After Startup Financing

Your startup received seed money, a nominal investment in exchange for equity in your company.  Or maybe you are on your second or third rounds of financing.  If you find yourself at this point and without a financial consultant or expert to assist you, there is a significant chance your financial information is already drastically wrong.There are various types of accountants you will encounter and who will try to sell you services.  Inexpensive bookkeepers, tax preparers that “do books,” etc.  But when we talk about accounting for startup financings, the vast majority of accountants, including the majority of CPA’s will not know how to account for such items correctly nor have your best interest in mind. Why is this?Revenue recognition – In technology startups, cash in does not necessarily mean revenue.  Revenue models such as subscription services, sale when right of return exists, and hardware sold with software and service contracts are all accounted for differently.Financing - Startup financings often include instruments such as redeemable stock, mandatorily redeemable stock, debt with warrants, convertible debt, convertible debt with warrants, debt issued at a discount, or other variations of these instruments.  If you see anything that resembles these issues on a financing, chances are you fall into one of these categories.   Each of these types of instruments comes with specific accounting rules to abide by.  The vast majority of even the best accountants don’t deal with these issues.  In fact, unless your accountant is a well qualified consultant that works with VC backed companies, or has significant accounting experience with public companies, they won’t know the implications of such transactions.Aside from the accounting of financings correctly, you should be aware of how these different types of security structures impact you as an owner.  It is very easy for an owner to be diluted out of a majority ownership.  Accordingly, having qualified accountants and lawyers is a necessity for startup businesses.Providing correct, accurate and expert information can only assist you in getting more money as it speaks to your business savvy and ability.  Investors invest in people as much as they invest in ideas.  Accordingly, you should show that not only is your business ready to succeed, so are you.BizCFO is an accounting and finance consulting firm with offices in Santa Monica, Orange County, and San Deigo, providing quality professional services. For additional complimentary information regarding this topic or other questions you may have please call one of BizCFO’s offices located in Southern California or contact us here.