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Startup Accounting Dictionary

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 or in this glossary, please contact us.

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A, B, C, D, E, F, GI, L, M, N, P, Q, R, S, T, U, V, Z

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. 

Accounting Dictionary Video: What is a 409a Valuation

Startup Accounting Video: How Long Does a 409A Valuation Take?

Accounting Dictionary Explanation Video: How Much Does a 409A Valuation Cost?

Startup Accounting Definition: Why Do Startups Need a 409 Evaluation

83(b) election

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.

Accounting Dictionary Definition: 83B Election – What To File and When?

Accounting Dictionary How-To: Electronic 83B Filings With Carta

A

Accelerator

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

Startup Accounting Definition: Is YC Worth it?

Accounting

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

Accounts receivable are the balances due from customers of a company that have purchased goods or services but have not yet paid for them.

Accounting Dictionary How To Video: How to Collect Accounts Receivable During COVID

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. 

Startup Dictionary Definition: Accounts Receivable Loans

Accounts payable

Accounts payable refers to the money a company owes to vendors or suppliers that have been purchased on credit.

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.

Accrual accounting

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.. 

Accounting Dictionary How To Video: How can you tell if your Accountant is doing Cash Accounting vs. Accrual Accounting?

Acqui-hire

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

Dictionary Definition: What does your startup need to know about acqui-hires?

Acquisition

The purchase of a company by another company or an investment group, which often leads to an exit.

Venture Capital Accounting Dictionary Definition: What does your startup need to know about acqui-hires?

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.

Allocation

The segment of a funding round that is designated for a specific investor, fund, investment group, or other investment entity.

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 investor

An early-stage investor that provides their own capital to help launch a startup or small business.

Accounting Dictionary Video: What is the Value-Add of Angel Investors?

Startup Accounting Definition: How can an angel investor sell their shares?

Tax Definition: Does an angel Investor pay capital gains taxes on an investment in their IRA?

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.

Angel syndicate

An informal collection of accredited investors who can select to opt in or out of potential investment opportunities. Each time an investment opportunity arises, members of the syndicate write individual checks of which they pool together. Unlike an angel group, angel syndicates are typically individuals who invest on the side, rather than professional 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).

Accounting Dictionary Explanation Video: Bookings vs. Revenue

Annual Recurring Revenue (ARR)

Annual recurring revenue (ARR) is contracted, subscription revenue, normalized on an annual basis, that a subscription business expects to receive/deliver to those customers. ARR is used to demonstrate predictable revenue to be received over a 12 month period, and is calculated by multiplying monthly recurring revenue (MRR) by 12. It excludes non-recurring or one-time revenue.

Accounting Dictionary Explanation Video: Bookings vs. Revenue

Accounting Dictionary Explanation Video: Why Subscription Businesses Report on ARR

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. 

Anti-dilution protection

Anti-dilution protection allows startup investors the right to maintain their ownership percentages in the event new shares are issued. Anti-dilution protections typically apply to preferred stock. If a startup has a new round of equity financing, the number of shares outstanding will increase, while a previous investor still owns the same number of shares. That means the investor’s percentage of ownership in the company will decrease. Anti-dilution protection adjusts the conversion of preferred shares into common shares during a dilution event, like a downround. That protects these investors if the new offering price is lower than the conversion price on the investor’s shares.

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.

Audit

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.

Accounting Dictionary Video: IRS Audits and Startups

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.

Automated Clearing House (ACH)

The Automated Clearing House is a system used nationwide by thousands of participating financial institutions. The ACH allows batches of electronic transactions, such as direct deposits and payments, to occur at a lower fee between businesses, consumers and governments.

B

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.

Balance sheet

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.

Accounting Dictionary How To Video: How to read a Balance Sheet?

Startup Accounting Video: What Startup's Accounts on the Balance Sheet Need to be Reconciled

Accounting Dictionary Explanation Video: How to account for seed or venture capital raises on your balance sheet?

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.

