Out of the Basement and Into a High Rise

Nov 4, 2016

When to take your startup to the next level
(and pitfalls to avoid)

These days, countless millennials and young professionals are preferring to start a company rather than going to work for someone else’s company. Need proof? Entrepreneurial rates are soaring above those of the dot.com (boom and subsequent bust) era of the late 1990’s. However, the entrepreneurs of today aren’t willing to make the same mistakes that previous generations made. Fortunate to learn from the mistakes of their predecessors, today’s entrepreneurs are leery of spending too much, too soon, with too little assurance that their business will succeed.

The challenge facing entrepreneurs today is all about timing. Specifically, when does an entrepreneur decide to go all in, and pack up the basement, invest in some furniture, and move into a real office space with their company logo on the door? How do you know when you’re ready for the next step? Take a look at three telltale signs that you’re ready to open commercial office doors, and keep reading for three pitfalls to avoid on your way up.

1. You Are Hiring.
Retention in the technology world is one of the most challenging aspects of growing a successful start-up. With low supply for talent – and high demand for skilled programmers and engineers from the technology giants in Silicon Valley – finding and keeping talent is of the utmost importance in the growth stage of start-ups. One of the easiest ways to keep your team happy is by having an amazing place to work. Our team sees office spaces across the spectrum, from mind-boggling, creative, high-end space to the more “vanilla” spaces (which typically look best on the P & L statements). While there is no right or wrong type of space, it is true that companies that are competing for talent against the Googles and Facebooks of the world probably need to invest more heavily in their office space. From conducting interviews to training new hires to building a collaborative, teamwork-driven environment, your office space is the first impression – and the face – of your company.

2. You Are Moving Towards A Large Series Round Of Funding.
Investors evaluate thousands of start-ups each year – and they are hedging their bets that the few companies they choose to invest in will make it big. They’re looking for passion, leadership, professionalism, and great ideas. What better way to demonstrate two of these four qualities – leadership and professionalism – than by showing investors the amazing home you have created for your company? Exceptional businesses are exceptional in all ways. They exude excellence in their products, services, ideas, creative thinking, culture, team, brand, reputation, and their work space.

3. You Are Confident About Where Your Company Will Be In Three Years.

Most landlords prefer three-year and five-year leases, though one-year leases are certainly doable with the right space (and the right market). Before signing a lease, you should be comfortable with the size of your team and confident in your profitability for the foreseeable future; otherwise, you’re risking your company’s financial health and even your personal financial health if you are required to personally guarantee the lease. Landlords are eager to take on the good qualities associated with start-ups (like accelerated growth), but when it comes down to a struggling start-up, there is no such thing as rent relief to get you through the hard times.

If your company is showing the aforementioned signs of being ready to move into your very first office, it’s important to take steps to avoid catastrophe. While entrepreneurialism is the American way, rest assured that there remains plenty of “Big Industry” when it comes to leasing office space. Big Industry is run by landlords and their teams of attorneys, accountants, analysts, and consultants who all share a common goal of increasing rents (and therefore increasing revenue). This leads to reduced flexibility for smaller companies. Protect yourself from these pitfalls by following these three suggestions.

1. Hire a Broker.
There is no easier way for a landlord to know that you are unfamiliar with market rates than to sign a lease without a broker representing your interests. Without a broker, you are showing all of your cards to the landlord. While they may be terrific people, their job is to extract the most rent from you as possible. They aren’t there to be your friend, mentor, or fiduciary – they are there to make a profit for their investors, by getting the most rent possible from you. Landlords know that you do not have the time to thoroughly investigate every space on the market, negotiate with several landlords to obtain competitive bids, and ultimately achieve fair market rates. That’s why tenants without brokers usually end up paying 30-40% more per month in rent than tenants with brokers. With a broker, you not only have market knowledge, but you have leverage. And the landlords know it. An added plus? The landlord pays all brokerage fees – whether or not you have a representative on your side of the table.

2. Plan in Advance.
Make no mistake, our team has helped companies to find, secure, negotiate, and sign leases for the perfect space in one week – but the best outcomes are usually achieved by having time on your side. For smaller companies, and especially start-ups, we recommend getting the process going six to eight months in advance. This gives you time to fully explore the market, negotiate the best rates at several of your top choices, and avoid being pressured into a bad situation due to timing constraints.

3. Plan for the Best – and the Worst.
In the start-up world, there are so many potential outcomes for a company’s future. IPOs, acquisitions, Series A, B, and C, you name it – the technology world changes so quickly that you have to be prepared for anything. Therefore, it is critical for start-ups to negotiate strategies both for growth and contraction in their office space. Termination options are challenging to get – but you are more likely to secure one if your space does not require much upfront capital or work from the landlord. If you foresee significant expansion in your company’s future, it is smart to secure a space in a building owned by a larger, institutional landlord with several buildings in their portfolio. In this situation, an expansion option is a possibility, allowing you the flexibility to transfer and upgrade your office within the portfolio of buildings should you outgrow your space.

This post courtesy of Exis Global