How Startups Should Plan Use of Proceeds: Aligning Spend with Investor Expectations

Your Use of Proceeds (UoP) model is the operating blueprint that shows investors how their capital will achieve specific business milestones. It connects your startup's story to its financial reality, demonstrating operational foresight and discipline. This model is more than a fundraising document; it is a detailed internal plan that guides post-funding budgeting and execution, helping you avoid depleting cash before you are ready for the next round.

Use of Proceeds (UoP): A detailed financial plan that shows investors how their capital will be spent to achieve specific business milestones. While your pitch deck financials present a summary, your internal UoP is the detailed guide for execution. A weak UoP signals strategic gaps that can lead to premature failure.

The model is built on a core principle: capital is a tool to buy down risk. You are not just covering expenses; you are using investor capital to hit milestones that justify a higher valuation in your next round.

Step 1: Anchor the Plan to Milestones, Not a Calendar

The first step in building a credible Use of Proceeds model happens away from the spreadsheet. Before listing any expenses, you must define the destination. The central question is: "What must we achieve with this capital to successfully raise our next round at a higher valuation?" Budgeting based on time, such as an "18-month runway," is a common mistake because it disconnects spending from value creation.

This process requires translating strategic goals into concrete outcomes. For instance, a vague goal like "achieve product-market fit" should become a specific target like "reach $50k in Monthly Recurring Revenue with customer churn below 4%." A biotech founder's goal to "complete pre-clinical studies" must be defined as "complete successful in-vivo efficacy study and select lead candidate." These tangible achievements become the anchor for your entire plan.

These milestones justify the 18 to 24-month runway you seek to fund and provide the "why" behind every line item. When assessing how these milestones drive valuation, you can refer to guidance from firms like PwC on how to value a start-up business. This milestone-first approach demonstrates strategic thinking, whether you are building a detailed model for a SaaS startup or a plan for a deeptech venture.

Step 2: Model Your Headcount, the Primary Cost Driver

For most early-stage startups, headcount is the largest expense. How you plan for hiring has a direct impact on your runway. Instead of assigning arbitrary start dates, implement trigger-based hiring. This approach links new roles to specific business events, creating a more flexible plan. For example, a new sales hire might be triggered by a revenue target, and a new engineer by the start of a new product development phase.

A frequent error is underestimating the total cost of an employee. Your model must calculate the 'fully-loaded' cost per employee, which extends beyond base salary. This includes payroll taxes, benefits, pension contributions, and necessary tools like software and equipment. As a rule of thumb, budget between 1.25x and 1.4x an employee's base salary to cover these additional expenses. Failing to account for this will erode your cash reserves faster than planned.

Hiring priorities vary significantly by industry, and a credible model must reflect these nuances.

• SaaS: The focus is on scaling commercial and product teams as revenue grows. For SaaS companies, it is important to develop hiring plans tied to revenue and product goals. A common trigger is hiring two Account Executives for every $500k in new Annual Recurring Revenue (ARR).
• Biotech: Headcount aligns with scientific progress and regulatory milestones. The hiring plan aligns with R&D phases, so you might hire a CMC specialist approaching an IND submission or a clinical operations lead after successful toxicology studies.
• Deeptech: The challenge is securing specialized talent to solve core technical problems. For these ventures, the focus is on scarce engineering talent needed to overcome specific hurdles on the R&D roadmap.
• E-commerce: Hiring is directly tied to order volume and logistical complexity. For direct-to-consumer brands, the hiring model is triggered by order volume, requiring new staff in marketing, fulfillment, and customer service.

Step 3: Allocate Capital for Growth and Operations

With headcount modeled, the next step is to structure the rest of your budget around the functions that drive your business toward its milestones. This allocation must be tailored to your business model. Miscalculating outsourced R&D or the cash flow impact of inventory are common pitfalls that a structured model helps prevent.

The primary cost drivers differ dramatically across sectors.

• For an E-commerce startup, the key is managing working capital between inventory and customer acquisition. Your Use of Proceeds model for e-commerce must forecast inventory purchasing (COGS), platform fees, and marketing spend, as cash can be tied up in stock for months.
• For a Biotech company, the budget is dominated by R&D. The model for biotech startups must allocate capital to long-timeline activities like lab consumables, equipment, and CRO services. If budgeting for long R&D programs in the UK, consult HMRC guidance on R&D tax relief to understand qualifying costs.

Beyond these core drivers, your marketing budget needs a structured approach, not ad-hoc tactics. Your model should include a framework for marketing budget planning, with funds for channel experimentation and a clear model for tracking customer acquisition cost (CAC).

If your milestones involve expansion, this must be explicitly modeled. For companies scaling into new territories, like a UK startup entering the US, creating dedicated geographic expansion budgets is essential. These must account for higher operational expenses, particularly salaries and benefits like healthcare, which are significantly more expensive in the US. You also need to budget for setup costs like legal incorporation, accounting, and state-specific compliance.

Step 4: Stress-Test the Model and Prepare for Due Diligence

A financial model is built on assumptions, and some will be wrong. The goal is not perfect prediction but understanding which assumptions have the biggest impact on your plan. This is how you transform your static budget into a dynamic, strategic tool.

First, build scenarios into your model. Create a base case (your most likely plan), a best case (if key metrics outperform), and a worst case (if you face headwinds like slower adoption). This exercise helps you understand the potential range of outcomes for your runway and prepare contingency plans.

Next, conduct a sensitivity analysis for your model. This involves identifying your most critical assumptions—such as revenue growth, CAC, or R&D timelines—and adjusting them to see the impact on cash. This analysis prepares you to answer tough "what if" questions from investors and provides a framework for making trade-offs.

When presenting your plan, avoid walking investors through every cell of your spreadsheet. Your primary tool should be a clear, one-page summary that directly links the funding ask to the key milestones it will achieve and the runway it provides. Keep the detailed model for internal management and due diligence.

Conclusion: Your UoP as a Strategic Roadmap

A robust Use of Proceeds model is more than a fundraising requirement; your UoP model is your company’s story told through numbers. It serves as a credible, actionable plan for turning investor capital into tangible value. By building it correctly, you provide a clear rationale for your funding request and give your team a roadmap for disciplined execution.

The process involves four key steps. First, anchor the plan to specific, measurable milestones. Second, model people costs with trigger-based hiring. Third, allocate capital to growth and operations based on your business model's unique drivers. Finally, stress-test your assumptions to turn the budget into a dynamic decision-making tool.

Your Use of Proceeds model should be a living document, reviewed monthly against actuals and updated quarterly. When preparing financial updates, ensure your accounting is consistent, whether using a system like Xero or adhering to local standards like FRS 102 in the UK. The IFRS Foundation also provides IFRS Standards for global comparability. The ultimate goal is capital efficiency. Every dollar spent should be a deliberate investment in de-risking the business and building an undeniable case for your next stage of growth.

Frequently Asked Questions

Q: What’s the difference between a Use of Proceeds and a budget?
A: A budget typically tracks monthly or quarterly spending against a static plan. A Use of Proceeds model is more strategic, linking every major expense directly to the achievement of specific, value-creating milestones required to secure the next funding round. It provides the "why" behind the budget.

Q: How detailed should my UoP model be for a seed round?
A: For a seed round, your UoP should be detailed but not overly granular. Focus on the major cost drivers: fully-loaded headcount costs, key R&D expenses like third-party contractors or materials, and significant marketing or sales spend. The goal is to demonstrate a credible, milestone-driven plan.