Bank Reconciliation

Bank reconciliation is the process of comparing a business’s bank balance to their financial records, reconciling, adjusting, and correcting the differences between them to ensure they align.

Basis

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

Benchmarking

Used by internal and external parties of an organization, benchmarking is the exercise of comparing an organization’s procedures, policies, or metrics against others in the industry. Examples of benchmarking may include comparing salary bands against similar companies or comparing the metrics of potential investment opportunities.

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 of directors

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.

Accounting Dictionary How To Video: How Often Should An Early-Stage Startup Have Board Meetings?

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.

Bottom Up Financial Model

A bottom-up financial model is a detailed and granular approach used to forecast the financial performance of a company, starting with the most fundamental building blocks or units of the business. This method involves analyzing and aggregating individual components such as product lines, sales channels, or customer segments to estimate revenues, costs, and ultimately, profitability. By focusing on the micro-level elements and their interactions, a bottom-up model allows for a more precise and realistic financial projection, enabling businesses, particularly startups and growing companies, to make informed decisions, plan for resource allocation, and assess potential risks and opportunities from the ground up. This approach contrasts with top-down forecasting, which starts with broader economic or industry data to estimate a company’s financial future.

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.

Accounting Dictionary Explanation Video: Bookings vs. ARR

Bookkeeping

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. 

Startup Accounting Video: The Best Bookkeeping - Combining Automation and Experienced Accountants

Startup Accounting Definition: 12 Common Bookkeeping Mistakes Made By Startup Founders

Dictionary Definition: Understanding Bookkeeping Services Pricing

Accounting Dictionary Video: How Good Bookkeeping Pays for Itself

Bootstrapping

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

Break-even point

The point at which a company’s revenue and expenses are equal. Before this point a company is likely operating at a loss, and the weekly/monthly amount of that loss is known as the burn rate. After reaching the break-even point, the aim is to make a profit.

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.

Dictionary Definition: What is a Bridge Loan?

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.

Burn rate

The monthly or weekly rate at which a startup spends its cash reserves to cover expenses, usually before earning significant revenues.

Accounting Dictionary How To Video: How to calculate burn rate

Business expenses

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

Business fundamentals

Business fundamentals vary based on the model of the business, but they will typically include growth rate, burn rate, churn, and cash on hand. Used to determine how a business is performing, they will be reviewed both by potential investors or internally to evaluate each functional area of the 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.

Buyout

A process in which the equity holders of a company are ‘bought out’ by an acquiring company as they take over the majority shares in the aforementioned company.

C

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 Sales Tax Exemption

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.

Tax Definition: California Franchise Tax

Accounting Dictionary How To Video: California Business Connect gives you online access to state agencies

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.

Tax Definition: California Statement of Information

Dictionary Definition: Don’t get scammed by fake California Statement of Information Solicitations

Cap table

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.

Startup Accounting Definition: How do you reconcile your startup’s cap table?

Startup Accounting How To Video: How to structure Ownership in the Cap Table Between Founders

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.

Venture Capital Accounting Dictionary Definition: Why do General Partner Venture Capitalists contribute cash to the funds they manage?

Dictionary Definition: Why do VC General Partners invest in other Venture Capital Funds

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.

Dictionary Definition: Does an angel Investor pay capital gains taxes on an investment in their IRA?

Capital loss

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.

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.

Carry or carried interest

Carry is the percentage of profits that an investment manager keeps as compensation. 

Cash accounting

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

Accounting Dictionary Video: How can you tell if your Accountant is doing Cash Accounting vs. Accrual Accounting?

Cash advance

Essentially a short-term loan, a cash advance is a lump sum of money that a company receives under fixed terms of repayment.

 

Cash inflow

A startup’s cash inflows equal the amount of revenue (income generated through operations) after deducting its expenses.

 

Cash outflow

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

 

Cash flow statement

The cash flow statement shows the movement of cash and cash equivalents in and out of a startup. It includes cash from operating activities, investing activities, and financing activities.

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.

