What’s better, remote or on-site? What is the Real Cost of Office Space in a Venture-backed Startup?

Since the COVID-19 epidemic, companies have debated the benefits of remote working. Some critics of remote work say that it can make it harder to create the kind of cohesive team and corporate culture needed for innovation. Remote work advocates like myself point out its benefits to both employers and workers. These include increased productivity, […]

Since the COVID-19 epidemic, companies have debated the benefits of remote working. Some critics of remote work say that it can make it harder to create the kind of cohesive team and corporate culture needed for innovation. Remote work advocates like myself point out its benefits to both employers and workers. These include increased productivity, expanded talent pools and significant financial savings. This article shows how going remote can not only lower your startup’s costs, but also preserve equity over time.

Since 2005, I have consulted with hundreds of startup founders on their financial and growth strategy. This has allowed me to see first-hand the impact that the choice between an office model and a remote-only one can have on a company. Startups with an in-office work model plan their immediate expenses, but they do not always consider the long term implications. Renting or building an office now will require you to raise additional funds, and that’ll mean giving up more equity when you sell.

The cost of that exit might seem far away, but your company’s value will increase over time, and the real price for any expense is likely to be much higher than its original purchase price. This article presents a data-driven framework that venture-funded firms can use to evaluate the financial impact of building a virtual company as opposed to a physical company. This structure can be used at any stage in the fundraising process. It will help you to make informed decisions.

Estimate Your Office Space Cost

Office space is one of the most important costs for starting a business on site. To decide whether you want to run your business on-site, it is important to consider the costs of leasing or buying space.

Anticipate Your Team Size

Estimate the growth of your staff over time to determine how much space you will need. If you haven’t already, make sure to have an established hiring plan. This should cover the next year or the time period that is covered by your funding round (usually 18-24 months).

Each of your departmental leaders should provide you with their specific staffing needs for the period that you are working within, according to their respective targets. The business development or sales leader can let you know how many transactions each member of the team is expected to complete per month, and how many staffers would be required to achieve this goal. The technology leader can give you information on the amount of staff required to support 1,000 users, the scale and frequency of the new features and more. Together with the growth goals of your business, these figures will enable you to create a hiring strategy that allows you achieve your targets before you receive your next round of funding.

Calculate Average Revenue per Team Member

Then, estimate how many employees your business will require in the first year or two following your hiring plan. Divide your target revenue by the startup’s average revenue per member. Divide your annual run-rate (ARR), forecasted by your business, into the average ARR for full-time employees (FTEs) within your industry to get a better idea of the team size in the future. It is a simple step that will ground your assumptions on real revenue data per person.

Different sources provide data about the revenue that companies can expect per employee at various stages of growth. In my example I used SaaS Capital’s benchmark of ARR per full-time employee for 1,500 venture funded SaaS firms as at 2022. You can use any source that works for you.

You may also want to change these amounts depending on how you assess your company’s revenue model in comparison to similar companies. One of my clients, for example, increased their ARR by FTEs after validating an especially strong pricing level. While optimism in founders is important, it’s always best to be cautious when making assumptions about your funding needs.

Calculate the space each worker needs and what it costs

After you have forecasted the future growth of your company, find out the average amount of space required per employee by your industry. A robotics, biotech, or SaaS firm, for instance, may require more office space. Look at the rents per square foot in the cities or towns where you are considering renting office space.

This data is available from many different sources, just like the expected revenue per member of a team. In this case, I am using workspace estimates by sector from the landmark “Workplace Standards Benchmarking” report from global architecture, planning, and design firm Gensler and Office Space Prices in Different US Metro Areas in Mid-2023, from CommercialEdge. In the two following tables, I have extracted some representative data.

Office space per person, by sector.

Office Space Rents in Five US Metro Areas: Averages for June 2023

This exercise can also be used to help select a location if you choose a more traditional office.

Calculate your rent using this data:

The total cost of rent per year is equal to the team size * Ft2 per person * Rent per Ft2

Remember that while you may be able to increase the amount of space your company rents on a regular basis (monthly), your flexibility will likely only allow for adjustments every year or, at longer intervals depending on your contract, more frequently.

