What Do Founders Need To Know About Taxes

Asif Ahmed : 0:00

The same way that early stage founders seek product market fit, they should always also seek advisor founder fit.Amardeep Parmar: 0:12

What do founders need to know about taxes when they're getting started? We look at the common mistakes people make, understanding different structures and when you need to put them in place, understanding bad financial terms and using numbers and data to effectively tell your story. To help us answer those questions, we have Asif Ahmed, who's a partner at Cooper Parry and head of early stage tech and high growth. He's also literally written a book for founders on taxes. I hope you enjoy this episode. I'm Amar from the BAE HQ and this podcast is powered by HSBC Innovation Banking. So Asif, great to have you on here today. And you've obviously helped us behind the scenes of different things too. So really grateful for that. But the topic for today is that what Founders need to know about taxes when they're getting started because I know for us, I am most scared of the legal side and the taxes side, because you can get it wrong. You can do marketing wrong and you can fix this but that, but if you make a mistake and HSBC comes up to you, it's a much bigger pain. So could you just give us like, maybe give us a few examples, like some of the mistakes you think founders make about their tax and like the way they structure their finances?

Asif Ahmed : 1:22

No, absolutely, and thanks for so much for having me. Yeah. This is a real favorite topic of mine to go into, because one of the things that I've always advocated for is that early stage founders need the best advice when they can least afford it, and that's kind of what I've built my entire career on is that if you are a first time founder say you're a young founder it doesn't necessarily mean that you have to be young, but if you are a first time founder, there's just no way of you being able to navigate this world of the governance and corporate side of setting up a business. And so I spend a lot of time with these first time founders trying to get behind really exactly what it is that they're trying to achieve, and, first and foremost, it's really about understanding what journey that they are planning on going on. So you know, some people want to just set up a business, other people want to scale a business, some people want to test a hypothesis, other people want cash flow, and those are all very different considerations, right, and they may also confer very different structures, and so a lot of the time it's a bit of a soul searching exercise in the first place to say, okay, do you actually know what it is that you want to do, because working for yourself and being an entrepreneur are also two different, very different things that a lot of people don't necessarily appreciate. So being self employed and being an entrepreneur, you know, arguably you could say, sound like the same, but they are very much not the same, and so you know.

Asif Ahmed : 2:48

I think that the easiest advice I can provide for an early stage or first time founder is to try and find an advisor that has a track record of having helped people in your situation. So someone that's maybe left a job that you know, that went on to create a business that you know has had some mild success. Who are the advisors that they used? Because the chances are that advisor was probably pretty instrumental in helping that person understand what the first taxes were that they needed to register for, whether they needed a limited company or a partnership or self employment. Um, if you can form that kind of relationship early with someone that is really willing to invest the time, uh, on getting you to understand these things, it will transform your experience of being an entrepreneur.

Amardeep Parmar: 3:43

And you mentioned there about the difference between being self -employed versus being an entrepreneur and different company structures and things like that as well. How early do you need to think about that? Is it they you mentioned about? Can you just test things out for a little bit and then sort it out, or should you really be doing it right at the early stages?

Asif Ahmed : 3:51

Yeah, that's a good question. I think you really do need to know the differences between different structures. A, because there are definitely going to be certain instances where there is absolutely the right answer for you, but more so also because changing from one to the other can be quite a costly exercise at a time where you just don't have the kind of spare cash to be able to spend it on things like accountants and lawyers to fix things that you may have got wrong because you just didn't know any better. And I'll give you a prime example of that. So you know I often, when speak, we're speaking to early stage entrepreneurs.

Asif Ahmed : 4:26

If I'm speaking with someone that's working in, say, the food industry, for example, I would never advocate for someone working in the food industry to be self employed. Now why? Because imagine you are selling something that someone has an allergic reaction to and this is a really extreme example but limited companies provide you with what's known as limited liability, right, and where you are in a business where liability is a possible risk to what it is that you do, it makes no sense to flirt with the idea of being self-employed. First, because you are optimizing for something that is necessary even on day one, and that's just one example, and there are other examples where you know, say you know that eventually you are going to want to raise money from investors. Again, real, really no point in flirting with the idea of being a self employed individual or a partnership, because that's not something that the investment community really recognizes as something that they can invest in.

