Startup Accounting Dictionary

409A valuation

A 409A valuation sets the price at which people may purchase shares of a private company’s common stock, and the fair market value of the company’s stock is set by a third-party, independent appraiser. These should be conducted annually, or after every new funding round, to help set the strike price for employee options. Learn about what a 409A valuation costs, or watch our videos to understand why startups need these valuations on a regular basis. 

Accelerator

A company or program that nurtures startups with mentoring, capital, and information about negotiating the startup ecosystem.

Accounting equation

The accounting equation, also known as the balance sheet equation, is a fundamental principle in financial accounting that states: Assets = Liabilities + Owner’s Equity. This equation forms the basis of double-entry bookkeeping and reflects the relationship between a company’s resources (assets) and its sources of funding (liabilities and owner’s equity). The accounting equation must always be in balance, ensuring that every transaction affects at least two accounts and that the total debits equal the total credits, thus maintaining the integrity of a company’s financial statements.

Accounts receivable loans

These loans provide financing to a company based on the company’s receivables, essentially allowing a company to pull its cash flow forward thirty to sixty days by paying the lender a small fee. 

Accredited investor

An investor that can participate in venture capital, private equity funds, angel investments etc. In order to be an accredited investor there is no standardized federal verification process, but you must meet at least one of the specific criteria.

This criteria consists of either having earned an excess of $200,000 (or $300,000 with a spouse) in each of the past two years with similar prospects for the current year. Having a net worth in excess of $1 million (together with a spouse or individually) or holding a series 7, 65 or 82 license in good standing.

The lack of official verification means it is a startup’s responsibility to assess the accredited investor’s status and reputation.

Acqui-hire

Purchasing or acquiring a company for the purpose of hiring the company’s staff. 

Administration fee

The fee incurred to cover the cost of administration (record keeping/filing/other administrative costs) when a line of credit, convertible note, a new loan, SPV or other financing vehicles is taken out from a bank, investor or lender.

Amortization

Amortization is used in different ways in accounting. One definition is a series of fixed payments that reduces or pays back a debt (loan amortization). Amortization is also used to refer to the process of gradually writing off an intangible asset, similar to depreciation. For example, the Tax Cuts and Jobs Act required companies to amortize their research and development (R&D) deductions over five years for domestic R&D and 15 years for foreign R&D.

Angel group

A professional organization of angel investors who collaborate in evaluating and identifying potential investment opportunities. When an opportunity is discovered they collectively write a check from pooled funds. As part of the startup ecosystem, they often have connections to later-stage investors, and frequently provide introductions to these investors.

Annual contract value (ACV)

Annual contract value (ACV) is the total amount of revenue generated by a customer contract, excluding any fees. ACV is a metric used by software as a service (SaaS) companies, and is normally an annual average derived from the total contract value (TCV).

Anti-dilution clause

A clause in a funding contract that protects an investor from having their percentage of company ownership reduced in subsequent fundraising rounds. 

Asset light 

The term used to describe a business when the majority of its assets on the balance sheet have little to no depreciation. In other words, the company only has a small amount of fixed assets. To be asset-light generally means a business will have a better return on assets, greater flexibility, and lower profit volatility. For example, companies in the service sector are commonly asset-light.

Authorized Shares

Based on a company’s articles of incorporation, authorized shares are the maximum number of shares a business is allowed to issue. A company’s authorized shares must never be exceeded by its outstanding shares.

Bad debt

Debt is a fundamental part of business, but businesses can have both good and bad debt. Bad debt is debt that can’t be collected, and it’s eventually written off. Bad debt is something that all businesses that extend credit to customers have to account for, since there’s always a risk that payment won’t be collected.

Balloon Payment

A balloon loan is a type of loan that generally has a high interest rate, lower payments, and a lump sum to be paid at the end of the loan’s term. Unlike other loan types, where the payment plan usually dictates a fixed amount to be paid in installments, a balloon loan (seen to be riskier than an amortized or installment loan) requires a significantly larger final payment compared to any of the prior payments made.

Basis

The initial cost of an asset, from which gains or losses are calculated.

Binding agreements 

A legal contract that meets several criteria: legality (the agreement doesn’t violate any laws); adequate consideration (something of value is exchanged); capacity (both parties understand what they’re doing); and mutual assent (offer and acceptance). If a contract meets these requirements, it is enforceable by a court. If one party doesn’t hold up its end of the bargain, the other party has legal remedies for any damages from breaking the contract.

