How Do You Know It's Time To Get Your Own Office?
Not a lot of the early internet companies made it. But LivePerson did. This is not to say that everything was easy for them.
They IPO-ed in April 2000, right in the middle of the Dotcom Bubble bursting. Then, being headquartered in NYC, made it through the market crash following the September 11th attacks the next year.
Like many internet based businesses at the time, they had to scale back.
At the time they had a 40,000 square foot office lease in NYC and were paying $250 thousand per month. They were able to cut expenses and headcount to get down to burning $300 thousand per month. Unfortunately, $250 thousand of that was rent.
The CEO went to the landlord, Vornado, a large commercial space owner, manager, developer, and asked if there was anything they could do. I imagine LivePerson’s CEO asked if they could reduce the rent, let them out of their lease, find a replacement tenant, etc. Anything to help reduce their rent liability.
Vornado said "no.' They had no motivation to help LivePerson. The market was down so they were not going to find a tenant to pay more. And the landlord had their 14 month deposit, worth $3.5 million, so they didn't have to. The worst that would happen is that LivePerson would go bankrupt, and the landlord would be entitled to the deposit and get any residual cash to pay off the rest of the term.
At the last minute, LivePerson lucked out. Their real estate broker came to them and said that another company needed to take over their lease. (Listen to the interview on Mixergy Premium - this is not an affiliate link.)
Although, we hope to not see another double blow like this in our lifetimes, it does show that taking on an office lease is a huge liability. It should be done with a lot of thought. If your company has to scale back, it could mean you are paying more in rent than in salaries, etc. Just like LivePerson was. Or even worse you cannot keep your business going because you have to pay rent over keeping employees. That is what you want to avoid.
How do you know when it is time to get an office space for your startup?
It would be great if there were a magical formula to know when the right time is. But there is no such formula. But, with a little skill and a lot of thought, you can create some pretty accurate projections based on realistic assumptions that will help reduce your risk.
1) You have seen consistent growth in your business and are confident in your projections. You feel good about how much space you need today and how much you will need in 1 year and a good estimate for 2 years.
2) You have enough money in the bank today to pay 12 months of rent, plus the deposit. Your investors may advise you to take out a loan rather than use their sweet equity money to sit in a bank.
3) You feel confident in your ability to react quickly and successfully to changes in the market that affect your business.
When you are thinking about taking on an office lease, consider the following if you are a VC backed startup.
- You will need to find a balance among getting a space you can grow into, a space you can currently afford and avoiding moving every year.
- You may need to build out the space: remodel, update, furnish, meet security requirements, etc.
- Even though you think your office design taste is simple, modern and cheap, setting it up will cost way more than you expect. Even if you get furniture and fixtures from a store cheaper than Ikea.
- Most startup Operations people know that the office space situation is an endless cycle: As long as your company keeps growing, you will need to keep making adjustments. Get smaller desks? Split up the team by getting some temporary space? There are so many ways to make your office situation more complicated.
- You probably need to get board permission. Although, this shouldn’t be time consuming getting buy-in may require some extra work.
- Office rentals usually require much larger deposits than your personal apartment. This is especially true for startups with little revenue and / or negative net income. Example: LivePerson’s deposit was 14 months rent.
- Office space rentals are typically for multiple years, with a built in escalation of the monthly rent. Additionally, at least in NYC, the electricity, A/C and heat are a fixed price per square foot and paid to the landlord. For example, $10 per square foot per month. (Find out the heat and AC schedule to make sure it works for your team). Factor that into your analysis.
- The whole process of getting a permanent office space takes time. At a minimum you will need to look at spaces, negotiate a lease, work with your bank, set up the office, and move in. And the move in date can be pushed out multiple times.
- If possible, try to work with a landlord you can trust. Someone who understands your business. I have seen a lot of buildings advertising that they are startup friendly and want that type of vibe in their properties. But many are unable to comprehend that in general startups just don’t have impressive Profit & Loss statements or much in the way of historicals. But they do have cash in the bank.
- In the end if you default of the lease, some landlords will go after the signer of the lease personally.
This post is not meant to convince you not to get an office space. I just want to provide you with a fuller picture of what signing a commercial lease involves and how you can plan to minimize the risk to your company. After all, if the sh**t really hits the fan like it did in the early 2000’s, do you think you could have kept your company going if you were in LivePerson’s position?
Taking the time to consider everything that is involved in taking on an office lease is worth it. It could cost you your company after all.