Sometimes it may seem like accountants speak another language. To help startup founders familiarize themselves with basic startup accounting terms, Kruze Consulting has created a dictionary of accounting terms used with startup and early-stage companies. If you have other questions about the financial terms and acronyms used in startup accounting, please contact us.
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.
An 83(b) election is a formal document that you sent to the IRS to state you are electing to buy your stock immediately, even if it hasn’t all vested. You file an 83(b) to lock in your stock prices so that you have a low tax basis.
A company or program that nurtures startups with mentoring, capital, and information about negotiating the startup ecosystem.
Accounting includes bookkeeping, the process of recording a business’s financial transactions, but takes that information and verifies, reports, and analyzes the results. The results are compiled into financial statements and presented to a number of entities, including investors, lenders, regulators, tax authorities, and other company stakeholders.
Accounts receivable are the balances due from customers of a company that have purchased goods or services but have not yet paid for them.
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.
Accounts payable refers to the money a company owes to vendors or suppliers that have been purchased on credit.
An accounting method that records revenue and expense transactions when the transactions occur, rather than waiting until the company has received or made actual payments..
Purchasing or acquiring a company for the purpose of hiring the company’s staff.
The purchase of a company by another company or an investment group, which often leads to an exit.
The segment of a funding round that is designated for a specific investor, fund, investment group, or other investment entity.
An early-stage investor that provides their own capital to help launch a startup or small business.
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).
A clause in a funding contract that protects an investor from having their percentage of company ownership reduced in subsequent fundraising rounds.
An audit is an official inspection of the records of a startup, usually performed by an independent third party, htat provides an objective appraisal of the company’s financial position.
Often described as a snapshot of the startup’s financial condition, a balance sheet reports a company’s assets, liabilities, and shareholder equity at a specific point in time. Balance sheets follow a specific equation, assets = liabilities + shareholders’ equity, which should always balance.
A startup’s board of directors exists to help guide the company, and are responsible for setting high-level goals for the startup. The board of directors represents the company’s shareholders, and the board’s role is to serve and protect the financial interest of the company, also called fiduciary duty. The board oversees the CEO and other executives, but the startup’s management team runs all the company’s day-to-day operations.
Bookkeeping is the process of recording a startup’s financial transactions on a regular basis. Bookkeeping is the foundation of accounting, and accountants use the recorded transactions to prepare financial reports.
Bootstrapping refers to self-financing a startup without relying on angel or seed investors.
These short-term loans help startups by providing funding to allow startups to reach the next round of funding or remove an existing obligation.
The monthly or weekly rate at which a startup spends its cash reserves to cover expenses, usually before earning significant revenues.
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.
Hardware startups that are in research and development mode and are purchasing physical goods in California may be able to take advantage of the Manufacturing and Research & Development Equipment Exemption, a partial sales tax exemption for qualified purchases.
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.
The capitalization table is a document that outlines a startup’s capital structure, and typically shows the percentage of ownership for each investor or employee.
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 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 losses are incurred when an asset is sold for less than the purchase price. Capital losses can be balanced against capital gains to reduce taxes, and a portion may be carried forward to following tax years.
Carry is the percentage of profits that an investment manager keeps as compensation.
Cash accounting recognizes revenue or expense transactions only when payment is exchanged.
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.
Also known as the zero cash date, the cash out date is the day that a startup runs out of money unless the company obtains additional funding.
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.
The CEO is the highest-ranking individual in a startup and is responsible for the overall success of the company, making all major managerial decisions. While some founders are CEOs, that’s not always the case.
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.
The chief operating officer of a company has a wide range of duties, including managing finances, overseeing recruiting and human resources, overseeing information technology, and supervising other day-to-day operational areas.
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.
Cliff vesting refers to an investor or employee becoming fully vested on a specific date, rather than phasing in vesting over an extended period.
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.
Common stock is a piece of ownership of a company, and is often issued to employees, strategic advisors, and founders. Preferred stock carries additional rights that common stock does not, and is normally reserved for investors.
A convertible note issued by an investor converts into equity when triggered by a specific event, like a subsequent round of funding.
A down round is a financing round in which a company sells shares of capital stock at a lower price per share than a previous round. A cram down round is a new round of funding that is also a down round, but in which investors are required to give up certain rights, like liquidation preferences or priorities.
Crowdfunding is when a startup gets funding by collecting small donations from many people, rather than a few major investors.
A financing option for startups, debt capital is raised by startups by taking out a loan, and is usually an alternative to equity capital.
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.
The Delaware Franchise tax is an annual tax paid to the state of Delaware by corporations, limited partnerships, and limited liability companies formed under Delaware law.
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.
Dilution occurs when a startup issues new equity shares that reduce the existing shareholders’ percentage of company ownership. When the overall number of shares increases, existing shareholders’ share of the company is diluted.
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.
Startups that experience down rounds have fundraising rounds where the company is valued at a lower price per share than previous funding rounds.
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.
EBITDA stands for “earnings before interest, taxes, depreciation, and amortization” and is a metric used to evaluate a startup’s operating performance. It’s often viewed as a loose proxy for a company’s cash flow because depreciation and amortization are added back to earnings.
The value of shares issued by a company.
Startups raise equity capital by exchanging equity or stock with investors for funds, and is an alternative to debt capital.
Profitable businesses make estimated federal income tax payments throughout the year, one per quarter.
An exit strategy is the method a startup founder or owner chooses to sell their ownership stake to another company or other investors, and generally refers to a way to liquidate their stake in the company.