Examine the impact of your office expenses on equity

After we have discussed the cost differences between a remote and on-site team, let’s look at the equity implications, as well as what this means for the company’s funding needs. Pitchbook’s Venture Funding Trends for 2022 is what I use to make these calculations.

Data for the pre-money values is also available in different percentiles. Pitchbook refers to the median value as the “average”. Since the average values have been skewed by mega-rounds, I will use median values.

Pre-Money Median Valuations of US Venture Funding Rounds, by Stage

This data allows me to use a linear forecasting model, which assumes the following assumptions:

• ARR of the company grows linearly from zero when it is founded to 100 million dollars by the end-stage VC funding round.
• The size of the team is based on benchmarks for SaaS ARR and FTE.
• In January each year the amount of space required for the office is updated based on how many team members there are at that time.
• According to the Gensler Report, the average size of a technology team is 135 square foot.
• Rent per square foot in major cities is 30 dollars.
• Each round is held at intervals of 18 months, from an initial angel round to a VC late stage round. This totals four rounds.
• After five years, there’s a possible exit at $300 million.

Rent expenses totaling $8.9 Million can be calculated by assuming these assumptions over the five-year period until departure. The company does not have to know the total rent expense upfront. It’s likely that company leaders will include rent in fundraising requests. The shares that are sold at the exit to pay for rent can reach $69.5 million if the company finances this cost as part of venture capital rounds.

This is a fact that too few startup companies realize: While building a team in-house will cost nearly $9,000,000 over your fundraising journey as direct costs, you will end up paying nearly $70,000,000 if you fund this expenditure with venture capital. The cost multiplier for financing the expense will be 7.8x. Any model that you create to plan the future of your business should allow you replicate this analysis.

Estimate the impact of an expanded talent pool

In your economic analysis, you should also consider that building a remotely-based team can expand your talent pool to areas outside your immediate geographic area. This could have an important impact, particularly if your recruitment strategy is to target less expensive regions. The remote working model is a great way for startups to attract more experienced people sooner than they could have if only local talent was used. This talent expansion, according to my experiences, has positive financial consequences. It allows you to achieve faster growth and higher valuations for subsequent funding.

It is difficult to calculate the impact of an increased valuation as a result of more senior employees joining your business at its infancy. It is best to compare compensation across markets and predict how much value these new senior hires will add. Then update financial projections, including implied valuations, for the next round of fundraising. It is an important exercise but it’s difficult to calculate a multiplier that applies to all companies.

What I suggest instead is to derive a more general–but still data-driven–estimation by revisiting the spread of venture valuations in the Pitchbook data that I used earlier. In my earlier analysis, I used median values; I now want to look at moving above that median.

For any amount of money raised, you will give away less equity if your valuation is higher. By increasing the price at which funds can be raised, you lower your capital cost. You get a better return on shares and less dilution per dollar of funding.

Imagine that you can execute every funding round between the median (let’s call it the average) and mean while maintaining the exit value. The multiplier for each dollar raised drops from 6.4x down to 4x. This is the benefit of a wider talent pool. I did not include the rent cost savings in the calculation. The final cost of the investment is reduced by a significant amount when you consider the number of shares that you have transferred to investors. Your expected exit value will also improve in the real world.

Choose wisely and look beyond the costs

It’s not possible to build a successful startup in a one-size fits all way. It’s important to evaluate your company’s goals in order to determine what is right for you. You and your business may benefit from a physical space. For example, robotics and biotech firms require more space to house their hardware. Regulators in certain industries like medtech often demand an on-site location. In some cases, business partners also want to be physically present.

If these scenarios don’t pertain to you, then you need to do a detailed expense forecast. This includes not just the costs of the office but also those of hiring local talent (which can be very costly) and any equity that you may have to give up to cover the expenses. Model how being able recruit top talent around the world might help you raise more money.

As you create your business plan it is worth taking into consideration the turbulent changes that have occurred in the last few years. As an economist, I studied market crises. This helped me to understand that economic shocks often lead to important technological and business breakthroughs. The COVID-19 Pandemic showed us that a more flexible and lighter cost structure, as well as access to a larger talent pool can make all the different in your business’ success.