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Berkonomics

If you must lease an office, make it a short one!

 Avoid long-term commitments!

It is statistically true that at least half of the young companies funded by angel or venture investors will not survive three years from funding to demise, and more than that percentage will die with two years if not well financed.  The greatest burden of either a growing company or one needing to retract and reduce expenses is the office lease – especially in these years after COVID and remote work.  Although payroll is almost always the greatest cost, companies have flexibility as to how to handle both rapid growth and rapid decline in the personnel arena.

Rapid growth?  Home workers? Business contraction?

The most difficult thing to deal with in any of these events – now or future – is the office lease.  A five-year lease may be cheaper per month than a three-year lease and may provide for more free rent and tenant improvements.  Those benefits pale in comparison to the high cost of retaining or buying out a longer-term lease when growing or reducing in size or misjudging number of at-the-office employees – which is most of the time for early-stage companies.

What is flexibility worth in higher cost?

[Email readers, continue here…]   From personal experience with many companies in my portfolio and from many board experiences over the years, young companies are unpredictably unstable in their facilities requirements. Flexibility is worth a few percentage points of fixed cost when companies are in high growth mode or are at early stages of proof of market.

Yes, it’s a hassle to move offices.

It is a hassle to move, requiring time and planning.  It is much worse to worry overpaying for two leases each month and tying up two large deposits.  Or honoring a personal guarantee if the company cannot pay.

Then there is the dread of “The tyranny of the new office” to worry about. But that is a story for next week’s insight…

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