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) companies offer integrated accounting, bookkeeping, financial, and business strategy products and services.
A financial model is a numerical depiction of a startup’s goals, relying on key performance indicators and assumptions that are tested as the startup executes its business plan.
A fiscal year, or financial year, is a 12-month period chosen by a company to report its financial performance. Fiscal years do not necessarily need to conform to the calendar year.
Startups must distribute 1099 forms by January 31 to any contractor to whom the startup has paid more than $600 during the year.
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 is an informational return that discloses to the IRS any ownership that US citizens and residents have in foreign corporations.
Form 5472 provides the IRS with information about US businesses that have foreign ownership, or foreign businesses that do a significant amount of business in the US.
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.
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.
This is the process uses to generate capital, primarily by exchanging equity for investment dollars, but also includes borrowing capital through debt financing.
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.
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.
Gross Merchandise Value or GMV is the total end-value to the customer of a product sold through a marketplace, or the total value of goods sold by an eCommerce startup. It’s generally calculated as the total value paid by the purchaser-side of the marketplace.
Incentive stock options are a type of equity compensation, used to motivate and retain employees. ISOs are granted only to employees, who can then purchase a set quantity of shares at a specified price, and get favorable tax treatment.
Like an accelerator, incubators offer capital and mentorship in exchange for equity, but often focus more on innovation, trying to nurture an idea into a viable business model.
A person who is paid to complete specific assignments for a business, but does not work for the business as an employee.
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.
The investor or firm that takes a primary role in negotiating a startup capital investment and conducting the necessary due diligence.
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.
The process of combining two companies into one is called mergers and acquisitions, and includes company finances, management, and strategy. The process may help the company grow faster or allow it to compete in a new business sector.
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.
A negative pledge on IP is a type of covenant used by venture debt lenders to prevent a borrower from pledging their intellectual property (IP) assets to others.
NQSOs are stock options that don’t qualify for the tax benefits that incentive stock options (ISOs) receive. NQSOs create additional taxable income to the recipients when the options are exercised.
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.
A professional employer organization is a full-service human resource outsourcing company that enters into a co-employment arrangement with a company, and performs employee administration tasks like payroll and benefits administration.
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.
A pitch deck is a comprehensive presentation of your business model, targeted at venture capitalists, angel investors, lenders, and other sources of capital.
A startup that has become part of a venture capital fund’s portfolio by receiving an investment from that company.
Preferred stock gives the stockholders a priority claim whenever a company distributes assets to shareholders or pays dividends. The exact terms of the preference can differ from company to company.
This is the value of a startup before it receives any external investment or funding.
This is the time period during which a startup’s founders are just beginning operations, and it’s often funded by founders themselves, friends, or family members.
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.
Primary shares of stock are newly issued, and investors buy them directly from a startup company. When the startup sells primary shares, those funds go to the company and help to fund company operations.
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
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).
The R&D tax credit is a government tax incentive provided to companies who improve a product or process, and provides a dollar-for-dollar cahs savings to companies that invest in innovation and product development.
The financial performance of a startup that uses current results to extrapolate performance over a longer period of time.
This is a corporation with no more than 100 shareholders, and is treated similarly to a partnership.
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.
A simple agreement for future equity, or SAFE note, is a legally binding agreement that allows a startup investor to purchase a stated number of shares at a specified price at designated point in time, usually a future financing round.
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.
A secondary stock transaction is buying shares from an existing stockholder, rather than directly from the company. The proceeds of a secondary stock sale go to the stockholder, not the company.
A part of the IRS tax codet that limits corporations’ use of net operating losses to offset profits.
Seed funding is the first stage of equity funding and is typically the first institutional financing that a company raises.
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 A funding is for startups that have developed a track record of revenues, customer, or other key performance indicators, and have both a great business idea and a strong strategy for becoming successful. Series A investments normally range from $5-$10 million.
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.
Businesses that seek Series C funding are already successful, and want additional funds to develop new products or expand into new markets. Sometimes Series C companies are trying to acquire other companies. Series C investments can range from $20 million up to hundreds of millions.
This agreement is between some or all of the shareholders of a startup and regulates the relationship between shareholders, the company’s management, share ownership, and other protections for the shareholders.
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.
The SR&ED program encourages companies to conduct research and development activities in Canada through providing two tax incentives – income tax deductions and investment tax credits.
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.
State taxes are levied by states on income earned by taxpaying entities like businesses. This includes businesses with a physical presence in that state and businesses that earn income that is sourced in that state. State tax rates and requirements vary by state.
A company that’s being considered for investment by a venture capital firm or angel investor.
Tax credits are a dollar-for-dollar reduction in a tax, and a business can deduct the credit directly from taxes owed.
Tax deductions reduce the adjusted gross income of a taxpayer, and can reduce the tax liability of a business or person.
“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.
A term sheet outlines the basic terms and conditions of an investment in a startup. Term sheets are nonbinding but normally serve as the basis for a legally binding agreement.
A company with a valuation of over $1 billion. This occur more often in the software or technology sectors.
A calculation of what a startup is worth.
A value proposition is the unique selling proposition (USP) that makes a business attractive to specific customers and investors.
Venture capital is a form of funding for startups and early-stage companies that individuals or investment firms provide in exchange for equity, or partial ownership, in the company.
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 capitalists, often abbreviated as VCs, are private equity investors that provide funding to companies that they feel have growth potential, and accept an equity stake in exchange.
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.
A schedule that determines how long employees or founders must stay employed by a company to receive their full share of equity.
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.