David Cummings on Startups

Thinking Through the Costs of an Initial Startup Office

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David Cummings

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After an entrepreneur signs a critical mass of customers or raises a seed round of angel funding, it often becomes time to get a formal office and start hiring. Only, getting a traditional office is usually a big time sink and expensive. Here are some of the standard costs for a 3,000 square foot office designed to accommodate up to 15 people (e.g five people in year one, 10 people in year two, and 15 in year three):

  • Three year lease at $18/ft/year for a monthly rental cost of $4,500 resulting in a total lifetime cost of $162,000 (disregard a 3% annual rent escalation)
  • $10/ft tenant improvement allowance resulting in a $30,000 budget for paint, carpet, and moving a wall or two (paid for by the landlord and amortized over time)
  • 7% commission with 2% going to the building leasing agent ($3,240) and 5% going to the tenant leasing agent ($8,100) all paid for by the landlord
  • Wiring for ethernet and electrical at a cost of $3,000 (assume $200 per employee)
  • Fiber internet access providing 100 mb/sec for $1,000/month (so, $36,000 over three years)
  • Furniture and chairs at a cost of $15,000 (assume $1,000 per employee for desk, chair, and collaboration areas like conference room furniture)
  • Total for three years: $216,000
  • Optional: parking at $60/employee/month for a cost of $900/month or $10,800/year when at full capacity

Now, this is a nice, semi-custom office designed in a relatively high density manner to support five employees per 1,000 and it costs over $200,000 for a small startup over three years. Costs, plus a serious amount of work over a 90 day period of time to put it all together, makes for a situation less than ideal in the volatile and time sensitive world of a startup.

What else? What are your thoughts on this breakdown of costs and what would you add/change about it?

Comments

5 responses to “Thinking Through the Costs of an Initial Startup Office”

  1. bagladyboutique Avatar
    bagladyboutique

    Reblogged this on Bag Lady Boutique.

    Reply
  2. dongrgic Avatar
    dongrgic

    Simple maths. It’s a wonder why more entrepreneurs don’t do the calculations before committing.

    Reply
  3. Mark Travis Avatar
    Mark Travis

    David, do these example numbers best represent Lenox area, Midtown/GA Tech, Chamblee, Alpharetta or ?? There are so many variables as far as location, office space type, etc.

    In a past startup, I negotiated 800 sq ft on the 9th floor of a nice office building in the Perimeter area for $1,000month from a “business center/virtual office/shared office” company, which included furniture, ethernet, covered parking, shared kitchen space and the ability to expand into adjacent offices. It had no windows (interior) and was cozy for 4 people with a lab area, but it was a great deal at the time. The downside was that I had no real flexibility to mold the space into something really nice. It was temporary and we knew we’d be looking for other space after the 1 year lease was out if the economy rebounded. (Office space at the time was in abundant supply in the Atlanta area.)

    Thanks for breaking down the numbers! It’s great having this as a reference.

    Reply
  4. Jason Jones Avatar
    Jason Jones

    We recently negotiated a “Must Take” provision in the lease of a 3,647 square foot space. For the first year we only paid rent on 2,000 square feet (i.e. almost half price). The lease said we then “must take” the remaining 1,647sf.

    This satisfied our need for flexibile growth without having to relocate after the first year. It is a great strategy – but the concept must be presented to the landlord on the first visit to the space. Otherwise they may think you’re being disingenous and it could sour negotiations.

    Reply
  5. Clay McClure Avatar
    Clay McClure

    Smaller startups are better off renting a house (or a floor of a house) in midtown than going into Class-A office space. An old house is a more creative environment to work in, more conducive to team-building activities like cook-outs, and more comfortable when you need to burn the midnight oil to get a release out. You could accomodate 10-12 people in a 1,500 sqft house and spend $2000/month all-in.

    Reply

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