Accounting Dictionary Explanation Video: Criteria for Startup Cash Management

Accounting Dictionary Video: Using bond ladders for startup cash management

Accounting Dictionary How To Video: What Recent Increase in Inflation Mean for Cash Management Programs

Startup Accounting Definition: Startup Cash Management and FDIC Insurance

Accounting Dictionary How-To: Criteria for Startup Cash Management

Cash out date

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.

Accounting Dictionary How To Video: How to calculate Cash Out date

Cash position

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

 

Certificate of incorporation

These certificates legally document the formation of a company.

 

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 executive officer (CEO)

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.

Startup Accounting Definition: Why a Startup CEO Needs to Pay Themselves a Market Salary

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. 

Dictionary Definition: What Does a Good Startup CFO Do?

Accounting Dictionary Video: Do you know that you can get Outsourced CFO Services for your business?

Startup Accounting Video: What do Fractional Startup CFOs Cost?

Chief operating officer (COO)

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.

Dictionary Definition: What does a VP of Ops or COO do at a startup?

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.

Cliff vesting

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 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.

Common stock

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.

Accounting Dictionary Explanation Video: What is Common Stock?

Accounting Dictionary Video: Is it common to see a convertible note convert a portion into Common Stock and Preferred Equity?

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.

 

Contract amendment

This is a mutually agreed-upon change made to a contract that may include modifying terms or conditions, and/or adding or deleting certain sections or language in the original contract.

 

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 note

A convertible note issued by an investor converts into equity when triggered by a specific event, like a subsequent round of funding.

Dictionary Definition: What are Convertible Note Terms?

Accounting Dictionary Explanation Video: What is a Convertible Note Valuation Cap?

Accounting Dictionary Video: What is a Convertible Note Investment?

Startup Accounting Video: Sample Convertible Note Agreement

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.

Corporate bond

Corporations can issue bonds as a form of debt to raise capital. Investors buy corporate bonds in exchange for a fixed term of repayments with interest.

 

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).

Cram down round

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.

Accounting Dictionary Explanation Video: What is a cram down round?

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.

Crowdfunding

Crowdfunding is when a startup gets funding by collecting small donations from many people, rather than a few major investors.

Venture Capital Accounting Dictionary Definition: Does Crowdfunding Capital Raise Discourage Future VC Investment?

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.

Current liability

A current liability refers to a debt or obligation that a company is expected to pay within one year or within the normal operating cycle of the business. Current liabilities are listed on the balance sheet under the liabilities section and includes items such as accounts payable, accrued expenses, and short-term loans. Current liabilities are important to assess a company’s liquidity and ability to meet its short-term obligations, and startup founders need to pay attention to current liabilities so they can help project their cash out date.

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.

Dictionary Definition: What is Customer Acquisition Cost (CAC)?

Customer lifetime value (LTV or CLTV)

The monetary amount that a single customer is worth to a company. The higher the value of a LTV, the greater the value of the customer to a company. And higher CLTV clients (and markets) mean that startups can justify spending more to acquire those clients.

From a technical/calculation perspective, Customer Lifetime Value refers to the total gross profits generated by a customer throughout their relationship with a company. Many investors will use a discount rate to reduce the value of future cash flows to a current value, although this is not alway done in the startup world. LTV is crucial for companies to gauge the worth of their customer base and determine the investment scope for acquiring new customers. Sometimes it is calculated by the total amount of revenue a customer generates over time - this is an incorrect calculation.

D

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. 

Venture Capital Accounting Dictionary Definition: Why do VCs like to invest in Delaware C-Corps?

Delaware Franchise Tax

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.

Tax Definition: Delaware Franchise Tax

Accounting Dictionary How To Video: Delaware Franchise Tax Recalculate Button

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.

Dilution

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.

Dilution Accounting Dictionary Definition: Dilution Never Killed A Company

Distributions to Paid-in Capital (DPI)

Distributions to paid-in capital measures the total capital that a venture capital fund has returned to its investors, and is calculated by dividing the cumulative distributions by the amount of the investment.

