SaaS Interviews with CEOs, Startups, Founders
Ardius Finds $500m in Tax Credits for Startups, Exits to Gusto
05 Aug 2021
Chapter 1: What is the main topic discussed in this episode?
We basically base our fee on utilization. It's a big proponent of us working with startups. We don't want to be a burden on your cash flow. So as cash flow comes in, we also are invoicing or billing for that time. So even though it could be $500 million or something thereof, it doesn't all hit at once. Right. You are listening to conversations with Nathan Latka.
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Hey folks, my guest today is Josh Lee. He's the founder of RDS.com, which helps you automate R&D tax credits for companies that innovate. And he was the first M&A deal that Gusto did, which we'll talk about. Josh, you ready to take us to the top? Absolutely. Thanks for having me, Nathan. You bet. All right. Tax credits is a really interesting space. Main Street seems to be growing like wildfire.
Boost AI in Canada also seems to be taking off. Were you sort of in that same space? Yeah, I actually started back at Ernst & Young, right? It was my first real job out of college and went right into tax credits and incentives. So yeah, for sure. We started way back in the early 2000 period. And so this is now all coming to light with technology. Sorry, you did not launch in 2018.
You launched earlier than that? I was at Ernst & Young, which actually is where I first started. And so that's where the genesis of learning about tax credits and trying to automate the process started. But RDS itself started in 2018. I see. Okay. So you launched in 2018. How much did you spend getting the MVP live?
Actually, it was funny because right before that, I was actually in the venture capital space. And so we had invested in about 23 plus companies. And so it was actually a function of servicing our own portfolio that we actually came up with this. Because once people find out you're a CPA, naturally, they want free advice.
And so we actually took them to my former big four, and they couldn't service us. We were just too small. Some of our companies were pre-revenue. And the labor intensity and the bill rates were just too high for the startups to actually afford. So that's why we actually came up with RDS to help serve them. So you spin that out.
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Chapter 2: How did Josh Lee start his journey in tax credits?
And so having been in restaurant tech ourselves or having some investments in those areas, it was great. Obviously, a big fan of Cantor's Deli as well. And so we helped them with their R&D credits, not only improving out some of the scalability of the platform, but also They were a big proponent. They were working with Techstars at the time, got us in front of Techstars.
We worked with their portfolio a lot. And so instead of going door to door, we started looking at some enterprise value with the accelerator funds, the venture funds around town, and even some other institutions that have a plethora of startups that could actually use this. And that's the crazy thing. Alex had never heard of it.
Most of these startup companies have never heard about the R&D credit. And so your model, what percentage do you typically take of the savings? Right now we're averaging anywhere from 10 to about 30. And I say that with a grain of salt just because it depends on sometimes the size of the company, the complexities. We're also starting to discount further in different cycles.
So that first cycle is kind of a beast, right? We're trying to automate, create a framework. And then once we get past the first cycle, we can obviously have economies of scale, right, to go forward. So we also will look to do that. We're also looking into maybe tiering it.
into maybe more of a fixed cost, depending on a variety of different variables, raising a Series A, maybe being pre-funded, pre-revenue, things of that sort. But trying to be flexible. And again, the end goal here is to get more credits into the hands of companies that need it.
And do you remember in the first year, I always like to ask first year questions, do you remember how much, I guess, tax savings you got for founders in 2018? Oh, wow. I know it was... I know it was a benchmark when we hit our first million, right? When was that? 2018? Yeah. Well, we started at the end of 2018. So this was in 2019. So we hit that mark.
And then from one to 10 to... Yeah, I think there was... I mean, we stopped losing check. It was almost like McDonald's, right? How many hamburgers have you served? And so it got to a certain point. We hit certain milestones. We celebrated. And then from there, we just kept going. So you broke $10 million the same year in 2019 in terms of those tax savings? For tax savings, yeah.
We had companies that came to us that were in the $3-4 million range. We had a huge client. Just one client alone, Nathan. It was crazy. They were in manufacturing, had never thought they would qualify for the life of them. We were actually able to go back you know, four or five years, right? Because it is a refundable credit.
So we went back four or five years and it culminated to about, you know, three, 4 million for federal and state credits. So it was a, it was a huge win. Yeah. And so if you look at between your start date, your first deal all the way up to today, have you guys passed 500 million in tax savings? That's a good question. I should go back. You have to know that number.
