you need to look at qualitative factors too.

3.2 Liabilities: Current and Non-Current

The right side of the balance sheet shows how the company raised its funds.
It's divided into liabilities and equity.

• Equity: Funds raised by giving up ownership (equity) in the company
• Liabilities: Funds that must be repaid. They create leverage but also increase risk.

1) Current Liabilities#

Debts that must be repaid within one year. The most urgent debts are listed first.

• Accounts Payable
  The amount owed for goods or services received from suppliers, with payment due in 30 days or later.
  From the supplier's perspective, they've essentially lent money to your company.

• Short-term Borrowings
  Loans that must be repaid within one year.

• Current Portion of Long-term Debt
  For example, if you have a $100,000 long-term bank loan, the$10,000 due this year is classified as a current liability, while the remaining $90,000 stays as long-term debt.

• Accrued Expenses

  • Example: Wages paid on October 20 are actually for September's work
  • This year's corporate tax is paid next year
    These are items where the expense has occurred but you haven't paid yet.

2) Non-Current Liabilities#

Debts due after one year.

• Long-term borrowings (long-term bank loans, etc.)
• Convertible bonds and other long-term obligations

Key points founders should check:

• Whether current assets (especially cash) significantly exceed current liabilities
• Whether equity is in positive territory
• Whether equity is gradually increasing over time (or heading toward capital impairment)

3.3 Shareholders' Equity: How the Founder's Share Accumulates

Shareholders' equity is composed of:

• Paid-in Capital: Investment from investors (at par value)
• Additional Paid-in Capital
  • If you issue a stock with $1 par value at$5, the remaining $4 is additional paid-in capital.
• Retained Earnings
  • The accumulated profits the company earned on its income statement that weren't distributed as dividends but reinvested in the company.

When a company is sold, the amount shareholders receive isn't necessarily equal to the book value of equity.

• Land is recorded at purchase price
• Goodwill, brand, team, and growth potential aren't well reflected in the books

For public companies:

For private companies:

• DCF (Discounted Cash Flow)
• Multiple methods (revenue/earnings multiples) and other valuation approaches are used.

4. Income Statement: The Startup's Report Card#

The income statement summarizes revenue, expenses, and profit for a specific period (monthly, quarterly, annually).

The basic structure looks like this:

Commonly referenced profit margins:

• Gross Margin: Gross Profit / Revenue
• Operating Margin: Operating Profit / Revenue
• Net Margin: Net Profit / Revenue

4.1 Accrual Accounting vs Cash Accounting

There are broadly two accounting methods:

• Cash basis: Recognized when money actually comes in and goes out
• Accrual basis: Recognized when products/services are provided and invoiced

Under accrual accounting:

• When you provide a product/service and send an invoice, it's recognized as revenue.
• Whether the customer actually paid is a separate matter -- the outstanding amount shows up as accounts receivable.

The reason for using accrual accounting:

• It better reflects the company's actual business performance
• Companies above a certain revenue threshold are legally required to use it

However, with accrual accounting, remember that income statement profits and actual bank balance can differ.
That's why you need to look at the income statement + balance sheet + cash flow statement together to see the full picture.

5. COGS, Inventory, and Gross Profit#

5.1 Cost of Goods Sold (COGS)

COGS is the cost directly incurred to generate revenue.

• For manufacturing: Raw materials, production labor, factory operating costs, etc.
• For services/SaaS: Server costs, traffic, licenses directly needed to deliver the service

Under the Matching Principle, you match a period's revenue with the costs directly incurred to produce that revenue at the same point in time to calculate profit.

5.2 Gross Profit

Gross profit is a key metric for evaluating business viability.

• It reflects unit pricing, commission structure, and supply cost structure
• It's widely used to see whether the business model itself makes sense

6. Operating Expenses (SG&A) and Operating Profit#

6.1 Operating Expenses (SG&A: Sales, General & Administrative)

Operating expenses are costs not directly included in the product or service.

• Office rent
• Phone, internet, various administrative costs
• Marketing expenses
• Executive and office staff salaries
• R&D costs (portions not directly included in COGS)

6.2 Operating Profit

Operating profit shows simultaneously:

• How well the company generates revenue in the market
• How efficiently it manages its cost structure

7. Net Profit and the Limits of Numbers

Net profit sits at the very last line of the income statement, which is why it's also called the Bottom Line.

However, net profit can change based on:

• Depreciation
• One-time expenses
• Tax strategies
• Accounting treatment methods

So it's a number with high adjustment potential.

