How Do You Estimate How Much Money You’re Going To Spend?
I like using the simple formula of $200K/Head/Year to figure out how far your funding will take you.
Let’s say you raise $10M, and you want the money to last two years. That means you can have around 25 employees:
25 employees x $200,000/Yr = $5,000,000/Yr.
And you’ll find this formula to be reasonably accurate here in the Silicon Valley.
Here’s how this breaks down:
A. Employees at $150K/Yr x 25 = $3,750,000. Now you’ve got $1,250,000
B. Don’t forget about employee benefits (14% of salary) = $525,000. Now you’ve got $725,000 left.
C. What about development expenses and tools for team? That could be another $200,000. You’re down to $525,000 left.
D. Oh. You’ve got to have an office for your team. That could be another $8,000/month or more. Let’s just say it’s $100,000. Now you have $425,000.
E. And you’re going to have to pay for utilities and building expenses and even a janitor. That’s another $5K/month. Now you’re down to $365,000.
F. And let’s say your team is traveling. That could be another $10K/month. Now you’re down to $245,000.
G. Maybe you’re using some contractors too? Let’s say that’s another $4k/month. Now you’re down to $195,000.
H. You’re going to need a lawyer(s) too. For H1-B visas, patents and general legal support. Let’s say that another $5k/month. Now You’re down to $135,000.
I. You’re going to spend money on marketing and advertising your product. Let’s say that’s another $10K/month. Now you’re down to $15,000.
You’d be amazed at where your money goes when you run a company. There tons of expenses that you just don’t realize. But they all add up.
For more, read: How Do You Know It's Time To Hire Your First Employee? - Brett J. Fox