Many of a startup’s expenses are driven by employees: wages, recruiting, payroll taxes, bonuses, etc.
Use the Employees section to forecast the number of employees by role. For example, you might create the following roles:
|Research & Development|
|Sales & Marketing|
|General & Administrative|
If you only have a few employees, you could also enter them individually by name. For each role, enter the hourly OR annual rate and the number of employees by month. Part-time roles can be entered as decimals such as “0.5” for a half-time employee. You can use the “Advanced Employee Assumptions” popup to edit the expenses driven by the number of employees.
Forecast employees in four categories:
- Direct Labor: Employees that support the production and delivery of a product or service. If I double my sales, I will need twice as many of these employees. For software products, this includes roles like account managers and support agents.
- Sales & Marketing: Employees whose work goes into generating new sales.
- Research & Development: This includes software development, engineering, and other roles focused on the creation of new revenue streams.
- General & Administrative: This covers everything else, including management team salaries.
If you will only have a few employees, can add an “Employee Type” for each individual and name them the employee’s name “John Doe”. However, bigger businesses should create roles such as “Account Manager” or “Team Lead” and forecasting the number of employees in that role each month. The forecast might start with one “Team Lead” in the first year and end with twenty “Team Leads” in year five.
Forecast Employee in Monthly Detail
Use the monthly detail to indicate the number of employees each month. You can enter half-time employees as “0.5”.
In addition to employee wages, there are a number of expenses that come along with hiring and maintaining employees.
Estimate these expenses for each of the four categories of employees (Direct Labor, Sales & Marketing, Research & Development, G&A).
The values will be applied to every employee in that category, so use the average that you would expect. For example, if you have a Sales Manager whose travel costs $5K per month and 4 Sales Reps who do not have travel expenses, use an average of $1K Travel & Entertainment Costs.
The expenses are as follows:
- Recruiting Costs (per new hire): This includes the cost of posting a job, interviewing, entertainment, background checks, sign-on bonuses, and other fees associated with finding, vetting, and onboarding a new employee. The amount often depends on the availability of labor in your industry. Recruiting costs can be higher than one would expect, but a good employee will cost less in the long run. Where possible, we recommend hiring candidates as contractors for specific projects before moving them into full-time roles. You should also factor in the training time required to bring an employee up to speed when building your hiring plan.
- Computer Equipment (per new hire): If your company provides hardware for each employee, enter the value of that equipment here. This ensures that the cost of computer equipment scales properly with the number of new hires.
- Software & License Fees (Monthly): Many enterprise software licenses have a per-user fee. Estimate the monthly expenditure per user on these licenses.
- Travel & Entertainment Costs (Monthly): If this type of employee will incur travel and entertainment costs for the business, estimate the monthly amount per employee here. This can also include client entertainment or internal events such as team lunches or birthday parties.
- Annual Bonus (% of Base Salary): This is calculated as a percent of each employee’s salary. Bonuses are accrued every month as a liability and paid out in cash at the end of each calendar year.
- Benefits & Taxes Costs (% of Base Salary): Benefits and taxes are typically 25-40% on top of a W-2 employee’s base salary. The expected value of benefits will vary based on the industry and type of employee. Startups often offer fewer benefits and more equity opportunities (which you can model as options and warrants in the cap table).
- Training Costs (% of Base Salary): This is the cost of training on an ongoing basis. For the cost of bringing an employee up to speed, edit the “Recruiting Costs”.
- Employee Turnover (% Annually): This is not a cost but rather a calculation of how often your employees will be replaced. This drives additional recruiting and computer equipment costs.
How does this work for 1099 contractors?
Some of these expenses might still apply to 1099 contractors. Employers don’t pay payroll taxes for 1099 contractors, but you might have recruiting costs, software subscription fees, or some kind of bonus plan. You can start by clicking “Clear All” and then enter only the ones that apply to your business.
Why is my compensation expense higher than the salary I entered?
Total employee compensation expenses are calculated by adding the base salary to non-salary employee expenses.
To edit non-salary employee expenses, click “Advanced Employee Expenses” at the top of the Employees tab. We have pre-loaded these assumptions with the typical expenses for startups. These expenses include taxes, travel & entertainment, hiring costs, annual raises, and training.
Startup founders often underestimate the expenses that come along with hiring employees. That’s one reason we recommend using part-time contractors until the startup is ready to hire at least 10 full-time employees.
Base Salary and Rate
Enter the base salary for the employee either hourly (such as $20 per hour) or annually (such as $40,000 per year). The model assumes 2,000 hours of work per year.
If this is a part-time position, enter either the hourly rate or the effective annual rate as if this were a full-time position. Then, when editing the employee count, enter the fraction of time the employee is spending. One person working half-time would be 0.5 full-time equivalents each month.
This does not include benefits, taxes, bonuses, or other supporting costs, which are entered in the “Employee Expenses” pane.
The annual raise is applied to the base salary at the beginning of each year. It also drives an increase in bonus, benefits and taxes, and training costs, which can be edited in the “Employee Expense” pane.
Employee Count and First Month Date
If you are only forecasting one employee of this type, enter the start month for the employee and ignore the “Edit Employee Count” button.
If there will be more than one employee, you can skip this input and click “Edit Employee Count” to start editing the number of employees of this type on payroll each month.
This is the number of “Full-time Equivalents” or FTEs. For part-time employees, use a decimal value to represent the number of employees, such as 0.5 for a half-time employee. Two FTEs in a given month could represent two full-time employees or four half-time employees.