For example, when negotiating a patent license agreement:

• Rather than receiving royalties based on the other company's net profit
• It's usually safer to base it on revenue
  (Because net profit can be reduced by loading in other expenses.)

8. Cash Flow Statement: Cash is King

What actually stops a company isn't "losses" but cash depletion.
So the most important numbers for founders to watch are:

• Cash on hand
• Cash Flow
• Burn Rate and Runway

The cash flow statement is divided into three parts:

1. Cash flow from operating activities: Cash coming in and going out from the core business
2. Cash flow from investing activities: Equipment, facilities, equity investments, etc.
3. Cash flow from financing activities: Bank loans, investment rounds, dividends, etc.

If operating cash flow is consistently positive:

• The business is actually doing well
• Profits are converting to cash effectively

8.1 Free Cash Flow

Free Cash Flow is:

• Cash earned from core operations (operating activities)
• Minus working capital increases and essential investments for maintenance and growth
• The cash that's truly free to use

If free cash flow is sufficient:

• Repay loans
• Acquire competitors
• Improve employee compensation
• Focus on growth without external investment

These options become available.
This is the hallmark of a truly strong company.

9. Financial Ratios: Key Metrics Every Startup Must Track

There are many types of metrics, but startups can make a big difference by managing just a few well.

9.1 Profitability

• Gross Margin: Gross Profit / Revenue
• Operating Margin: Operating Profit / Revenue
• Net Margin: Net Profit / Revenue
• ROA (Return on Assets): Net Profit / Total Assets (If ROA is excessively high, the company might not be investing enough in equipment and assets for the future)
• ROE (Return on Equity): Net Profit / Shareholders' Equity (A very important metric for external investors)

9.2 Efficiency -- Working Capital Management

• Working Capital

  $$Working Capital = Accounts Receivable (AR) + Inventory - Accounts Payable (AP)$$
  • Inventory and accounts receivable represent the company's cash tied up
  • Accounts payable represent how much others are covering for the company

• Days In Inventory (DII)

  $$DII = \frac{\text{Average Inventory Level}}{\text{Average Daily COGS}}$$

• Days Sales Outstanding (DSO)

  $$DSO = \frac{\text{Year-end Accounts Receivable}}{\text{Average Daily Revenue}}$$

• Days Payable Outstanding (DPO)

  $$DPO = \frac{\text{Year-end Accounts Payable}}{\text{Average Daily COGS}}$$

  A higher DPO is better for the company's cash position, but suppliers may not appreciate it.

• Cash Conversion Cycle

  $$Cash Conversion Cycle = DII + DSO - DPO$$

The shorter this number, the more the company recovers cash quickly and operates efficiently.

9.3 Liquidity -- Can You Pay What's Due Now?

• Current Ratio

  $$Current Ratio = \frac{\text{Current Assets}}{\text{Current Liabilities}}$$

• Quick Ratio

  $$Quick Ratio = \frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}}$$

The quick ratio is more conservative since it excludes inventory.
Generally, above 1 is considered stable, and early-stage startups need to pay extra attention to this number.

9.4 Leverage -- How Much Debt Are You Using?

• Debt-to-Equity Ratio

  $$Debt Ratio = \frac{\text{Total Debt}}{\text{Shareholders' Equity}}$$

• Interest Coverage Ratio

  $$Interest Coverage Ratio = \frac{\text{Operating Profit}}{\text{Annual Interest Expense}}$$

Debt is risky, but in some cases it can be cheap capital for growth.
Banks, founders, and investors each prioritize slightly different metrics.

10. Burn Rate and Runway

10.1 What Is Burn Rate?

Burn Rate is the number that shows how much net cash goes out each month.

• Salaries, rent, server costs, marketing, etc. -- all monthly cash outflows minus monthly cash inflows
• Especially in the early days when expenses exceed revenue, burn rate essentially means "how fast you're bleeding each month"

10.2 Calculating Runway

Runway is how many months you can survive at the current burn rate.

Investors typically:

• Expect at least 12-18 months of runway per investment round
• Consider it stable if the burn rate is within 10% of the investment per month

For example:

• If you raised $250,000
• Your monthly burn rate should be around $20,000 or less to survive over a year

10.3 Founder's Burn Rate Management Principles

Managing burn rate well isn't just about being frugal --
it's closer to building efficient systems and culture.

