Simple FX Forwards for Series A Startups: Protect Your Runway and Budget

Simple FX Forwards for Series A Startups: A Guide to Protecting Your Runway

Your Series A round closed, and your startup is scaling internationally. You might be hiring remote engineers in Europe or sourcing key components from a supplier in the UK. Suddenly, your burn rate spreadsheet, once a stable predictor of runway, has a volatile new variable: foreign exchange rates. A 5% swing in the EUR/USD rate can turn a predictable monthly payroll into a surprise cash drain, directly impacting how long your funding lasts.

This volatility introduces a layer of uncertainty that early-stage companies cannot afford. It is a distraction that pulls focus from product development and growth. The solution is not complex financial engineering. It is about regaining control over your budget with a simple tool designed for exactly this problem. Learning how to use FX forwards for startups is a practical step in de-risking your operations and protecting your runway.

Foundational Understanding: What is an FX Forward and When Does it Matter?

An FX forward is an agreement to exchange a specific amount of one currency for another on a future date, at a rate you lock in today. Think of it as pre-booking your exchange rate. Instead of being subject to the unpredictable “spot” rate on the day you need to make a payment, you guarantee the rate weeks or months in advance. It is not financial speculation, it is a tool for certainty.

A Practical Example: The Impact on Your Runway

Consider a US-based SaaS startup with a new development team in Portugal. Their monthly payroll is a predictable €100,000. In Month 1, the EUR/USD rate is 1.08, costing them $108,000. In Month 2, the rate moves to 1.12, and the same payroll now costs $112,000. That unexpected $4,000 increase is a direct hit to the company’s runway. Over a year, small fluctuations like this can add up to tens of thousands of dollars in unplanned expenses.

With an FX forward, the startup could have locked in the 1.08 rate for both months, and even for several months into the future. This would ensure the cost remained a predictable $108,000, allowing them to budget accurately and removing currency risk from their financial plan. This stability is a core principle of effective currency risk management for startups.

When to Consider Hedging: The Materiality Threshold

An FX forward becomes a valuable strategy rather than a distraction when foreign currency costs become a material part of your budget. For an early-stage company, resources are limited, and you should only dedicate time to problems that have a meaningful impact. The administrative effort must be justified by the risk being managed.

The practical rule is to consider hedging when predictable, recurring foreign currency expenses consistently exceed 15-20% of total monthly burn. Below this threshold, the potential savings from hedging are often outweighed by the time and effort required to set up and manage the process. Once you cross this line, currency volatility poses a genuine threat to your financial stability.

Step 1: "Good Enough" Forecasting to Size Your Hedge

One of the biggest hurdles for founders, especially those without a dedicated finance team, is forecasting future expenses. The fear of getting it wrong can lead to inaction. However, the goal for hedging is not perfect accuracy. It is about creating a “good enough” forecast to inform a conservative and protective hedge.

Building Your Simple Forecast Model

You can build a functional forecast directly in a spreadsheet using data from your accounting software, like QuickBooks for US-based companies or Xero in the UK. The process is straightforward:

1. Set Up Your Timeline: Create columns for each of the next six months. This is a typical horizon for a Series A startup’s operational planning.
2. List Known Expenses: In the rows, list all your known, recurring foreign currency expenses. For a deeptech startup, this might be a monthly payment to a specialized manufacturing partner in the UK. For a biotech company, it could be contracted R&D services from a lab in Europe.
3. Focus on Predictability: Include only highly predictable costs. These are typically contractual obligations like salaries, rent for an overseas office, or fixed-fee supplier contracts. Avoid including variable costs like marketing spend or ad-hoc contractor payments.
4. Assign Confidence Levels: Add a column to assign a confidence level (e.g., High, Medium, Low) to each line item. "High" confidence means the expense is contractually certain to occur.

Sizing Your Hedge: The 80-90% Rule

Once your model is built, sum only the expenses marked “High” confidence for each month. This total forms the basis of your hedging decision. The reality for most Series A startups is more pragmatic: focus on what you know you'll spend, not what you might spend.

This conservative approach directly addresses the pain of over-hedging. If you hedge for an expense that never materializes, you are still obligated to complete the currency exchange, which may mean buying foreign currency you do not need. Unwinding this position can be costly and complex. It is always better to slightly under-hedge than to over-hedge. As a clear guideline, the advised hedge amount is 80-90% of a highly confident forecast for the next 3-6 months. This buffer protects you if an expense is delayed or cancelled.

Step 2: Choosing a Partner and Getting a Fair Deal

Once you know how much you need to hedge, the next step is selecting a provider. Your options are typically your traditional business bank or a specialized fintech FX provider. While your bank is a familiar option, fintechs often provide more competitive pricing and better terms for early-stage companies, which is critical for managing FX risk for Series A companies.

