Most people don't fully understand the impact of stock-based compensation (SBC).

Technology companies give employee equity awards out like candy.

Here is what you need to know about SBC and the related dilution 👇 How is SBC calculated?

SBC expense is determined on the date it is granted to the employee, which is usually within a quarter of when they are hired.

A fair value is assigned each share and is then recognized as an expense as those shares "vest"

Alteryx earnings call:

Analyst Q: With full year reiterated guide -how do you give us comfort that the 11% headcount cut doesn't have any disruption with go-to-market or sales capacity?

CRO: Easy. We will just increase sale rep productivity They also said, like everyone else, that deal cycles continue to lengthen, there is increased scrutiny, budgets constrained, etc.

Seems optimistic to think you can continue to increase productivity if the above is true….

Reps will already be more busy with current deals

99% of people don’t know how to properly trick investors.

Here is what you need to know 🧵 Annual recurring revenue (ARR)

-Use exit ARR
-Remove “one-time” discounts
-Use contracts with 90-day opt outs with full refund
-Give a lot of professional services away for free so everything can count as ARR
-Or just count pro serv as ARR

If revenue growth slows, companies need to show strong free cash flow generation in order to have top valuation multiples.

Lots of companies are figuring out how to balance revenue growth slowdowns and becoming more efficient.

Quick 🧵 A company’s stock price can increase from:

1⃣Increasing the level of revenue

2⃣Increasing valuation multiples (i.e. multiple expansion) such as EV/Revenue

Domo’s financial metrics are one of the worst for public B2B SaaS companies

-CAC payback period of ~9 years 🤯
-FCF margin of (5%)
-NTM revenue growth of 9%
-SBC as % of revenue = 28% 🙈
-$71M in cash and $107M in debt due in two years 😬

Probably a good PE target tho. 🧵👇 I don’t think Domo will have many choices other than to be acquired given their financials. So they will be seeking it out.

But I think there are positives of Domo that makes an acquisition by PE attractive.

Keep reading…

Skillz might have been the craziest valuation at a peak of ~$12B.

Now it’s only worth $315M, which is still too much.

Twitter finance influencers and even Motley Fool once said it was a buy.

Quick 🧵on how it could have been avoided. A quick like at the P&L would show screaming red flags

Some said “hey, gross margins are great! It will be awesome at scale!”

This is not a software company.

If S&M grows faster than revenue then there is a problem. Scale doesn’t help…

I have finished my series on understanding software financial statements. Links in thread.

-Balance Sheet
-Income Statement
-Cash Flow Statement

Leaders and investors need to understand the basics. It's surprising how many do not. How to read a balance sheet

open.substack.com/pub/onlycfo/p/…

Company leaders and investors must understand the Cash Flow Statement.

Here is what you need to know: 🧵👇 The cash flow statement shows the cash inflows and outflows of a company over a specific period of time.

It starts with cash at the beginning of the period, shows the period’s activity, and then the ending cash balance.

What does an inverted yield curve actually mean?

And why does it mean a recession is coming?

If you want to destroy your next dinner party then keep reading 👇 The yield curve looks at the relationship between the yield (i.e. investment return) on debt investments with different maturities.

Most commonly used is the relationship between the

1️⃣3-month or 2-year US treasury debt yield
2️⃣10-year US treasury debt yield

How to read an income statement (P&L) for software companies.

Highlights in thread 🧵👇
onlycfo.substack.com/p/how-to-read-… Here is a quick cheat sheet of the main P&L line items.

For key highlights read on...

How to Read Balance Sheets - Software Edition

Most people somewhat understand income statements, but few understand balance sheets.

Read on for the key takeaways🧵👇
onlycfo.substack.com/p/how-to-read-… A balance sheet is a snapshot at a point in time of a company's financial health.

There are three main sections of a balance sheet

-Assets: What a company OWNS
-Liabilities: What a company OWES
-Equity: Value attributable shareholders

The below formula must always be true.