Board rights

The rights of each member of the board within an organization, outlined the organization’s bylaws. These rights can include voting power, raising points of discussion, requests for financial inspection, and calling board meetings.

Bookings ARR

Annual recurring revenue (ARR) is a metric that shows the amount of money coming in ever year, and it’s very valuable for SaaS startups or any business that works on a subscription basis. ARR is the value of a startup’s recurring revenue from subscriptions over a single calendar year. ARR looks at historical revenue, however, so some startups like to also look at bookings ARR. Bookings ARR is the value of new annualized contracts that are booked in a given period, regardless of when that revenue will be recognized. This metric can provide a better view of a company’s revenue growth and sales performance, since many enterprise B2B SaaS companies have a long sales cycle. Booking ARR can be distorted by customer cancellations, so it’s important to remember that.

Bootstrapping

Bootstrapping refers to self-financing a startup without relying on angel or seed investors.

Bridge loan

These short-term loans help startups by providing funding to allow startups to reach the next round of funding or remove an existing obligation.

Burn Multiple (SaaS Metric)

A SaaS burn multiple is a metric that measures a company’s efficiency at producing new ARR vs. the amount of capital used. It’s calculated by dividing the net cash burned by the net new ARR in a given period. Lower burn multiples are better, as this shows that the startup burns less capital to generate its growth. Decent burn multiples are under 2x, whereas the best are under 1x.

Business expenses

Normal and necessary expenses that are required to run a business.

Business loans

Business loans provide startups with financing, either as a lump sum or a credit line. This funding is provided to a business with the understanding that it will be paid back under a set of terms, usually with interest and fees.

C corporation (C-corp)

The most common type of corporation in the US, a C-corp is named for subchapter C of the Internal Revenue Code that outlines the tax differences between C-corps and other corporations. In general, a corporation is a legal entity that has shareholders, directors, and officers, and the shareholders are not personal responsible for any debts of the corporation.

California Statement of Information

The California Statement of Infomration is an annual report that legal entities in California need to file. The report updates the state about the company’s business status and principal officers and directors. A newly formed business has to file the first Statement of Information within 90 days of filing Articles of Incorporation, and the annual updates are due on the last day of your anniversary month. Most corporations can file their annual Statements online at the Secretary of State’s website for $25.

Capital

Capital refers to a startup’s financial assets, like funds in deposit accounts. Capital can be raised from financing sources like angel investors, venture capital funds, or venture capital lenders.

Capital gain

Capital gains are the profit earned when an asset, such as stocks, bonds, or real estate, is sold for more than the purchase price. Capital gains are taxed at different rates depending on how long the asset is held, either less than one year or more than one year.

Capital under management

The amount of money a fund, group or syndicate has available to invest in new investment opportunities. Typically, a VC fund calculates capital under management by adding up the total amount of capital committed by its investors across all of its funds.

Cash accounting

Cash accounting recognizes revenue or expense transactions only when payment is exchanged.

Cash drag

Cash drag refers to the negative impact on a VC fund’s performance caused by holding uninvested capital. It occurs when a fund has cash on hand that’s not being invested in startups, earning little to no return while still being factored into the fund’s overall performance metrics. To minimize cash drag, VC funds must carefully balance having enough capital available for investments while avoiding excessive idle cash, as this can lower the fund’s internal rate of return (IRR) and potentially impact its competitiveness in the market.

Cash outflow

A startup’s cash outflow equals the amount of its expenses that exceed its generated income.

Cash management

Cash management, also known as treasury management, involves administering cash inflows and outflows to maintain financial stability. For startups that don’t typically generate profits or revenue, cash management focuses on preserving the company’s capital and maximizing liquidity.

Cash position

A startup’s cash position is the amount of cash it has on its books at a certain point in time.

Chart of accounts

A chart of accounts lists all the financial accounts included in a startup’s financial statements, and allows all of the financialtransactions to be categorized during a specific accounting period.

Chief financial officer (CFO)

A CFO manages a startup’s financial activities, including financial planning and analysis, as well as managing cash flow. For startups, hiring a CFO becomes a priority when the startup begins to raise more significant funding. 

Churn

A startup’s churn rate (also known as attrition rate) is the rate at which customers stop doing business with the startup over a specific time period. A high churn rate indicates that there’s something about a startup’s product or service that customers don’t like or didn’t expect.

Cloud accounting

Cloud or online accounting relies on cloud-based accounting software, rather than traditional desktop accounting progams. Accountants can log into an always-updated accounting system online and all data is stored safely and securely on a cloud server. Most cloud systems also include a variety of third-party APIs that connect with a business’s other systems.