Key Negotiation Points for Startups

Your primary goal is to secure fair terms without needing to be a treasury expert. Here is a simple checklist for negotiating with potential providers:

• Fair Pricing and Spreads: The key metric to understand is the “spread.” This is the difference between the mid-market rate (the real exchange rate you see on Google) and the rate the provider offers you. It is their fee, plain and simple. For managing international payments as a startup, minimizing this cost is crucial. For a typical startup transaction, the spread over the mid-market rate should be under 1%, ideally closer to 0.5% or less for larger amounts. Always ask providers to quote their spread explicitly.
• Zero Collateral Requirements: Many traditional providers require you to post cash as collateral, or “initial margin,” to secure a forward contract. This ties up precious capital that should be used for growth. A critical negotiating point is that collateral or initial margin requirements for a venture-backed startup should be zero or very low. Modern providers who understand the venture ecosystem will often waive this, underwriting your company based on its funding and creditworthiness rather than its cash on hand.
• Simple Onboarding Process: The documentation and setup process should be streamlined for a standard venture-backed company. You should not be required to provide extensive personal guarantees from the founders. The process should take days, not weeks.
• Modern Platform Functionality: The provider should offer a simple online platform where you can book, view, and manage your forward contracts yourself. You should not need to call a broker for every transaction, which adds time and inefficiency to your process.

The ecosystem of fintech providers can differ between the US and UK, so it is always worth getting quotes from two or three platforms to compare pricing and terms before making a decision.

Step 3: Managing the Forward: The "Set It and Forget It" Plan

After setting up a forward, the ongoing administrative burden should be minimal. The goal is to make this process a predictable part of your monthly payment runs, not a source of extra work.

Execution and Rollovers

The lifecycle of a forward contract is straightforward: you book the contract for a future settlement date, and on that date, you send your domestic currency (e.g., USD) to the provider. In return, the provider sends the agreed-upon amount of foreign currency (e.g., EUR) to your designated recipient, such as your overseas subsidiary or supplier.

Occasionally, a payment date may shift. If a supplier invoice is delayed, you can “rollover” the forward to a new maturity date. This is a standard procedure where your provider extends the contract. However, they will typically charge a small fee or adjust the rate based on market movements, so it is best to use this feature only when necessary.

The Critical Accounting Step: Mark-to-Market

The most important ongoing task is accounting for the forward contract on your books. This is also the step most often missed by founders, leading to cleanup work during an audit or due diligence. Even though no cash changes hands until the settlement date, the forward contract is an asset or liability on your balance sheet whose value fluctuates with the market.

Consequently, FX forward contracts need to be marked-to-market on the balance sheet at the end of each month. This means you must calculate the unrealized gain or loss on the contract based on the closing exchange rate at month-end. This is recorded with a journal entry in your accounting software. It is a non-cash item that adjusts your P&L, reflecting the current value of your hedge.

For US companies, this accounting treatment falls under US GAAP. For UK startups, it is a requirement under FRS 102. Your accounting software, whether QuickBooks in the US or Xero in the UK, can handle this through manual journal entries. Your FX provider may also supply a monthly statement showing the mark-to-market value to simplify this process.

Practical Takeaways for Your Startup

Protecting against exchange rate fluctuations is not a distraction, but a fundamental part of cash management for any startup with international operations. By removing a variable you cannot control, you strengthen your financial plan and protect your runway. It is one of the most direct ways to introduce predictability back into your financial operations.

To implement these simple hedging tools for founders, follow this framework:

1. Assess Materiality: If your predictable, recurring foreign currency costs are above 15-20% of your total monthly burn, it is time to consider hedging.
2. Forecast Conservatively: Build a simple forecast of your highly confident expenses for the next 3-6 months. Plan to hedge 80-90% of this amount to avoid over-committing.
3. Negotiate Smart: Choose a provider, likely a fintech specialist, who offers a spread under 1% and requires zero or very low collateral for a venture-backed company.
4. Manage the Accounting: Remember to perform the month-end mark-to-market journal entry in your accounting system (QuickBooks or Xero) to stay compliant. This is a crucial piece of early-stage cross-border finance.

By treating FX forwards as a pragmatic tool for budget certainty, you can ensure that a volatile currency market does not derail your growth plans. To learn more, continue at the FX hedging strategies hub.

Frequently Asked Questions

Q: What happens if I hedge too much (over-hedge)?
A: If you hedge for an expense that does not happen, you still must fulfill the contract. This may mean exchanging currency you do not need at a potentially unfavorable rate. This is why it is critical to hedge conservatively based only on highly confident forecasts, typically 80-90% of that amount.

Q: Is using an FX forward the same as speculating on currency?
A: No, it is the opposite. Speculation is betting on currency movements to make a profit. Hedging with an FX forward is a defensive strategy used to eliminate uncertainty and lock in a known cost. It is a tool for certainty designed to protect your budget, not to generate financial gains.

Q: How far in advance can I book an FX forward?
A: You can typically book forwards for dates ranging from a few days to over a year in the future. For a Series A startup, a common and prudent approach is to hedge highly predictable expenses for the next 3-6 months, aligning with your near-term operational planning horizon.

Q: Do I need a full-time finance person to manage this?
A: No. While a finance professional helps, the process for simple hedging is designed to be manageable for a founder or operations lead. By using a modern fintech platform and following a conservative forecasting approach, you can implement an effective hedging strategy without a dedicated treasury team.