Investors and Funding13 minute read

Remote or On-site? The Real Cost of Office Space for a Venture-backed Startup


Toptalauthors are vetted experts in their fields and write on topics in which they have demonstrated experience. All of our content is peer reviewed and validated by Toptal experts in the same field.

For funder-backed startups, brick-and-mortar offices cost more than just money–they dilute founder equity.


Toptalauthors are vetted experts in their fields and write on topics in which they have demonstrated experience. All of our content is peer reviewed and validated by Toptal experts in the same field.
Erik Stettler
Verified Expert in Finance
19 Years of Experience

Erik is a co-founder of a global venture capital fund that has invested in 50 startups (raising more than $500 million) and has realized six exits. He serves as Toptal’s Chief Economist.

Previous Role

Founding Partner

PREVIOUSLY AT

Firstrock ConsultingNERA Economic Consulting
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Companies have been debating the merits of remote work since the onset of the COVID-19 pandemic. Those pointing out remote work’s downsides say it offers potentially fewer opportunities to build the cohesive teams and company culture necessary for innovation. Proponents of remote work like me note its clear benefits for employers as well as workers, including increased productivity, access to expanded talent pools, and substantial financial savings. In this article, I demonstrate how choosing to go remote not only reduces your startup’s overhead, but can preserve significant equity in the long run.

I’ve consulted on financial and growth strategies for hundreds of founders and startup CFOs around the world and have seen firsthand how the decision between an in-office and an all-remote model can make or break a business. While startups with an on-site work model typically do plan for the immediate costs of a physical office, they don’t always look deeply enough into the implications. Spending additional dollars now to rent or build an office requires raising those additional dollars—and that means relinquishing more equity to investors when you exit.

That exit may seem far off now, but as your company grows in value, the true cost of any given expense today extends well beyond its initial price tag. In this article, I present a simple, data-based framework for venture-funded companies to assess the full financial implications of building a remote company versus a company with a traditional physical footprint. You can apply this structure at every stage of the fundraising process to help you make fully informed decisions.

Forecast Your Office Space Expense

While every business is different, guides to starting an on-site business typically point to office space as one of the chief costs, after staff, and rightly so. The first step in deciding whether to build your company as an on-site or remote operation is to model the full impact of buying, leasing, or renting space.

Anticipate Your Team Size

To know how much office space you’ll need, begin by estimating the size of your team over time. You should already have a specific hiring plan for at least the next 12 months, or, better yet, for the period covered by the funding round that you’re raising money for or have recently completed (typically 18 to 24 months).

Have each of your team leads provide their staffing requirements for the time frame you’re working with, based on their different departmental targets. Your business development and sales lead can tell you how many deals each team member is expected to close per month and how many people would be needed to reach this target. Your technology lead can provide you with information such as the number of IT staffers required per 1,000 active users and the frequency and scale of new features launched, and so forth. These figures, in tandem with your company’s growth targets, will help you build a hiring plan that will allow you to achieve your objectives before your next funding round.

Calculate Average Revenue per Team Member

Next, anticipate how many people your company will need in the years immediately following this hiring plan for your first one to two years or whatever period you’re using. To do so, you divide your revenue targets by the average revenue per team member for startups by stage. Dividing your company’s annual run rate (ARR) forecast by the ARR per full-time equivalent (FTE) in your industry allows you to predict the size of your team over the later years in your model. This step is analytically simple and grounds your assumptions in real data on revenue per person.

Various sources offer data on the average revenue per team member companies should expect to generate at different stages of company growth in different sectors. For my example, I’ve used SaaS Capital’s benchmark for ARR per FTE for 1,500 venture-funded SaaS companies as of 2022, but you should use whatever source works best for your industry.

Annual Run Rate (US$ Millions)
ARR per FTE
< $1
$25,750
$1-$3
$59,108
$3-$5
$92,327
$5-$10
$107,143
$10-$20
$128,961
> $20
$170,950

Additionally, you may want to adjust these dollar amounts based on your assessment of how your revenue model compares to other companies similar to yours. For example, one of my clients increased the ARR per FTEs by 15% after validating a particularly strong pricing level. But while optimism is crucial in a founder, I advise always erring on the side of caution when making assumptions that involve your fundraising needs.

Estimate How Much Space Each Worker Needs and What It Costs

Once you’ve forecast the growth of your team over time, search out data on the average square footage of office space needed per employee in your sector—a robotics or biotech company, for example, will require more space than a SaaS one. Then look at the average rent per square foot of office space in the city or cities where you’re considering office space.