Accounting Dictionary Definition: Distribution to Paid-In Capital Ratio

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. 

Startup Accounting How To Video: Double-Entry Bookkeeping versus Single-Entry

Down round or downround

Startups that experience down rounds have fundraising rounds where the company is valued at a lower price per share than previous funding rounds.

Dictionary Definition: What is a cram down round?

Venture Capital Accounting Dictionary Definition: Why VC’s Don’t Want to Lead Down Rounds

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.

Startup Accounting Video: Startup's Due Diligence Information Venture Lenders Ask For

E

EBITDA

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.

What is EBITDA

Equity

The value of shares issued by a company.

Startup Accounting Definition: Venture Lenders Asking for Right to Invest Equity

Accounting Dictionary Video: Fintech Equity & Debt Staircase

Dictionary Definition: Startup Capitalization Table vs Equity Account

Startup Accounting How To Video: How to Legitimize a Handshake Equity Agreement Between Founders

Equity capital

Startups raise equity capital by exchanging equity or stock with investors for funds, and is an alternative to debt capital.

Estimated tax payments

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

Exit strategy

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.

F

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. 

FDIC insurance

Bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000, per depositor, per account category, and per bank.

Accounting Dictionary Definition: Startup Cash Management and FDIC Insurance

Finance as a Service (FaaS)

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

Financial model

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.

Accounting Dictionary How To Video: Kruze Consulting Simple Startup Financial Model

Startup Accounting How To Video:Startup Financial Modeling 101

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.

Fiscal year

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. 

Accounting Dictionary Video: How To Move Your Startup’s Fiscal Year-End From December 31st to January 31st

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 941

Form 941 is used by businesses that report income and payroll tax withholdings on a quarterly basis. Form 941 is used by large employers with payroll tax and withholding liabilities of more than $1,000 annually.

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-B

This tax form reports the type of health insurance that a company provides to its employees and their dependents. It also outlines the dates that employees and their dependents were covered by insurance.

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 1099

Startups must distribute 1099 forms by January 31 to any contractor to whom the startup has paid more than $600 during the year. Read our article on 10 Reasons a Startup Can’t Use it’s Payroll Provider for 1099 Creation.

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 3921

Form 3921 reports the exercise of employee incentive stock options (ISOs) to the IRS.

Form 5471

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

Tax Definition: When is IRS Form 5471 due?

Form 5472

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.

Dictionary Definition: IRS Form 5472 for Foreign Shareholders

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.

Startup Accounting Video: How many co-founders should a startup have?

Startup Accounting Definition: When Should Startup Founders Pay Themselves?

Accounting Dictionary How-To: How To Rebalance Ownership Between Founders

Founder Preferred Stock

Founder preferred stock (also called series FF preferred stock) is a relatively new concept. Preferred stock comes with rights and privileges that make it more valuable. Normally founders receive common stock. However, some founders may receive a percentage of their normal allocation of common stock as preferred stock, allowing founders to sell those preferred shares at a higher price.

Accounting Dictionary Definition: What is Founder Preferred Stock? 

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.

Fundraising

This is the process uses to generate capital, primarily by exchanging equity for investment dollars, but also includes borrowing capital through debt financing.

Accounting Dictionary Explanation Video: What The Fed Raising Interest Rates Means For Startup Fundraising

G

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.

Accounting Dictionary Definition: What Is Gross Burn Rate?

Gross Merchandise Value (GMV)

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.

I

Incentive stock options (ISO)

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.

Tax Definition: Tax Reporting ISO and NQSO

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.

Incubator

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.

Independent contractor

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

Accounting Dictionary Video: Does a Contractor trigger Tax Nexus in a State?

Startup Accounting Video: How should my startup pay engineering contractors?

Insured cash sweep accounts

Also called networked deposit services, insured cash sweep (ICS) accounts distribute a startup’s funds in increments of $250,000 among a network of banks, maximizing the FDIC insurance coverage.

