Maximize Shareholder Value

No matter how big your company is, the goal is to maximize shareholder value. Whether your company is Dell, and you have a billion dollar market cap or you run an internet music startup, like Grooveshark, your goal is to deliver the best return on investment for your investors. To do this, you have to produce the lowest burn rate possible, and deliver the best returns. While I won’t go into how you can maximize your revenues on this post, I’ll go over how you can cover your costs best and bring in the most value while spending the least amount of cash.

Cash Flow is King

Cash flow is king in a startup. Understanding how cash flow operates is essential, so we’ll first cover exactly what cash flow is, and how you can maximize it. Whenever you have money coming into the company or you have money coming out of the company, you are spending cash. There are different levels of cash and different levels of liquidity and urgency that different types of cash carry. If you’re spending money on a credit card, the urgency isn’t the same as leaving $50 cash on a business lunch. When spending money on a credit card, if it’s a charge card, you have 30 days (or until the end of the month) before you have to pay back that money. If it’s a typical revolving credit line, you have until the end of the month to pay off the minimum balance, and essentially forever before you have to pay down the entire principle, so credit cards provide you an advantage when it comes to maximizing cash flow.

When you pay for expenses with cash or from your debit card, you’re basically throwing away your money. When starting a new company, bootstrapping is essential, and you need to learn to maximize every dollar you have. So throwing down cash on purchases is like putting your company 1 month in the hole. Never make a purchase with cash or debit that you could be making with a credit card.

Bootstrapping Rule #1: Get the Best Credit Cards

Now that you know you should always be using a credit card, you need to make sure you have the best credit card. All good bootstrappers know that your purchases on credit cards should be contributing to the overall benefit of your business. Good credit cards to own include cards that give you bonuses on Airline travel, Gas rebates, and business-purchases bonuses (like using your card at Fedex for shipping). Good credit cards can net you an extra 3% in bonuses, and they definitely stack up quickly. Imagine you’re spending $10k per month on business expenses, that’s an extra $300 per month you could be contributing to gas or it’s an extra airline ticket to San Francisco to raise money. Here are some great business credit cards:

CitiBusiness Card
0% APR on Purchases AND Balance Transfers for 12 months*

Amex Platinum Business
0% Intro APR for Purchases for 12 months.

Citi American Airlines Advantage
Earn 25k miles after first $750 in spending

Pay Your Employees First

When it comes time to pay your bills, always make sure to pay your employees first. This is a simliar rule to planning for your retirement. They say to always take 20% of your income, and automatically deposit it into a retirement account. This same principle applies to building your startup business. Your employees are the lifeblood of your company, and you need to make sure they’re healthy and motivated to keep working.

Your employees are the lifeblood of your company, so when it comes down to payday, make sure you postpone those credit card payment and pay your employees, because if you don’t have any employees you can’t generate any revenue, and all your bills don’t get paid.

When starting a business, it’s important to realize how to best spend your money, and bootstrapping is key. When you have to spend money, spend money on the right expenses, and when you spend money, spend smart money, and that’s credit. Never use cash or debit cards when you can use credit cards.

1. Not really so much as a way to save money, but it’s a good way to set up a culture: Make everyone accountable for everyone else. At Grooveshark, we all feel the pain when we have a big outlay of money. I swear we have a team of part-time accountants (do we really need an EVDO card? yes. do we really need iMacs for our whole dev team? probably not). It’s refreshing that everyone is so conscious about spending money, it really allows us to make smart decisions about money and make sure we’re spending money in the right places.

2. Allow people to work from home, adjust their schedules. By giving our team control of their schedules, they feel empowered, and this allows them to make the best decision for the company.

3. Encourage peer pressure: the biggest motivator at our office is looking across the room at somebody else and seeing them working hard. I’m constantly trying to “beat” anyone else in the office for putting in the most hours. Constantly trying to overwork each other can be fun and really encourages our startup culture.

4. 0% interest credit cards. When we purchase something, it’s always on a credit card, and at that, it’s always on a low interest card. This allows us to have more freedom in using our capital and allows us to push payments back when we are strapped for cash, and at the very least allows us 30 days to pay for purchases on a regular basis.

5. Shop at Sam’s Club, call up your local bottling distributor, and beg and plead for free goods. We buy in bulk on the food we buy, the drinks, and we’re constantly trying to negotiate a lifetime of free energy drinks from vendors.

6. Pay employees in stock as opposed to cash. At the early stages of our development, we didn’t have much cash, so we paid people in equity. As we’re getting more capital, the equity and our company is becoming more valuable so we’re resorting to cash outlays as opposed to equity as we’re moving on. However, being able to provide equity upfront was paramount in our ability to develop our product

7. Locate your company in the cheapest location you find. We’re in a college town, and you really can’t get much cheaper than that. With the majority of our employees being in college or now dropouts, it’s not hard to get people to sustain themselves on ramen and granola bars. As we’re growing, however, people’s palettes are starting to change so we’re going to be looking for new ways to eat on the cheap, while giving it more of a healthy twist.

8. Stock up on plenty of caffeine. Whether it be in the form of coffee, energy drinks, mountain dew — whatever it is, it helps people stay alert and working all through the night. I’m personally an advocate for no-name energy drinks at $1 each, but apparently our team is a bit picky and likes $2.50 Red Bulls.

9. Allow your employees to live in company housing. 6 of us live in our old office. Instead of leaving the office vacant, we decided to move into the office to save ourselves from losing money. This is two-fold, as it allows us to save the space in the event we need to expand and also allows us to live for dirt cheap, thus saving money on salaries.

10. Have tons of parties. We’re constantly celebrating our achievements at Grooveshark. Now the tip is, do it on the cheap. As I said, we’re in a college town, so the Natty Light is constantly flowing. Also, pizza is a great celebration food — no need to get expensive catering when everyone is just as happy with some premium pizza (we love Satchel’s).

Anyone have some other cost savings tips they care to share?