Amardeep Parmar: 5:38

So you mentioned there about funding and obviously that's a huge thing that so many founders often think about and I think there's so many misconceptions about people when they're thinking about funding and what works right for them and equity, because a lot of people their initial baseline comes from, say, Dragon's Den right, where I say, okay, somebody's going to give you 50k or something like that for 20% of your company, which is obviously a terrible thing for most early stage startups to give away that much equity for that amount of money.

Amardeep Parmar: 6:07

But the challenge is is that if you haven't been in this world, you just don't know any better, right? Like you don't know what's kind of valuation and all of those kinds of things. What do you advise people at that kind of stage of where they're trying to think about getting investment ready and how should they should think about their finances during that process? Like how should they think about

Asif Ahmed : 6:27

Yeah, no, I mean, that's again a great point and, you know, I think Dragon's Den and shows like that serve a purpose, but that purpose certainly isn't to teach people how to structure investment rounds, as you just alluded to. There's a couple of questions probably nestled in the question that you've asked, and the first one is, I suppose, a little bit around how entrepreneurs should think about fundraising more generally and how can they avoid getting bad terms like, for example, giving away 20% for their first round of funding. And again, I think that will really be a function of doing some groundwork and some research and connecting with people that have been on the journey before. You know, I think that, particularly for the venture-backed community, it really doesn't make sense today to be working in complete isolation. There are a lot of communities you know, like BAE HQ, for example, that you can easily connect with other entrepreneurs and get some advice around what good looks like. You know who the right investors are, who the friendly investors are for the kind of business that you're operating in, and really you can crowdsource best practice. And the reason why I think crowdsourcing best practice is a good idea, as opposed to just reading about it through books is because it's always a moving target, right. You know there's there are good times and there are bad times, so to speak, and there will be industry norms that will be right for any given time of an economic cycle. And so you know, you might go and read the book Venture Deals, which is very popular, and then get a firm idea of what you think the right thing to do is go out into the market and realize that that's really not the mood music of the venture community right now, and so so I would firstly encourage people to join communities, you know, like BAE HQ and others, and go to events and connect with people again that have done this before to get you that real knowledge as to what good looks like for your specific situation.

Asif Ahmed : 8:16

I suppose the second question you asked within that question was a little bit around what they should do with their finances to, I guess, get investor ready or put themselves in the best position to receive investment. And that whole process really starts again by making sure you have the right foundations. So is your structure fit for the business that you're building? That's number one.

Asif Ahmed : 8:41

Number two, have you been mindful and careful about all of your obligations when it comes to things like compliance, making sure your accounts are filed on time, making sure your HMRC obligations are fulfilled. You know, those are all really basic, rudimentary things that any investor would expect you to have as being an investment candidate for their portfolio. But more so than that, to take sort of one step forward, is do you have a firm understanding of what the finances of your business are actually telling you? So you know this is a whole separate rabbit hole, but know, to give you an example, um, are you actually building? Is your business, are your finances actually reflecting the story that you're telling this investor about your business? Um, and that's probably the highest level I can keep it at without going too deep into a rabbit hole.

Amardeep Parmar: 9:29

So there's a couple questions on a follow-up for that. So the first one would be about you mentioned how the goalposts are constantly moving right about what's the best way to do things. What are some of the things that people come to you, where they've got this idea, where you sit in their minds and it's maybe based on outdated models of how the venture community works and that, you see, has changed quite significantly, because maybe somebody's listening right now has that misconception and potentially can fix it?

Asif Ahmed : 10:18

I think the misconception sometimes around venture capital is that it is this isolated pool of money that is in no way connected to the rest of the economy, um, and that it has this sort of angel glow around it of always being there at friendly terms to fund any business and any entrepreneur. And you know, I suppose to some extent that is a misconception that you can't blame founders for having, because to some extent the venture capital community is complicit in making themselves known as that kind of pool of capital.

