When it comes to start-up companies, there’s no sexier topic of conversation than accounting.
Well, ok, that’s not really true. But what is true is that talented entrepreneurs don’t often think about records that will become critical during the phase before an IPO.
During the venture capital procurement phase, companies are often required to produce CPA-reviewed or audited financial statements. This should be the point at which management takes a closer look at the detailed records that support the balances and transactions that are being reported. Let’s take a look at some critical records that should be reviewed by management for completeness and accuracy:
- Employment agreements. Keep all legal documents and amendments centralized for easy access. The provisions of these documents are meaningful to the company’s financial position. Promises of future compensation must be tracked and recorded.
- Stock records. I can’t say it often enough. Generally, the stock records of the company are managed by the corporate clerk (law firm). Due to the volume of venture capital transactions, the records are typically kept on software applications specifically designed for tracking shares. However, these records are not always reconciled to the general ledger of the company. Management should review related documents to ascertain par value amounts, costs of fundraising, and paid in capital by class of share. This is not only required for financial reporting but will become important as the capitalization of the company transitions to its next phase.
- Convertible debt. The same advice with respect to tracking shares of stock applies to convertible debt and related interest accruals. There should be a clear trail, by investor, of each note, interest accrual, dates of conversion, and shares issued.
- Vendor agreements. If the company has agreements with vendors that relate to delayed payments and/or stock compensation, such agreements should be reflected in the financial statements. Keep a summary of the key provisions on hand.
Suffice it to say, the above is an abbreviated list of essential records, but should be of particular concern for start-up companies as they stretch to the next level. Which, of course, is the goal.