Boost Startup Efficiency: Don’t Leave Money on the Table

Startups are built to move quickly, not perfectly. In the rush to acquire customers, ship code, raise capital, and manage burn, many founders ignore a quieter threat to their financial efficiency: the slow leak of unclaimed credits, unnecessary tax payments, and suboptimal entity structures. Unlike fundraising delays or missed product milestones, these losses rarely make headlines. But they matter. Over time, they siphon capital, extend burn, and—most critically—signal that the company lacks the internal discipline needed to scale.

As an operational CFO who has advised companies across sectors and stages, I’ve seen how often these missteps are framed as tactical oversights. In truth, they’re strategic gaps. They reflect a lack of systems thinking—an absence of structures that surface tax opportunities and mitigate liabilities long before filings are due. For early-stage companies especially, these inefficiencies are avoidable. But only if they are made visible.

This essay explores the most common ways startups leave money on the table—through missed credits, ignored deductions, and inefficient structures. It outlines how founders can shift from reactive compliance to proactive optimization, and how tax awareness becomes a hidden growth lever when embedded early.

The Hidden Wealth in Tax Credits

Federal and state tax credits exist to reward business behavior. For startups, the most powerful of these is the Research and Development (R&D) credit. It allows eligible companies to offset up to $250,000 in payroll tax liability each year based on qualified research activities. Yet year after year, founders fail to claim it.

The reasons vary. Some assume they don’t qualify because they haven’t commercialized a product. Others lack the documentation to support the claim. And still others rely on outsourced tax providers who aren’t incentivized to dig deeply into engineering workflows. The result: tens of thousands, and often hundreds of thousands, in forgone credits.

I’ve supported early-stage companies that, after reframing their product development activity through a tax lens, were able to recapture multiple years of R&D credits—materially extending runway. The activities qualified all along. The issue wasn’t substance. It was visibility.

The same principle applies to other credits—such as the Work Opportunity Tax Credit (WOTC), which incentivizes the hiring of certain disadvantaged groups, or state-specific incentives tied to job creation or investment zones. These programs are not obscure. But they do require process. They require integration between HR, engineering, and finance. And they require a CFO—or a founder—who sees taxes as an asset class, not a cost center.

Poor Bookkeeping Undermines Deductions

The inverse of a missed credit is a lost deduction. This happens when expenses are misclassified, under-documented, or simply omitted from the general ledger. Early-stage startups, especially those running lean teams, often defer robust bookkeeping in favor of speed. But tax efficiency demands granularity. It demands that expenses are correctly allocated—not just for accounting, but for IRS scrutiny.

Common losses arise in travel and meals, contractor services, and software tools. These often fall into ambiguous categories—labeled as “Operations” or “General Admin”—without detail. Without that detail, they become harder to support in an audit and easier to overlook when tallying deductions. Worse, they create inconsistencies between financial reporting and tax returns, which increases the probability of inquiries.

I’ve worked with companies that recovered significant deductions simply by reclassifying prior year expenses using a more refined chart of accounts and pulling the proper substantiation. But this work is always harder to do retroactively. It is more efficient, and far less stressful, to set up these systems at the outset. Doing so is not overhead. It is capital preservation.

The Wrong Entity Costs You Twice

The entity structure chosen at formation often lingers untouched, even as the company changes shape. A C-Corp might have been necessary to accommodate VC funding. An LLC might have been used for speed or flexibility. But over time, the tax implications of these structures can become misaligned with the company’s actual needs.

C-Corps may face double taxation—once at the corporate level, again at the shareholder level—unless mitigated by planning strategies such as QSBS treatment or salary optimization. Conversely, LLCs create pass-through income that flows directly to founders’ personal returns, which can cause cash flow mismatches and trigger personal estimated tax obligations even when the business retains cash.

I’ve observed founders who remained in an LLC structure far longer than they should have, missing out on QSBS eligibility or losing investor interest due to pass-through complexity. Others switched too hastily to a C-Corp without evaluating how state tax exposure or compensation structures would change.

Entity structure is not a one-time decision. It is a tax strategy. One that must be revisited with each phase of growth. Founders should model the tax implications of their structure just as they model cap table scenarios or hiring plans. It is an exercise in financial clarity, not just compliance.

Underutilized Losses and Overstated Assets

Startups often operate at a loss in their early years, which creates the opportunity to carry forward net operating losses (NOLs) to offset future profits. But these losses are only valuable if tracked, reported, and preserved correctly. IRS Section 382 limitations—triggered by changes in ownership—can sharply restrict how much of these losses a company can actually use after significant financing events.

In one diligence process I supported, a buyer assumed the seller’s $4 million in NOLs would provide a tax shield post-acquisition. But earlier funding rounds had triggered multiple ownership changes, reducing the usable amount to less than $500,000. The misrepresentation was unintentional. But it created negotiation friction and reduced the deal’s final value.

Preserving the utility of NOLs requires precision: clear cap table records, timely tax filings, and updates to deferred tax asset models after each financing round. It also requires founders to understand that the value of a tax asset is not just what’s written on the balance sheet—it’s what’s actually usable under the code.

Stock-Based Compensation: Where Good Intentions Invite Bad Tax Outcomes

Equity is the most common currency for startups. But it’s also one of the most misunderstood tax mechanisms. Options, RSUs, and other equity-linked instruments carry implications that affect both the company’s tax position and the employee’s personal liability. Founders often focus on dilution math, forgetting that tax timing matters.

Grants issued without proper 409A valuations may violate IRS rules, exposing employees to penalties. 83(b) elections not filed within 30 days of share issuance can convert what should be capital gains into ordinary income. Option plans that are not clearly documented may require reissuance, triggering unplanned taxable events. I have seen companies delay acquisitions by months over unresolved questions about option compliance and employee tax exposure.

The solution is not complexity—it is cadence. A cadence of valuing equity quarterly during periods of rapid growth. A cadence of ensuring board approvals are documented and communicated. A cadence of educating employees, early and often, on how their grants interact with tax timing. Equity should motivate. It should not surprise.

How to Build a Culture of Tax Awareness

The reason most founders overpay or underclaim on taxes is not that they are careless. It’s that their systems are not designed to notice. Building tax awareness is not about memorizing regulations. It is about creating checkpoints—moments when tax is discussed during contract review, during hiring, during product expansion, during funding. It is about equipping finance leaders with the tools and mandate to surface issues early.

Companies that win on tax do not do so by being conservative or aggressive. They do so by being informed. They understand that tax is not a barrier to innovation, but a lens through which to protect value. Every tax dollar saved is a dollar of extended runway, a dollar of optionality preserved, a dollar not borrowed in future dilution.

Founders don’t need to be tax experts. But they must insist that tax is never an afterthought. In doing so, they stop leaving money on the table—and start reclaiming it for growth.

Disclaimer: This blog is intended for informational purposes only and does not constitute legal, tax, or accounting advice. You should consult your own tax advisor or counsel for advice tailored to your specific situation.