• Check cash flow daily or at minimum weekly
• Delay major expenses (office expansion, equipment purchases, etc.) as long as possible
• Hire only when truly necessary, as late as possible
• Don't cling to ideas that aren't working -- pivot quickly
• Always start your next fundraise while you still have runway cushion

11. Funding Stages: From Seed to Series

Startup funding typically progresses alongside these milestones:

• Founding -> (Seed Funding): Prototype development, initial customer acquisition
• -> (Series A): Market entry, approaching PMF
• -> (Series B): Business expansion
• -> (Series C and beyond): Scale-up, exit preparation

In seed rounds, you typically see:

• The founder's bootstrapping (self-funding)
• Small investments from angel investors and early-stage VCs

11.1 How to Determine Funding Amount?

In the early stages, overly complex and sophisticated financial models often don't matter much.
Instead, try this approach:

1. First determine the time needed to reach the next milestone.
   • Example: 12 months to complete the prototype and acquire the first 10,000 users
2. Conservatively estimate the expected monthly burn rate for that period.
   • Example: 50 million KRW/month -> 600 million KRW/year
3. Add a buffer (contingency funds) to determine the funding size.

Revenue forecasts are often wrong,
but remember that expenses are much easier to execute as planned -- this makes funding design feel a bit more realistic.

12. VC Term Sheets: Economics vs Control

When receiving investment from VCs, the document you'll get is a Term Sheet.

• It's not a fully legally binding contract,
• It's closer to a letter of intent (LOI / MOU) -- a preliminary agreement on investment terms,
• But in practice, 70% or more of the actual deal is effectively decided here.

The term sheet revolves around two axes:

1. Economics
2. Control

12.1 Economics

• Pre-money Valuation
• Investment amount
• Price per share
• Stock option pool size
• Liquidation preference, anti-dilution provisions, etc.

Price per share is typically calculated as:

Post-money Valuation:

12.2 Control: Board and Protective Provisions

VCs often hold less than 50% of equity,
but can exert significant influence through control provisions.

The main ones are:

• Board composition
• Preferred stock protective provisions

Board Composition Examples#

• 3-member board

  • 1 Founder
  • 1 VC
  • 1 Independent director (selected by agreement between founder and VC)

• 5-member board

  • 2 Founders
  • 2 VCs
  • 1 Independent director

Boards are typically composed with an odd number to ensure clear decision-making.

Protective Provisions#

Even without directly controlling a board majority,
VCs can gain veto rights through protective provisions. For example:

• Amending the charter
• Changing board size
• Dividend policy decisions
• Major borrowing decisions
• Licensing/transferring core IP
• Company sale, merger, liquidation, bankruptcy declaration, etc.

From the founder's perspective,
it's extremely important to carefully review these control-related provisions, not just the valuation.

13. Three Core Concepts of Company Valuation

When investors evaluate a company, they fundamentally look at three concepts:

1. Future Free Cash Flow

   • The net cash the company will generate through its business going forward
   • Cash remaining after working capital and essential investments

2. Time Value of Money

   • The concept that today's dollar and next year's dollar have different values.
   • Because of inflation, opportunity cost of investment, and human impatience.
   • For example, at a 3% interest rate, the present value of $100 one year from now is: $$PV = \frac{100}{1.03} \approx 97.09$$

3. Risk Premium

   • Reflects the probability of the company actually succeeding, repaying debt, etc.
   • Higher risk means a higher expected rate of return (discount rate) is applied.

13.1 Valuation Methods: DCF and Multiples

There are various valuation methods, but the main ones are:

1. DCF (Discounted Cash Flow)

   • Project future free cash flows over several years
   • Discount each year's cash flow to present value using an appropriate discount rate
   • Sum them all up to get the company's value
   • The discount rate is determined by the business's risk, cost of capital, etc.

2. Multiple Method

   • Apply the industry average revenue multiple or earnings multiple from comparable companies.
   • Example: If the industry average is 5x revenue,
     a company with 1 billion in revenue would be valued at roughly 5 billion.

VCs often target 10-20x returns,
and they set valuations by mixing quantitative and qualitative judgment
based on prior investment experience and portfolio performance.

14. Wrap Up: Finance Isn't About Memorizing Numbers -- It's a Language

Understanding finance well doesn't mean memorizing formulas.
It means being able to have conversations with investors, your team, and the market using numbers.

• You can explain "What are the key drivers of our business, and how do they connect to financial numbers"
• You can rationally decide "Where should we spend more, and where should we cut back"
• You can concretely plan "The runway and milestones until the next funding round"
• At the negotiation table, you won't let your company be undervalued

If you want to study further,
I'd recommend reading books like "KAIST K-School Startup Finance Special Lecture"
and connecting the content of this post to real-world cases.

It is not so important to know everything as to appreciate what we learn.

— Hannah More