Asif Ahmed : 10:32

But anyone that wishes to scratch the surface a little bit or peel behind that quite obviously too good to be true situation would recognize that well, clearly there are dependencies, right, and so if macroeconomic factors change, that will likely change the appetite and hurdles that the venture capital community are working to, because, remember, they also have to report their performance and their investments and their portfolio performance to their LPs, and so you know it's not going to be something that can be done in a vacuum or isolated to the rest of what's going on in the economy.

Asif Ahmed : 11:07

And so, yeah, so we do have situations sometimes and you know this is very indicative of the sort of entrepreneurship world really where you have an early stage entrepreneur today saying I'm about to build a business that looks like X and I know that another business that looked exactly like this got funded really easily two years ago and so I'm pretty confident that I'll be able to go out and raise a seed round or whatever the case and you know it's then our job to go and tell them that that is very unlikely to be the case and given the dynamic of the venture community 2 years ago and the venture community today. And it just means that rather than it being something is um like holding sand, it really is incumbent upon the entrepreneurs to just recognize that fundamentally good businesses will always be attractive and if you are fundamentally not a good business, then you will be subject to the cycles of the economy, and that's really the best distinction to have.

Amardeep Parmar: 12:12

We hope you're enjoying the episode so far. We just want to give a quick shout out to our headline partners, HSBC Innovation Banking. One of the biggest challenges for so many startups is finding the right bank to support them, because you might start off and try to use a traditional bank, but they don't understand what you're doing. You're just talking to an AI assistant or you're talking to somebody who doesn't really understand what it is you've been trying to do. HSBC have got the team they've built out over years to make sure they understand what you're doing. They've got the deep sector expertise and they can help connect you with the right people to make your dreams come true. So if you want to learn more, check out hsbcinnovationbanking. com.

Amardeep Parmar: 12:49

And then you mentioned there, too, about the story that people are telling right when they're trying to raise funding, and I think sometimes it happens to a founder who's so passionate about what they're doing that it's very story-driven, whereas obviously investors need the numbers as well. They need to know are they going to make a return, and how you weave the financial situation into your story is really important. And a classic thing I see lots of people do is they only post their growth rates, not the absolute numbers and it's like, well, you might have grown 10,000%, but you had a base of one pound last month. So it's those numbers can start to be very deceiving. And how do you advise founders on how to use the numbers effectively to tell their story, but also to make sure that it's not misleading as well?

Asif Ahmed : 13:36

Yeah, no, absolutely. That's a really great point, and I think you know I look after the early stage portfolio at my firm, and so this is even more relevant for the founders that we work with, because at the earliest stages of funding, you really are pitching more of a vision than you are data right, and so there's going to be very limited results effectively to prove that what you believe is true. However, you know I've always been a big proponent of the fact that an early stage entrepreneur should always try and maximize the number of experiments that they're doing at any given time so that they can generate as much data as possible in the absence of having a complete data set to prove that their business is onto something good. And so you know, I think and again, the answer is different for earlier stage entrepreneurs to later stage entrepreneurs. For earlier stage entrepreneurs, I would say you know you really need to be honest about what the data that you do have is telling you about your vision, right?

Asif Ahmed : 14:39

So if there is something that isn't quite supporting what you think, you need to have a good reason as to why you still think what you think in the, in the, in the presence of that data. And you know, for later stage founders, it's very hard to hide behind the data if the data isn't supporting your thesis. Right, because you now have revenue metrics, you have unit economics that you can report or will have to report, and the the funding community is very much dependent on certain hurdles being met along those lines and so, regardless of your vision at that point, you know your financials will need to support it.

Amardeep Parmar: 15:16

You mentioned there how you work with a lot of early stage founders and what's interesting, I imagine there's a lot of founders who try to put off getting a proper accountancy firm or helping that side for quite a long time. And you probably get some companies come in who are in absolute state before you start working with them, right, and you've got to try and then clean up what are state before you start working with them, right, and you've got to try and then clean up. What are some of the things you see founders do there where, because they've tried to do things themselves, maybe they've been a bit misguided they then come to you and then you've got to sweep up and fix some of those problems. So what are some of those common things that founders just go wrong on?