Collateral

Collateral is any sort of asset owned by a startup which is used to secure loans or other debt. Collateral is offered as “insurance” for paying back the loan.

Conversion rights

The right given to investors to convert preferred stock into common stock. Conversion rights can be optional or mandatory, depending on the startup’s circumstances.

Convertible preferred stock

Shareholders with convertible preferred stock are entitled to convert their shares into a fixed amount of common shares on a predetermined date.

Covenants

A covenant is a clause within a debt agreement that either prevents borrowers from making financial actions that may lead to them being unable to meet the payment terms of the agreement (negative covenant), or forces borrowers to perform specific actions in order to meet them (affirmative covenant).

Creditor

Institutions or individuals who have the resources to issue credit (debt) to other businesses. In order to receive a loan from a creditor, a company will usually have to offer some form of collateral or personal guarantee.

Current asset

Current assets are all assets that are reasonably expected to be converted into cash within one year or during the normal operating cycle of the business. These include cash and cash equivalents, marketable securities, accounts receivable, inventory, and other short-term assets. Startup founders should not only track their cash, but also understand how current assets like accounts receivable changes, as this should be a source of cash flow for a startup, or inventory, which can consume cash if more inventory is purchased but can create cash flow if product is sold and inventory is sold down.

Customer acquisition cost (CAC)

Customer acquisition cost is the amount a startup spends to find new customers and convince them to buy its product or service. CAC includes sales and marketing costs as well as any property or equipment used to acquire new customers.

Debt capital

A financing option for startups, debt capital is raised by startups by taking out a loan, and is usually an alternative to equity capital.

Delaware C corporation

A Delaware C corporation is a taxable business entity legally registered in Delaware, and is often preferred by startups because of the laws in Delaware that protect investors, and the fact that venture capital firms and investors are familiar with these laws and procedures. 

Depreciation

A planned, gradual reduction in the recorded value of an asset over its useful life. Depreciation is charged to expense, and the company is generally spreads the depreciation over the period of time during which the asset is earning revenue.

Directors and Officers (D&O) insurance

Directors and Officers (D&O) insurance is a specialized form of liability insurance designed to protect individuals serving as directors or officers of a company from personal losses if they are sued for decisions made in their official capacity. This insurance covers legal fees, settlements, and other costs associated with defending against such lawsuits, and it can also provide financial protection for the company itself if it is named in a lawsuit. D&O insurance is essential for attracting and retaining qualified leadership, as it offers peace of mind by safeguarding personal assets against claims related to management decisions.

Double-entry bookkeeping

Double-entry bookkeeping, sometimes called double-entry accounting, is a standard accounting method that records each transaction in at least two accounts, creating a debit in one or more accounts and a credit in one or more accounts. 

Due diligence

Due diligence is conducted by investors or company acquirers to make sure the financial information provided by a startup is accurate, and allows them to assess whether or not the startup is a good investment.

Equity

The value of shares issued by a company.

Estimated tax payments

Profitable businesses make estimated federal income tax payments throughout the year, one per quarter. 

FATCA (Foreign Account Tax Compliance Act)

The Foreign Account Tax Compliance Act requires foreign financial institutions and some other non-financial foreign entities to report on the foreign assets held by US account holders. 

Finance as a Service (FaaS)

Finance as a Service (FaaS) companies offer integrated accounting, bookkeeping, financial, and business strategy products and services.

Financial statements

The three main financial statements for every business are the income statement, the balance sheet, and the cash flow statement. The three statements represent the financial status of the business, and they work together to present a complete picture of the company.

Flat round

A flat round is the name given to a fundraising round achieved by a startup while remaining the same valuation as their previous funding round. Many times this means that the share price is the same as the share price at the prior round, which may not technically result in a flat valuation due to various factors such as equity distribution adjustments and potential dilution effects. A flat round can occur as an extension of a previous round or as a new round at the same valuation, often seen as a strategic maneuver to avoid the negative implications of a down round. While maintaining the same share price, the issuance of new shares for capital can dilute the equity of existing shareholders, including founders and early investors.

Form 944

Form 944 is used by very small employers to report employment taxes once a year. Small employers are defined as having an annual employment tax liability for Social Security, Medicare, and federal withholding tax of less than $1,000.

Form 1095-C

Applicable large employers (ALEs) are companyes with at least 50 full-time workers or full-time equivalents. ALEs must provide health insurance to their workers, and must use Form 1095-C to document the coverage.

