For most privately-held companies, a major growth milestone (and admitted headache) is the point in time when their compiled financials are transitioned to audited financials. And while this may sometimes to be more of a pain than not, what it does signify is your path toward outside investment, revenue and growth.
However, what the transition to audited financials also means is that ownership information, all the way back to the first day of the company’s history, must also be in an auditable state to pass review.
But where can you even get started? Luckily, we’ve got a few tips for you to successfully prepare your equity information for success.
Tip 1 – Get your internal and external team organized
If you’re like most privately-held, venture-backed companies, your equity administration responsibilities fall within several different functions of your organization, including:
- Outside Counsel, who creates stock types and stock option plan paperwork
- Human Resources, who provides updated contact and employee information
- Payroll, who handles taxation issues
- Controller, who reconciles equity transactions for accounting and financials
- CFO or In-House Counsel, who is responsible for board minutes and circulating relevant portions of equity reporting to the parties who implement equity decisions
Needless to say, that’s a lot of touch points. Your best course of action when making the move to audited financials is to organize your team early on to understand exactly who touches your equity information, as well as what their primary responsibility is with that information. Institute a standard process for tracking, reporting and sharing information, both among your internal team, as well as with your audit team, to ensure a seamless flow of accurate and appropriate reports.
Tip 2 – Collect a complete historical record of your equity records and plans
Your next step will be to collect all of your documentation, articles and amendments to understand the structure of your equity and how it has changed over time. Be sure to include at least a few representative grant agreements so that you understand the terms of your plan and the structure under which the grants were made. Not only will you need to describe the historical overview of your equity plan, but you will also need to collect all of the historical documents, dates and information regarding each grant. For example, if a grant was cancelled, you should include the date that the grant was cancelled, as well as the reason it was cancelled to properly track forfeitures and expirations. If a grant was exercised at any point in time, you’ll need the documentation necessary to demonstrate when it was exercised and the resulting certificate number.
Tip 3 – Consider automation as an alternative to spreadsheets
Excel was never built to sufficiently handle the complex equity accounting and reporting requirements of privately-held companies today. While there is always a place for Excel and spreadsheets in finance, unfortunately, the real-time, accurate data calculations and reporting that ASC Topic 718 requires (and your auditors will demand of you) means that you’ll need to find a way to centralize and automate your option expensing to better track, report and share your information. In the end, you will generate better results in less time and at a lower cost.
When you implement an automated system, don’t be surprised if your previously reported expense from your spreadsheets does not completely match the output from a new system. There are slight variations in how each system and for that matter each separate CFO’s spreadsheet amortizes the equity compensation expense from period to period. Even if your spreadsheet is 100% correct with its information, your method will probably differ from the system you now use. Typically, this difference is immaterial and a line item in your first reporting period after initial implementation is all that is necessary.
Tip 4 – Start early and review often
The best advice we can offer is to start getting yourself organized early on in the process. Don’t wait until your plan has hundreds of participants, as you will be setting yourself up for a mild disaster down the road. If you are organized in an automated system from the start, your path toward audited financials will be that much easier. You should also plan to review your records on a monthly basis as a best practice, even if you aren’t doing grants. This way, you can avoid any surprises that might catch your audit team off-guard.