David Cummings on Startups

What percentage of a startup’s revenue should be spent on office space?

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David Cummings

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Over the last few months I’ve received the following question two times: what percentage of our revenue should we be spending on office space? Rarely do I like top-down approaches, rather I prefer doing a bottom-up approach whereby the most basic ingredients are analyzed to come up with a number. For office space costs, focus on the type of environment you want to have and the projected number of employees. Here are some examples:

  • Co-working environment or scrappy sublease — $100 – $250/employee/month (most desirable if it works for your startup)
  • Creative office or decent class B office building — $300 – $500/employee/month
  • Swanky office building with nice finishes and great views — $500 – $1,000/employee/month

Generally, I like to recommend budgeting $500/employee/month for a nice office as I’m a big proponent of the office being a direct reflection of the company and its corporate culture. So, for a startup with 30 employees, $6,000/employee/year results in an office space budget of $180,000/year. There’s no perfect fit for all companies but for technology startups that are growing, I like investing in a great office.

What else? What are your thoughts on the percentage of a startup’s revenue that should be spent on office space?

Comments

4 responses to “What percentage of a startup’s revenue should be spent on office space?”

  1. seebq Avatar
    seebq

    We targeted the $300/employee/month, and are at that right now. That’s the approach we used to justify what seemed (at the time) to be high 6k/mo rent. Divide by employee and it’s not bad at all.

    In our technology field, the highest costs are employee salaries (and training/retention), so in comparison, a cost of offices at $300 or $500 per head is not really a big deal.

    I would say that moving and even expanding is super expensive, can be a huge time waste and worth estimating into any model.

    Reply
  2. seebq Avatar
    seebq

    DC you should come tour our space, to get ideas for your next one! BTW, the mural by a graffiti artist in your new space will have to be paid in stock, too, not cash.

    Reply
  3. Jason Jones Avatar
    Jason Jones

    To convert David’s cost/employee advice into the real estate measure of cost/sf, Startups should look for Class A- or B buildings with rental rates in the mid-teens to mid-$20’s per square foot.

    But Startups don’t know how fast they will grow. As important as cost is for a fledgling company, flexibility can be just as critical. Therefore, short-term leases can be a life saver. Look for landlords willing to sign a 2 year term (difficult) – or for a sublease with approximately 2 years left on it. That is enough time to stablize the company in the space, but not so long that it precludes the chance to relocate when expansion/contraction are necessary. Many companies died painful deaths in the dot.com bust partly due to lengthy lease obligations (which unlike headcount, cannot be reduced unilaterally).

    Important flexibility issues to negotiate properly are sublease rights, expansion rights, termination rights and Rights of First Offer/Refusal.

    Even more simple, but often overlooked, is to lease only the amount of space that you really need (plus a buffer of +10% for organic growth). The best way to manage costs properly is to get the design and size of the space to fit your “shoe size”. (i.e. leasing 10% less space due to proper space design will save 10% on your monthly rental cost – which is probably more than you can negotiate off of the rental rate. Simple, but true!)

    In Atlanta, a Startup should be able to find great space for $20/sf to $23/sf (sometimes even less).
    Just be sure it’s a short-term lease with options for flexibility!

    Jason Jones

    Reply
  4. Reid Smith-Vaniz Avatar
    Reid Smith-Vaniz

    There comes a time where the leasing vs. buying question needs to be asked. I’ve been looking for flex property in Atlanta for 10 months. Some of the issues I ran into:

    1. Limited Parking for buildings with loading docks
    2. Limited windows for buildings with loading docks
    3. Limited office space available with buildings with loading docks

    After thinking thru the option to place the warehouse and engineering team in a separate location, we concluded that the impact to Culture was not worth it – so we started to look for buildings to buy.

    Oh – the one option to lease was going to be roughly 12,000 per month for roughly 12,000 sq ft and required a 5 year commitment. After staring at the number for about 3 minutes, I thought buying was a better option. I’d hate to have to move in 3 years do to growth and be on the hook for 24 payments at $12,000.

    Buy comparison:

    -16,000 Sq Feet
    -$16,000 per month in payments, fees, taxes
    -8,000 of excess space to lease out today – roughly $40,000 – 80,000 per year of offset.
    -2 acres with parking for 50+
    -A green field to throw a frisbee, run, do crossfit, and have events
    -In house gym
    -Patio with BBQ cooking stations

    In my mind this buy decision made sense. It’s a real estate investment and long term home for Reliant. If we have to move in 3 years, I can always rent or sell the space. Much better than a $288,000 lease cancellation fee.

    Reply

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