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Chapter 3: What challenges did RDS face in servicing startups?
Yeah. So before the Gusto acquisition, so right up to that, what was the total team size? We were at roughly 15 at the time. Of the 15, we had half. Okay, so was it a tech-heavy product? I mean, really, you're basically reading thousands of pages of tax code and trying to figure out how to automate that for folks, right? Was it heavy tech? It is, yeah.
And so I think tax is one of those areas that we feel are most conducive for software, right? Because the tax code, internal revenue code changes all the time, right? And it actually makes a lot of sense to change and program that at the top level and then disseminate that down to our customers, our clients, right? So it doesn't matter, Republican, Democrat, who's in office, right?
it's going to change, right? And so now we can kind of make those adjustments up front. And we feel that there's a digital footprint, right? If you look at QuickBooks, right? Payroll information like Gusto, right? There's information in there that we can actually flag, right? That's a good indicator, right? Of things that could potentially qualify, right? For the credit.
Tax returns are the same way, right? They give rise to, hey, I think You might qualify for this. You're in this demographic. You're in this location. You have this job title. All these different things I think we can connect into a platform and really be able to at least identify or discover things that we've missed.
many of you guys listening have built incredible sas tools to help other founders specific industries really get value or make some system easier the problem is you can't help your clients until they import some portion of their data and you've considered on your trello board and your sprint timelines spending weeks building a csv importer for certain data sets you're spying right now because you know i'm right
And either you do it and you waste engineering time or you don't do it and your customers have a horrible time getting onboarded. And listen, let's face the facts. Your ability to give value to your customers sometimes is very dependent on their ability to get you their data. Once you have the data, everything is really smooth.
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Chapter 4: How did RDS evolve to meet the needs of its clients?
You don't have to commit to a bunch of stuff. You can actually see a demo live instantly right now. Check it out. Nathan Latka.com forward slash flat file. Looking back to 2018, if you feel like you're sort of maybe flirting with that $500 million in tax credits sort of awarded today and your low end is 10%, I mean, could I take 10% times $500 million?
It's $50 million in total revenue over three years. Well, there's a timing difference, right, Nathan? So in this case, we were of the mindset and the model. We didn't do the big four model where we charge an upfront retainer and we charge everything upfront. So for us, there is a timing difference. So I want to caveat that. We basically base our fee on utilization.
It's a big proponent of us working with startups. We don't want to be a burden on your cash flow. So as cash flow comes in, so thereof, we also are... are invoicing or billing for that time. So even though it could be 500 million or something thereof, it doesn't all hit at once.
If you told an audience that a founder could get a million dollars, why wouldn't they draw down that million from the government immediately? Yeah. So some examples could be the way you utilize credits are in two major pathways. One is if you're utilizing it against payroll or sorry, your income tax, right? That's an easy one. It's right away. So you're right.
So for those, you could be a large company that's profitable. If I save you a hundred grand, right, you're going to get a hundred thousand dollar credit. Then we can invoice right away. Right. In instances where let's say you're a pre-revenue company, right? You have no profitability, right? There's another pathway where the IRS will allow you to offset that against your payroll taxes, right?
And so your payroll taxes are right? Come every quarter, right? It's being filed. And so you may have a credit of, let's say a million dollars, but your payroll taxes may not hit that million dollars, right? Until year number two, three or four, right? So that comes in time. And so therefore, you know, if you're only hitting, let's say 50,000 per quarter,
You may only use 200,000 in credits for that one. Yeah. You're identifying what the total credit base is. And then the founders are saying, okay, we have enough income here where it's worth offsetting with this portion of the tax credits RDS and Josh have given me, but they're not going to do it all today. They might do some 2022, 2023, et cetera. Yeah.
And so that's where we want to grow with startups as well. So the fact that they can take this money back or raise around or hire more people, right? The more people, the more payroll tax, right? The more payroll tax, the quicker they utilize their tax credits. Yeah. So what was revenue in 2020 before the sale? Oh, that's a good question. That's something that we're not at liberty to discuss.
Were you past the million dollar run, right? The magical moment there? We were close. Yeah. Okay. Fair enough. Fair enough. And then as we wrap up here, why was it the right time to exit? I think it was the right partner. I think with us, Gusto has been ahead of the curve in terms of automating the R&D credit itself, number one. Having the vision of integrated and embedded payroll, number two.
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