Asif Ahmed : 15:48

Yeah, absolutely. I mean I think that the the main thing I can, the sort of high level lesson here, is that the same way that early stage founders seek product market fit, they should always also seek advisor founder fit right. And when I say that I mean that your advisors should always be fit for the journey that you are going on, not fit for your today needs, right. And it is almost always that error that a founder has made where they've either optimized for cost or they've optimized for their parents accountant or they've optimized for the lawyer that their friend is using, because they don't have the framework with which to understand what is the right way to find the right person for me, understand what is the right way to find the right person for me.

Asif Ahmed : 16:38

And so a lot of the time when we take on early stage founders and they've come from another firm, if that firm has not had really any kind of specialism of working with early stage technology companies, we see you know a whole raft of things that really then need to be fixed right, whether it's whether it comes to the way that their financials are set up, whether it comes to how their EIS is managed, for example, whether it comes to how their share options are managed.

Asif Ahmed : 17:01

These are all things that have industry norms associated with them, and sometimes you get, you know, local accounting firms or firms that have no real skills in working with venture backed companies, really put those companies in a position where they now need to spend a lot of money to fix those errors, and so, largely speaking, when I talk about founder advisor fit, I say that you should always end up working with an advisor and they can actually help you with the journey that you're going on as opposed to the situation that you're in today and that really will put you in good stead to make sure that you're not in a situation where they are helping you with things that they've really had no expertise in helping anyone else with before.

Amardeep Parmar: 17:43

I think one of the interesting things about founders right too is that a lot of times they're feeling they just don't know what they don't know, so you might register a company. Then there often isn't a very good pack to tell you okay, here's the things you now need to remember to do. So. One classic thing I get every time I start a company you get the letter from the ICO, right so the Inpatient Commissioner's Office where they use to take GDPR and things like that but you don't know that when you start and you've got to do your own tax returns you, but what's the kind of time where things like okay, starting a company, you can start making revenue, what's some things you just to make sure you don't forget to do, and then have HMRC on your back in the video this time?

Asif Ahmed : 18:25

Yeah, no, absolutely. And you know what I think I'm almost I've always been a big proponent of founders being, or getting, the knowledge themselves and not ever really being in a position where they are 100% reliant on somebody else telling them how this stuff works. Now, there's no obvious and easy solution to getting that knowledge. I mean, we've put together a few things that and few resources, exactly for this reason. So, you know, a founder can go and check them out. And you know, I wrote a book about this sort of thing also, and it was exactly for this reason that it's just like how is a founder supposed to know where to start, right and beyond just becoming entirely reliant on an accountant? You know what? If they do want to manage it themselves, where would they go and find this information?

Asif Ahmed : 19:10

And I think, look, fundamentally, you should always be aware that everything that you do will come with a set of filings and obligations associated with it.

Asif Ahmed : 19:18

So if you set up a company, that will need accounts filing every year, it will need a tax return filing every year. If you are VAT registered, that will need to be filed every quarter, and you know all of these sorts of things. But again, I can't stress enough how important it is to make sure that you try and find a mentor to help you understand these things. You know we try and serve that role in the community when it comes to early stage entrepreneurs, but there's nothing quite like having like a community of other people that are in this situation who can effectively guide you to say, you know, either go and speak to this person who can help you or, you know, have you thought about the fact that you might need to file your payroll submissions, for example? Or have you registered for a pension? You may have forgotten that you need to do that now as an employer. But fundamentally, there's just too many things for me to list them all and say it's easily learnable. Just go into this resource and learn it all.

Amardeep Parmar: 20:10

You mentioned that you've got your book and you've got a resource. Feel free to plug it. We can put a link in the comments If that is going to be helpful to founders after this episode.

Asif Ahmed : 20:25

What can they go to? Where can they find those resources? So I mean, yeah, I mean so we. I wrote this book called the finance playbook for entrepreneurs, and it was literally written for this problem that I continually had seen working with early stage founders. I've now been doing this for nearly nearly 20 years.