Accounting Dictionary Definition: What Are Insured Cash Sweeps?

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.

Startup Accounting Definition: What is the IPO Window?

L

Lead investor

The investor or firm that takes a primary role in negotiating a startup capital investment and conducting the necessary due diligence.

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.

Accounting Dictionary Definition: What Are Liquidation Preferences?

Local tax

A tax charged by a local government, usually a city or county.

M

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.

Dictionary Definition: Funding MAC (Material Adverse Change) in Venture Debt

Mergers and acquisitions (M&A)

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.

Startup Accounting Definition: Startups Should do a Mock M&A Diligence Session

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.

Accounting Dictionary Video: Bookings vs Revenue

N

Negative pledge on IP

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.

Startup Accounting Definition: Negative Pledge on IP

Non-qualified stock option (NQSO)

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.

Tax Definition: Tax Reporting ISO and NQSO

P

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. 

Startup Accounting Definition: Gusto and Payroll Tax

Tax Definition: State Payroll Tax Registrations - does your startup need to worry about them?

PEO (Professional Employer Organization)

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.

Startup Accounting Definition: What is a Professional Employment Organization (PEO)?

Startup Accounting Video: Best Time to Switch to a PEO

Startup Accounting Video: What are the advantages of using a Global PEO to pay foreign employees?

Accounting Dictionary Video: Pros & Cons of PEOs

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.

Startup Accounting How To Video: How Should You Handle Petty Cash At Your Startup?

Pitch deck

A pitch deck is a comprehensive presentation of your business model, targeted at venture capitalists, angel investors, lenders, and other sources of capital. 

Accounting Dictionary Video: What to include in a seed stage pitch deck

Portfolio company

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

Preferred stock

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.

Startup Accounting Definition: What is Preferred Stock?

Accounting Dictionary Explanation Video: Should your startup use a convertible note, SAFE, or preferred stock?

Pre-money valuation

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

Pre-seed round

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

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.

Accounting Dictionary Explanation Video: What is the Value of Pre-Seed Venture Capital Funds?

Primary shares

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.

Accounting Dictionary Explanation Video: What’s the Difference Between Primary and Secndary Shares at a Startup?

Private equity

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

Q

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

Dictionary Definition: QSBS is a big reason to not incorporate as an LLC

Accounting Dictionary Video: Do SAFE Notes start the QSBS Holding Period Clock?

R

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).

Research and development (R&D) tax credit

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.

Tax Definition: What is an R&D Tax Credit and what does it mean for startups?

Startup Accounting Video: How much money can you save with the R&D Tax Credit?

Accounting Dictionary Explanation Video: What counts as research and development in R&D Tax Credit?

Accounting Dictionary Video: Is my startup eligible for the R&D Tax Credit payroll offset?

Run rate

The financial performance of a startup that uses current results to extrapolate performance over a longer period of time. 

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.

S

S corporation

This is a corporation with no more than 100 shareholders, and is treated similarly to a partnership. 

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.

Tax Definition: SAAS Sales Tax

Startup Accounting Video: Best SaaS Accounting Software

SAFE note

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. 

Dictionary Definition: What are safe notes?

Tax Definition: Is a SAFE Note Taxable?

Accounting Dictionary How To Video: Accounting for a SAFE note investment

Startup Accounting Definition: What happens to investors’ SAFE Notes when a Startup is acquired

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. 

Accounting Dictionary How To Video: The importance of having a bookkeeper who can handle your sales tax

Startup Accounting Video: E-commerce Sales Tax

Accounting Dictionary Video: Economic Nexus & Sales Tax

Tax Definition: At what revenue level should startups worry about state sales tax?

Secondary shares

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.

Startup Accounting Definition: What is a secondary stock transaction?

Section 382

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

Dictionary Definition: Section 382 Triggers

Seed funding

Seed funding is the first stage of equity funding and is typically the first institutional financing that a company raises.

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.

Accounting Dictionary How To Video: Top Tip to Close a Seed Round

Series A

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.

