The Garage and the Penthouse

When it comes to rent, entrepreneurs are sometimes too cheap for our own good. Up ‘til Redfin’s move last week, I’d spent the last 15 years in Grade B & C office space and, as a point of pride, looked forward to spending another 30 more in the same.
It was the only thing I knew. On my first day at Redfin, I sat in David Eraker’s apartment at a desk beside the bathroom, listening twice a day to Bahn and Savan work their magic. Our first San Francisco office was an un-air conditioned sweat-shop next to a pile-driver that made the floor shake every few seconds.
Redfin got low-rent places partly to save money – I still sleep on friends’ floors when I travel and none of us has an assistant — partly to avoid going soft, partly just to one-up our friends: entrepreneurs brag about controlling costs because it’s the one thing at a startup we can control. And we love the camaraderie — is there a more potent startup symbol than the garage? — of everyone working together in close quarters.
But I’ve seen startups take it too far, with eight people in a one-bedroom apartment working beneath the auspices of a Ho-Chi Minh poster. This sounds fun, but you get less done.
So when rents plummeted in Seattle last fall, Redfin went on the prowl for a better space. Now that we’ve moved to a little building by a farmer’s market, overlooking the water and a few mountains, the whole office is energized. People smile more. Since all the walls are glass, folks feel more approachable. We are more likely to work things out in person, which is faster than emailing. Since the building doesn’t turn the heat off at 5, we are more likely to work late.
Was it worth the extra juice? Let’s just do the math. Even for a hefty startup of 50 people, which requires about 7,500 square feet, the costs differences are small:

• Dump: $15 per square foot, $9,375 per month
• Not bad: $20 per square foot, $12,500 per month
• Pretty nice: $25 per square foot, $15,625 per month

You can adjust rents up 15% for Silicon Valley, and down 15% for Seattle. By comparison, once you add up benefits, taxes and equipment, each employee costs a company nearly $12,500 per month. The difference between a dump and a pretty nice place is half that — around $6,250 a month — or 1% of payroll.
It’s the Payroll, Stupid
So the question comes down to whether you’ll get an extra 1% out of yourself and your colleagues if the place where you work all day is a nice place to be. If you’ve hired an army of clock-punching dipsticks maybe not; your goal should be to treat them as poorly as you can get away with. But most of us are trying to hire artists, not an army. Artists work better in a happy place, with good spots for lunch, dinner and drinks close by, and plenty of light.
And these people, not rent, are a startup’s big cost. If James Carville ever saw a startup’s income statement, he’d immediately come to the conclusion that took me years to recognize: “It’s the payroll, stupid”  — and the rest is mostly symbolism. The best way to be cheap is to hire a handful of ninjas who get a terrifying amount of work done. This doesn’t mean you should rent the penthouse suite in some antiseptic skyscraper, only that it helps recruiting, retention and productivity to have a creative space.
A Startup Should Move Every 18 Months
One other thing that took me a while to figure out: if you really want to save money on rent, don’t focus on the traditional metric, dollars-per-square foot. Instead, get smaller spaces, and move more often when you grow. Moving’s a pain, but it’s easier now that most systems run in the cloud. A brief tour of Craigslist for sublets will tell you that the #1 way a startup wastes rent is by being stuck in too much space, for too long — when signing a lease, the company feels embarrassed to tell a landlord it might be out of business in 18 months, and a commercial agent make more on longer leases.
So here you have a company that prides itself on its scrappiness telling the world to order the steak – or the pot roast — because sometimes it’s cheaper than ordering more of the ground round than you can eat. I don’t know if Redfin would have ordered steak had it not been a blue-light special — we’ll actually pay less rent in 2010 because of the move — but what I never would have guessed is how much that steak has affected us so far.
(The funny picture of Ho Chi Minh comes from Wikipedia’s Creative Commons)