Form 1120

Form 1120 is the US corporation tax return that corporations use to report income, gains, losses, deductions, credits, and calculate their tax liability.

Form 5471

Form 5471 is an informational return that discloses to the IRS any ownership that US citizens and residents have in foreign corporations. 

Form 6765

Informally known as the R&D Tax Credit Form, this form is used to document the research and development activities to claim the Research and Development tax credit. 

Founder

A startup founder is a person who launches a new business, often with co-founders. Founders are usually developing innovative products or services to fill a need they see in the marketplace.

Franchise tax

Franchise taxes are state taxes on businesses that do business within that state. Franchise taxes are separate from income taxes and sales taxes.

GAAP (Generally Accepted Accounting Principles)

Generally Accepted Accounting Principles (GAAP) are issued by the Financial Accounting Standards Board, and function as a common set of accounting standards, rules, and procedures that public companies in the US have to follow when creating their financial statements.

Gross burn rate

While burn rate is typically calculated as the amount of cash a startup spends each month, gross burn rate is the total amount of operating costs the company incurs each month, including operating expenses, taxes, registrations, and often capital expenditures.

Guarantor

A guarantor is an individual or entity that agrees to assume responsibility for a borrower’s debt if the borrower defaults on their loan obligations. This role involves pledging their own assets as collateral, providing additional security to lenders and facilitating loan approvals for borrowers who may not meet certain financial criteria on their own. Unlike co-signers, guarantors do not have ownership rights over the asset purchased with the loan but are liable for the outstanding debt if the primary borrower fails to fulfill their payment obligations.

Income statement

The income statement (also called the profit and loss, or P&L, statement) show how much a startup is spending and how much revenue it’s bringing in.

Independent contractor

A person who is paid to complete specific assignments for a business, but does not work for the business as an employee. 

Initial public offering (IPO)

An initial public offering, or IPO, is a private company’s first sale of stock to the public. In an IPO, the company lists its share on a stock exchange, making them available for general public purchase.

Liquidation preferences

Liquidation preferences determine who gets paid first and how much they receive if a company has a liquidation event, such as selling the company. It’s usually part of venture capital contracts, and specifies that investors or preferred shareholders get paid first if the company is liquidated.

Material adverse change (MAC)

Also called a material adverse effect (MAE), this is a clause that gives buyers or sellers, funding or acquiring entities, or lenders or other parties the right to withdraw from an agreement if there has been a significant negative change to a business’s prospects or other conditions that affect the business.

Monthly recurring revenue (MRR)

This is predictable income received each month by a business, and is frequently used as a key metric in software as a service (SaaS) or subscription-based companies.

Net 30

Net 30 is a common payment term used in business transactions, indicating that the full payment for goods or services is due within 30 days of the invoice date. This arrangement provides the buyer with a short-term, interest-free credit period, allowing them to manage cash flow more effectively while giving the seller assurance of timely payment. Net 30 terms are widely used across various industries and can be beneficial for both parties, as they help build trust, facilitate smoother business operations, and potentially lead to stronger business relationships.

Net dollar retention

Net dollar retention (NDR) is a crucial metric for startups that measures the percentage of revenue retained from existing customers over a specific period, including expansions, upgrades, downgrades, and churn. A high NDR (typically above 100%) indicates that a startup is not only retaining its customers but also growing revenue from its existing customer base through upsells and cross-sells, which is often more cost-effective than acquiring new customers. For startups, especially in the SaaS industry, maintaining a strong NDR (ideally above 120%) is vital as it demonstrates product-market fit, customer satisfaction, and the potential for sustainable growth, making the company more attractive to investors and potentially leading to higher valuations.

Payroll tax

A tax imposed on employee wages and salaries, which is usually withheld by employers from employee pay or in some instances is paid solely by the employer. 

Petty cash at startups

Petty cash refers to money (literally coins and bills) that a startup keeps on hand to handle small expenses, like buying lunch for staff or tipping the delivery driver. Typically companies will regularly reconcile petty cash expenses. Petty cash isn’t common any more, because it’s difficult to track, easy to abuse, and credit cards are a more effective option that allow for better cash management.

Portfolio company

A startup that has become part of a venture capital fund’s portfolio by receiving an investment from that company.

Pre-money valuation

This is the value of a startup before it receives any external investment or funding. 

Pre-seed funding

Pre-seed funding is a round of investment at a very early stage of a startup. It’s designed to help the founders form the company, start uperations, and hit the milestones necessary to raise a seed round.