Startup Accounting Video: How the stock option pool at the Series A impacts a Founder’s ownership

Accounting Dictionary Video: Employer Benefits Contributions for Employees vs. Dependents at Series A Startups

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. 

Accounting Dictionary How To Video: How Series B and Series C companies are cutting operational costs

Series C

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.

Shareholders’ agreement

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.

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. 

SR&ED (Scientific Research and Experimental Development) Canadian tax program

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.

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. 

Tax Definition: Startup Tax Return

Startup Accounting Video: Startup Budgeting

Startup Accounting How To Video: The benefits of a positive corporate culture at your startup

Tax Definition: The Most Important Tax Deadlines for Startups

State tax

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.

Dictionary Definition: What is State Tax Nexus?

Tax Definition: State Tax Compliance when your Employees Change States

T

Target company

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

Tax credit

Tax credits are a dollar-for-dollar reduction in a tax, and a business can deduct the credit directly from taxes owed.

Accounting Dictionary Video: Changes in Employee Retention Tax Credits in Build Back Better Act

Tax Definition: IRS is Paying Interest on Employee Retention Tax Credits

Tax deduction

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

Taxable income

Taxable income is a taxpayer’s gross income minus any claimed tax deductions.

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.

Dictionary Definition: What is State Tax Nexus?

Accounting Dictionary Explanation Video: Does a Contractor trigger Tax Nexus in a State?

Term sheet

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.

Dictionary Definition: How long does it take to Negotiate a term sheet?

Startup Accounting Definition: What is an Exploding Term Sheet?

Venture Capital Accounting Dictionary Definition: What is a no shop provision in a VC Term Sheet?

Accounting Dictionary Definition: Structured Term Sheets in Late-Stage Venture Capital

U

Unicorn

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

Unique selling proposition

Often abbreviated as USP, this is the unique benefit of a product, service, or company that allows it to stand out from the competition.

V

Valuation

A calculation of what a startup is worth.

Dictionary Definition: What do you do if you raised capital at a huge valuation before the market decline?

Startup Accounting Video: Jan 2022 Nasdaq Correction and Startup Valuations

Accounting Dictionary How To Video:How the correction in public SaaS stock trading multiples affect startup valuations

Venture Capital Accounting Dictionary Definition: Flat is the New Up for VC Valuations

Value proposition

A value proposition is the unique selling proposition (USP) that makes a business attractive to specific customers and investors.

Venture capital

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.

Dictionary Definition: 5 Things to do after You Raise Venture Capital

Startup Accounting How To Video: Easiest Way for Venture Capital Backed Startups to Hire Globally

Startup Accounting Definition: Why do VC General Partners invest in other Venture Capital Funds

Dictionary Definition: How do venture capital firms make money?

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.

Startup Accounting Definition: What are VC Fund Reserves?

Venture capitalists

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 Capital Accounting Dictionary Definition: How Do Venture Capitalists Make Decisions?

Accounting Dictionary How To Video: Why do General Partner Venture Capitalists contribute cash to the funds they manage?

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. 

Venture Debt Accounting Dictionary Definition: Why Do Startups Take Venture Debt

Dictionary Definition: 4 Reasons to Raise Venture Debt

Accounting Dictionary Video: Dangers of Venture Debt

Accounting Dictionary How To Video: What to do if you can’t raise Venture Debt?

Vesting

A schedule that determines how long employees or founders must stay employed by a company to receive their full share of equity.

Dictionary Definition: What is a vesting period?

Accounting Dictionary Explanation Video: Stock Option Vesting Cliff

Z

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.

Startup Accounting How To Video: Know your zero cash date

Zero-based budget

A zero-based budget is a budget that is created through a process whereby ALL expenses are justified for each new period. Unlike traditional budgeting and forecasting, where projections are based on run rate or existing expense levels, zero-based budgeting starts from a “zero base” and every expense must be re-justified in the budgeting exercise. 

Important Tax Dates for Startups

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