5-min read

Waseem Daher, co-founder and CEO of Pilot, discusses the four biggest and most common money mistakes that startups make and the solutions to avoid them. These mistakes include mixing personal money with company money, not doing your taxes properly, handling your own payroll and not getting a handle on financial records.

Techstars Global Network Partner Pilot provides bookkeeping and tax prep services to startups so that they can focus on their business instead of their books. Techstars alumni companies can receive 20% off Pilot Core bookkeeping for six months and a free consultation call for setting up their back office. 

By Waseem Daher, Cofounder and CEO of Pilot

My Pilot cofounders and I built and sold two companies before Pilot. In the process, we learned a lot about the pains and pleasures of building companies. At our first two companies, one of the biggest pains was bookkeeping, so our third business—Pilot—is all about solving that problem.  

Along the way, we’ve become extremely familiar with the financial mistakes that startups make. Some of them Pilot can help you solve. As for the rest, here’s my best advice on what not to do. 

The 4 Biggest — and Most Common — Mistakes Startups Make:

1. Mixing your company’s money with your personal money

Don’t do this. Seriously, just don’t. The official name for this is “commingling,” and it causes problems. 

For one thing, if you commingle your company’s assets with your personal assets, you could lose the liability shield that you got by incorporating. This is what keeps your company debts separate from your personal ones. You don’t want to be on the hook personally for your company’s debts. Another problem with commingling: the possibility of owing lots more in taxes, if the IRS decides that stuff the company buys for you is actually compensation you aren’t paying taxes on. Not good. 

My solution: Get and use corporate credit cards to make company purchases. This gives you a clean separation of work and personal expenses, plus you can easily see what the company is spending money on. If employees need to spend money on behalf of the company and then get reimbursed, use expense reporting software (I like Expensify) to do the tracking and reimbursing. Take a day early on in your startup and set this stuff up. You will not regret it — and if you don’t do this, I guarantee that you’ll spend way more than a day sorting out the mess later. 

Want to get more expert financial advice for your startup, or hear more from Pilot founder Waseem Daher about how he built three successful companies? Watch the replay of this AMA with Waseem Watch Now →

2. Not doing your taxes properly

This is a big one, so I’m going to break it down into the top errors I’ve seen:

• Not filing corporate tax returns

You still have to file corporate tax returns, even if you made no money. Yes, there are penalties if you don’t do this. 

• Ignoring other fees and filings

You probably already know about state and federal tax returns and payroll filings. But there are other fees and filings you need to take care of as well. These vary by state and even city. 

• Missing tax credits

Your company might qualify for tax credits worth a lot of money. The R&D tax credit, for example, could save you up to $250,000 per year in payroll taxes if you qualify. 

• Not collecting W-9s as you go

When tax time rolls around, you’re going to need information about the vendors you paid that year. Don’t waste time begging already-paid vendors to go back and fill out paperwork in December. Have them fill out a W-9 at the start of the relationship, and you’re set. 

My solution: Most of your tax problems can be solved by hiring a good tax preparer and keeping good records. Even if you feel confident in your ability to file your returns correctly and on time, consult a tax preparer to make sure you’re not missing any of those other fees and filings—or credits. Also, before you decide to do your taxes yourself, take a minute to run the math: estimate the cost, then compare that to your best guess at how much time it’ll take you to DIY your taxes, and factor in your level of certainty that you’ll get it right. Now go ahead and hire the tax preparer. 

3. DIY payroll 

Most startups get into trouble with payroll because they don’t want to take the time — or spend the money — to set up a proper payroll system. But I guarantee that you’ll make a mess if you pay employees without a payroll system. You don’t want to be calculating tax withholding payments and form filings by hand.

Another hot tip: keep employee addresses up to date in your system. The wrong address can lead to incorrect state tax filings, and fixing these will be a major headache for you and your out-of-state employee. 

My solution: Set up the payroll system. Yes, it’s another day that you’re setting up processes instead of building your business. Except that this stuff is building your business, and building it well. Techstars calls this slowing down to speed up, and I love that. If you want my recommendation for a payroll provider for your startup, I really like Gusto. 

4. Messy financial records

Why do you need proper financial records? Three reasons: 1) filing taxes, 2) providing financial statements to a potential investor, landlord, business partner, etc., and 3) saving yourself time and money. 

The first two are pretty clear. As for the third: you will spend way more time cleaning up messy records than you would have setting up good systems at the beginning. Plus, good clean records mean that you won’t make mistakes like paying double charges, which can add up fast on large items like rent. 

My solution: Hire some help. For our first startup, we did the books ourselves, and in retrospect it was a mistake. I didn’t think it would be a huge burden, and I thought it would keep me closer to the details of the business. I was wrong. It took a surprising amount of time to do well, plus my time was better spent focusing on running my business. Even financial professionals hire bookkeeping firms to take care of their day-to-day stuff. 

Ultimately, most of this advice can be summed up as keeping your personal and company money separate, keeping good records, and hiring experts for your taxes, payroll, and bookkeeping. The first two are plain good sense. As for hiring those experts, I have seen over and over how much time and money startups waste trying to do these things for themselves — usually in an effort to save time and money. Learn from their mistakes. 

Waseem has lots more financial advice to offer startups — and he’d love to take your questions. Register for a live AMA (Ask Me Anything) with Waseem on February 20, 2020 at 1 pm ET. Register Now → 

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