Most companies get “span of control” wrong, which causes:

1️⃣Inefficient teams - wasted time and money

2️⃣Ineffective teams - bad outcomes

Don’t just follow a rule of thumb. Understand what should guide the span of control and revisit it regularly. 🧵 Span of control is defined as

The number of people managed directly by a superior.

A narrow span of control (flat structure) means that a manager has relatively few direct reports.

While the opposite is true for a wide span of control (tall structure).

What’s the best way to get budget for a tool?

Link it to efficient revenue growth.

Almost impossible for a CFO to turn down spend that does this.

Examples might be:
-Sales enablement to reduce AE ramp time
-CS tool to reduce churn and drive upsell Net new spend isn’t always a no.

But it probably is a default no unless you show how it improves one of your company’s key objectives.

Hint: efficient growth is always critical 😁

These zombie SaaS companies were caused by VC overfunding and then a fast change in the market.

VCs were playing the game on the field.

Founders were happily accepting it.

Now let’s work together to have the best potential outcome.

https://twitter.com/HarryStebbings/status/1596478093329600512

The best VCs will still help most of these “zombie companies”.

But if a company seems unfixable then don’t expect VCs to give too much attention

I can’t blame them…they have responsibilities to their LPs and focusing on seemingly dead companies is likely bad for their business

Lots of folks right now are thinking of how they will fix their broken CAC and drive more efficient leads. Such as

1️⃣Add a PLG motion
2️⃣Redefine ICP
3️⃣Re-segment sales
4️⃣New marketing channels

None of these are necessarily bad ideas but…🧵 CAC will likely get worse before it gets better.

Most major GTM changes will cause CAC to increase at least in the short-term.

PLG for example will require more people, software spend, and attention…all while still fully running your regular motion until PLG is successful.

Fundraising is much harder than it was at its peak last year.

Q3 was the largest drop in funding in a decade

So how does the new fundraising environment impact your company?

Keep reading... The obvious point is that average SaaS valuations are down.

In some cases, they are WAY down from the 2021 peak.

As seen below, things obviously got a little too hot last year.

Budget season is particularly hard this year.

When sales targets are being missed you need to show your board how you are adjusting on the expense side.

Most VCs are recommending 2 - 3 years of cash runway. A long cash runway is critical, but…

If you sacrifice too much growth to extend cash runway then it might just be a slow death.

Review your sales plan with your board early and ask them if the planned growth is enough to raise the next round.

Most investors and operators don't fully understand the impact of stock-based compensation (SBC).

Technology companies give employee equity awards out like it is candy.

Here is what you need to know about SBC and the related dilution 👇 How is SBC calculated?

SBC expense is determined on the date it is granted to the employee, which is usually within a quarter of when they are hired.

A fair value is assigned each share and is then recognized as an expense as those shares "vest"

Dual class share structures have come under fire again.

The most discussed right now is how Zuckerberg who owns only ~13% of $META but controls that majority of the votes.

Large investors disagree with what Zuckerberg is doing but he can’t be stopped.

Quick 🧵on dual class A dual class structure establishes two “classes” of stock.

This is usually presented as Class A and Class B shares. The Class B shares are the ones with higher voting rights.

The typical Class B voting structure is 10:1 ratio for votes per share, while Class A is 1:1.

Here is a controversial proposal for startup stock options.

Startups should offer long post-termination exercise periods (PTEP). The standard 3 months to exercise after termination is outdated.

Why limit the benefit of options to only those that can afford the exercise price?🧵 Startups are continuing to take longer to go public which can tie up employees’ money in stock options for a really long time.

Also, based on the recent market conditions, startups are riskier than they have been in long time and have less potential upside in many cases.

A high net revenue retention (NRR) can hide future growth issues.

The split between expansion and new logo growth can be an early indicator of growth problems.

If a company is too reliant on expansion ARR in earlier stages then it will struggle to continue to grow rapidly. I like this chart from ICONIQ that breaks down expansion vs new logo based on growth motion (PLG vs SLG)

If you have a smaller landed deal but expand quickly then obviously expansion will play a bigger role. This higher NRR *does not* necessarily mean it's a better company tho!