Private equity

These are funds directly invested in private companies, and are not listed on any public exchange.

QSBS

The qualified small business stock benefit helps investors in Delaware C corporations that operate in the hard science or innovation space, and who have held their stock for at least five years, save up to $10 million a year in taxes

Refund accounting

Refunding customers is a necessary part of business, especially for ecommerce or direct-to-consumer companies, and the Financial Accounting Standards Board (FASB) has outlined how to account for refunds under Generally Accepted Accounting Principles (GAAP).

Retained earnings

Retained earnings represent the cumulative net income a company has earned over time, minus any dividends paid out to shareholders. This financial metric is reported on the company’s balance sheet under the shareholders’ equity section and reflects the amount of profit reinvested back into the business rather than distributed to owners. Retained earnings serve as a key indicator of a company’s financial health, profitability over time, and its ability to fund growth, pay off debt, or return value to shareholders through dividends or stock buybacks.

Runway

The length of time that a company can continue to operate using its current cash reserves, based on the company’s burn rate, which is monthly or weekly spending.

SaaS (software as a service)

SaaS allows customers to connect and use a cloud-based applications over the Internet. Customers pay for a software license which allows them to access software that is located on external servers.

Sales tax

Sales tax is a tax imposed by federal, state, and/or local governments on the sale of goods and services. A 2018 Supreme Court decision determined that companies establish tax nexus and can be charged taxes by states if they sell products or services in that state, even if they have no physical presence. Sales tax laws vary by state, so startups need to carefully evaluate any sales tax responsibility. 

Section 382

A part of the IRS tax codet that limits corporations’ use of net operating losses to offset profits. 

Seed round

A seed round is an early capital funding round that raises money to launch a startup. While seed capital oten comes from the company founders’ personal assets, friends, family, or angel investors, there are also seed funds that are managed by professional venture capitalists.

Series B

Series B companies have proven they are ready for success by having substantial success and they are ready to expand their market reach. Series B investments normally range from $25-$50 million. 

SGA expenses

Selling, General and Administrative (SG&A) expenses are the costs a company incurs to promote, sell, and deliver its products and services, as well as to manage day-to-day operations, excluding direct production costs. These expenses typically include items such as rent, utilities, salaries of non-production staff, marketing and advertising costs, office supplies, and other overhead expenses that are not directly tied to creating goods or services. SG&A expenses are reported on a company’s income statement and are crucial for understanding a business’s operational efficiency and profitability, as they represent the overhead costs that must be covered before a company can generate a profit.

Single-entry bookkeeping

With single-entry bookkeeping, each transaction is recorded with a single entry into the company’s financial records, and basically tracks incoming and outgoing cash, much like a checkbook ledger. 

Startup

Startups are new companies in the early stages of operation. Startups are typically funded by company founders or external investors, because they have high costs and limited revenue. 

Target company

A company that’s being considered for investment by a venture capital firm or angel investor.

Tax deduction

Tax deductions reduce the adjusted gross income of a taxpayer, and can reduce the tax liability of a business or person. 

Tax nexus

“Nexus” is the required level of connection between a taxpaying entity and a taxing jurisdiction that allows the jurisdiction to collect taxes. Different states have different requirements that establish tax nexus, including dollar amount of sales or total number of sales.

Unicorn

A company with a valuation of over $1 billion. This occur more often in the software or technology sectors.

Valuation

A calculation of what a startup is worth.

VC fund capital call

A VC fund capital call is a formal request made by the fund manager to its limited partners (investors) to contribute a portion of their committed capital. These calls are typically issued when the fund needs to make new investments in startups or cover operational expenses, allowing the fund to draw capital as needed rather than holding all committed funds upfront. Capital calls are legally binding obligations outlined in the fund’s partnership agreement, usually giving investors a 10-30 day window to transfer the requested funds, and they help minimize cash drag while enabling the fund to remain agile in pursuing investment opportunities.

Venture capital fund reserves

Most venture capital funds maintain 30-40% of the fund in reserve, while the other 60-70% is used to fund new startups. Reserve funds are typically used to support the fund’s portfolio companies if those startups are doing well or need additional capital to reach a milestone.

Venture debt

Venture debt is loans offered by banks or other lenders that are designed for startups and early-stage companies that have already received venture capital funding. 

Zero cash date

Also known as the cash out date, the zero cash date is the day that a startup runs out of money unless the company obtains additional funding.