As with expected revenue per team member, this data can be found in many sources. For this example, I’m drawing on workspace by sector estimates from “Workplace Standards Benchmarking,” a landmark report by global architecture, design, and planning firm Gensler, and office space prices in different US metro areas in mid-2023 from CommercialEdge, a commercial real estate management platform. I’ve excerpted some representative data in the following two tables.

Average Square Feet of Office Space Needed per Person, by Sector

Sector
Square Foot per Person
Technology
115-155
Biotechnology and Science
125-410
Engineering
150-185

Average Asking Rent for Office Space in Five US Metro Areas, June 2023

City
Rent per Square Foot
Chicago
$27.40
Atlanta
$30.68
Philadelphia
$30.92
Seattle
$38.68
Boston
$48.28

Given the wide range of costs across cities, this exercise may also help you with location selection, should you decide that you prefer a traditional office.

With this information, estimate your total rent cost with this calculation:

Team Size * Ft² per Person * Rent per Ft² = Total Cost of Rent Annually

Bear in mind that, while your team may expand on a monthly basis, your ability to adjust how much space you rent will most likely occur annually or at other, probably longer, intervals, depending on your lease.

Evaluate How Your Office Expense Impacts Equity

Now that we’ve discussed the actual cost implications of having a remote team versus an on-site one, let’s explore the impact on equity, and what that means for a company’s fundraising needs. For these purposes, I am using Pitchbook’s 2022 trends on venture funding.

The data for pre-money valuations is available at different percentiles, as is the mean (Pitchbook calls it the average) value for each. I’ll use the median values (the midpoint of the data set), since the mean values are skewed upward by outlier mega-rounds.

Median Pre-money Valuations for US Venture Rounds by Funding Stage

Funding Stage
Valuation (US$ Millions)
Angel
$4.94
Seed
$10.50
Early-stage VC
$50.00
Late-stage VC
$67.31

With this data I use a simple linear forecast model to calculate the financial and fundraising trajectory of an on-site company with an initial founding team of 10 people, assuming the following:

  • The company ARR grows at a linear rate from zero at inception to $100 million by the time of the late-stage VC round.
  • The team size is calculated based on the SaaS capital ARR per FTE benchmarks.
  • The amount of office space needed is updated in January of each year, based on the number of team members at the time.
  • The company needs 135 square feet per person (the midpoint for technology teams per the Gensler report).
  • The annual rent per square foot is $30, the effective price for several of the major cities listed above.
  • The company holds an angel round at inception and each subsequent round at 18-month intervals, through a late-stage VC round for a total of four funding rounds.
  • There’s an exit after five years at a $300 million valuation.

Modeling these assumptions across the expected five years until exit yields $8.9 million in total rent expenses. Of course, the company doesn’t need to come up with that total upfront. Chances are, however, that leaders will decide it’s prudent to incorporate rent costs into fundraising asks. If a company does finance this expense as part of the venture capital rounds, the shares sold to cover rent will reach a value of $69.5 million upon exit.


Funding Round 1
Funding Round 2
Funding Round 3
Funding Round 4
Exit
Months
1-18
19-36
37-54
55-72

ARR
$0
$33,333,333
$66,666,667
$100,000,000

Team Members
10
150
393
591

Rent Expense Included in Round
$118,125
$1,304,100
$3,097,238
$4,344,638

% of Company Sold for Rent Expenses in Round
2%
11%
6%
6%

Value That Equity Sold for Rent Expenses Will Have Upon Exit
$5,512,687
$29,317,885
$16,438,384
$18,189,908

Total Rent Funded by Investors




$8,864,100
Total Value of Equity Sold to Cover Rent Expenses




$69,458,863
Effective Multiplier




7.8

The upshot—which too few startups may realize—is that while building your team on site will cost you nearly $9 million in direct expenses over the course of your fundraising journey, it will ultimately cost you nearly $70 million, should you finance this expense with venture capital, yielding an effective cost multiplier of 7.8x. As you plan your company’s future, any model you build should effectively allow you to replicate this analysis for yourself.