Asif Ahmed : 20:41

Amardeep Parmar:

You're only 20 years old

Asif Ahmed :
Yeah, well, it's right, yeah, exactly yeah so since I was born, yeah, um, so you know I continually just used to see that the value that I always end up providing to a founder was the education piece right around here is what a company is, and here's why you need a limited company and not a partnership, etc. And eventually I just got kind of a little bit frustrated with the fact that I feel really bad for founders who clearly want to build something but are just almost starting with their hands tied behind their back. From a corporate governance perspective and to to not make it too political, I also saw the difference between people that came from a certain background versus people that came from another background, and you know that doesn't need to be across any kind of controversial lines, but it's very easy to start from here as opposed to here, if you know that your parents can, for example, provide you with their lawyers and their accountants. Or maybe you've seen your parents can, for example, provide you with their lawyers and their accountants, and or maybe you've seen your parents run their own business and it's, you know, a very different experience to someone who might be being an entrepreneur for the first time in the last three generations of their family. Right, because they've all been working in other jobs, and that was also a very stark data point for me, and so I wrote this book, and it's written in the book as well that the book's there to serve as a purpose to equalize the starting point for everyone, right? So that, regardless of your background, you have access to the same foundational knowledge of how to set up a business and how to think about setting up a business.

Asif Ahmed : 22:12

Because I'm not really in the business of giving people answers on a platter, because if I give you answers, you won't know when to change the answer, whereas what the book seeks to do is to equip founders with the ability to ask better questions. So if you are in a position where you're continually improving your questions and your ability to ask questions, I think fundamentally that's a better skill set to have, because, as business scales, you know you're not going to be doing this stuff. You may end up hiring a finance person, a CFO, or you might have a whole finance team. Who knows how big your company might get.

Asif Ahmed : 22:49

At that point, the founders really shouldn't be worrying about what's going in the VAT return, right? But the founders should know that the VAT return is an important part of the finance compliance, and here are some of the questions that I might have as the founder. So that's why I wrote that book. We then created this resource called the Finance Department website, which has a bunch of resources on there as well. But yeah, I mean, if anyone wants to check out the book, feel free to do so. It's on Amazon. But yeah, fundamentally, I'm more than happy to answer questions for anyone that might have questions also.

Amardeep Parmar: 23:22

So we're going to move to quickfire questions now because of time. So the first question is who are three predications you think are doing incredible work and you'd love to shout out.

Asif Ahmed : 23:41

OK, so the first one I'd like to, the first pair I'd like to shout out, are Zahid and Arfa, who run a organization called Islamic Makers. I think they're doing a great job of just promoting like making it easier for Muslims to access the technology world, and bringing that community together. They put on a great event every year as well. They're just also great advocates for people of our background in the community. Zahid also runs a really fantastic AI business called Cohelm, and so those are two I would like to shout out. And the third is a guy who you might be familiar with, a guy called Amardeep Parmar, who's doing a really good job running a business called BAE HQ, and so I'd like to shout him out also, and I'm not sure if you're familiar with his work, but he's doing a great job.

Amardeep Parmar: 24:30

He's really handsome, is what I heard.

Asif Ahmed : 24:31

I've heard this. I don't know this.

Amardeep Parmar: 24:35

So thanks for that. Then, if people want to find out more about you and what you're up to, where should they go to?

Asif Ahmed : 24:39

anywhere. I mean linkedin, uh, in person, uh, you know anywhere that you might. You might seek to find um people from my industry, but yeah, I mean linkedin is probably the easiest place. Um, otherwise, maybe at one of the next BAE hq events.

Amardeep Parmar:
‍And then is there anything that people could help you with right now?

Asif Ahmed : 24:55

I suppose what I, what I would say, is that not so much helping me but helping other entrepreneurs as well. You know, when it comes to, you know, things like financial best practice and stuff like that. I know that sounds like a very niche thing to be worried about, but fundamentally, I feel very passionately about empowering early stage entrepreneurs to really go and build. You know, whatever it is that their heart desires to build. But I also believe that a really unfortunate part of that reality is that they need to have access to advice and and best practices that they just may not be able to afford right when when they're first starting out, and so for those of us in the community that are maybe at slightly later point of that, that spectrum is to just pay it forward and, in as much as I can be part of that story for any of you guys, feel free to reach out.

Amardeep Parmar: 25:42

So, thanks so much for coming on today.

Asif Ahmed : 25:44

Have you got any final words? All good, thanks, so much for the opportunity.

Amardeep Parmar: 25:48

Thank you for watching. Don't forget to subscribe. See you next time.

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