Forecast the Impact of an Expanded Talent Pool

The final factor to consider in your economic evaluation is that building a remote team opens up the talent pool beyond your geographic vicinity, which can have a substantial impact, especially if you strategically target recruitment to less expensive regions. Venture capitalists—and, indeed, everyone—should also note that a remote work model allows startups to draw more senior people earlier than might have been possible if they tapped only local talent. In my experience, this talent pool expansion has positive financial implications, in that having more senior talent earlier in your company’s life enables you to grow more quickly and achieve higher valuations on subsequent funding than you would have otherwise.

A bar graph shows price parities in the US states, with Hawaii being the most expensive and Mississippi the least.

An increased valuation due to more senior talent joining your company in its early stages is highly consequential, but complex to model. The most accurate approach would be to review compensation levels across different markets, predict the increased value-add these senior hires would bring, then update your financial projections and implied valuations for your next fundraising round. This is a valuable exercise, but variations from company to company make it hard to estimate a general multiplier.

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. I used median figures for that earlier analysis; now I want to explore moving above the median.

Funding Stage
Median Valuation
(US$ Millions)
Mean Valuation
(US$ Millions)
Average of Median and Mean Valuation
(US$ Millions)
Angel
$4.94
$13.35
$9.15
Seed
$10.50
$20.93
$15.72
Early-stage VC
$50.00
$131.99
$91.00
Late-stage VC
$67.31
$286.48
$176.90

The higher your pre-money valuation at each funding round, the less equity you give up for any given amount of capital raised. Increasing the valuation at which you can raise funds effectively lowers your cost of capital, since you command a higher price for shares sold and experience less dilution for a given amount of funds raised.

Assume that by widening your talent pool, you are then able to execute each funding round at a point between the median and the mean (let’s say at the average of the two) while keeping the final exit value the same. This brings the total multiplier effect for every dollar you fundraise down from 6.4x to 4x. (Note that this is the value related solely to the widening talent pool benefit, and, for simplicity’s sake, I haven’t taken into account the benefits of not fundraising for rent costs in this metric.) This is a substantial improvement in the final cost you bear through the shares you transfer to investors throughout fundraising. In the real world, of course, your expected exit value can improve as well.

Looking Beyond Expenses and Making Choices

There’s no one-size-fits-all, surefire way to create a startup. To find what’s right for your company, it’s crucial to assess your goals. It may be that building or acquiring a physical location is the right approach for you and your company. Robotics or biotech companies, for instance, require more dedicated space for hardware. And regulators in certain industries, such as medtech, often require an on-site presence; in some cases, enterprise partners want a physical location as well.

However, if these situations don’t apply to your startup, you should undertake a thorough expense forecasting that incorporates not only the cost of an office, but also the cost of limiting your talent pool to local (and potentially very expensive) hires and the equity you will sacrifice in order to pay for it all. As best you can, model how being able to recruit and attract top talent from around the globe might increase the valuations at which you can fundraise along the way.

Finally, as you build your business plan, it’s worth considering the tumultuous changes of the past few years. My prior professional focus as an economist studying market crises helped me understand how economic shocks are often the impetus for many important breakthroughs in business and technology. As the COVID-19 pandemic has shown us, a lighter and more flexible cost structure and access to a broader talent pool may make all the difference in ensuring your success.

Understanding the basics

  • How do you calculate the per-employee cost of having a physical office space?

    Office space is one of the largest startup costs for a business. To estimate the per-employee cost of a physical office space, you can use a publicly available estimate of how many square feet each worker needs, depending on the industry. For example, the biotech sector may require as much as 410 square feet per worker.

  • How do you calculate and budget for true startup costs?

    Calculating true business startup expenses means looking at how much your immediate costs will impact the amount of equity you have to give up when you exit. Following a framework that combines current benchmark data with a forecast of how much your company will grow can help you understand the true cost of your startup.

  • What is annual run rate in sales?

    The annual run rate is the amount of revenue a company should expect to generate in a year. This amount varies depending on the stage of growth the company is in.

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Erik Stettler

Erik Stettler

Verified Expert in Finance
19 Years of Experience

New York, NY, United States

Member since November 21, 2017

About the author

Erik is a co-founder of a global venture capital fund that has invested in 50 startups (raising more than $500 million) and has realized six exits. He serves as Toptal’s Chief Economist.

authors are vetted experts in their fields and write on topics in which they have demonstrated experience. All of our content is peer reviewed and validated by Toptal experts in the same field.

Previous Role

Founding Partner

PREVIOUSLY AT

Firstrock ConsultingNERA Economic Consulting

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