ASC 718, also known as Accounting Standards Codification (ASC) Topic 718, is the accounting standard that provides guidance on the accounting for stock-based compensation. Stock-based compensation refers to the practice of granting employees or directors of a company equity awards, such as stock options or restricted stock units (RSUs), as part of their compensation. This is not really generally a big deal for small startups, in that their board, investors and accounting firms do not require ASC 718 compliance at the early-stage!
This standard provides guidance on how to measure and recognize the expense associated with stock-based compensation, as well as how to disclose information about stock-based compensation in the financial statements for companies that are going fully GAAP, which not all startups are worrying about. The standard applies to all forms of stock-based compensation, including stock options, restricted stock, restricted stock units, and other equity-based awards. Read all about startup stock options here.
The Financial Accounting Standards Board (FASB) is the independent organization that establishes financial accounting and reporting standards for public and private companies, as well as non-profit organizations. FASB requires public companies to disclose detailed information about their stock-based compensation plans and the expenses recognized under those plans in their financials. This includes information about the number and types of awards granted, the fair value of the awards, and the vesting and expiration dates of the awards - and so, as you’d expect, the accounting for large public companies is a lot more onerous than for smaller technology startups.
ASC 718 is part of the FASB Accounting Standards Codification, which is the official source of generally accepted accounting principles (GAAP) in the United States. FASB is the organization responsible for issuing and maintaining GAAP.
An ASC 718 valuation, also known as a fair value determination, is the process of determining the fair value of an equity award for the purposes of accounting for stock-based compensation under Accounting Standards Codification Topic 718. Under this set of standards, the expense associated with stock-based compensation is measured at the grant date, based on the fair value of the award.
An ASC 718 valuation and a 409A valuation are similar, but they serve different purposes.
An ASC 718 valuation, also known as a fair value determination, is the process of determining the fair value of an equity award for the purposes of accounting for stock-based compensation under Accounting Standards Codification Topic 718. This valuation is used to calculate the expense associated with the award and to disclose information about the award in the financial statements.
A 409A valuation, on the other hand, is a valuation of the fair market value of the company’s common stock for the purposes of complying with Internal Revenue Code Section 409A. Section 409A sets forth rules for deferred compensation, including certain types of equity awards, to ensure that the compensation is taxed appropriately.
To comply with Section 409A, companies must determine the fair market value of their common stock at least once a year. This valuation is used to set the exercise price of stock options and to determine the amount of income that must be included in an employee’s taxable income when certain types of deferred compensation are paid. Startups should hire an outside, qualified firm to conduct the valuation and to produce a report that will pass muster with the IRS.
While both an ASC 718 valuation and a 409A valuation involve determining the fair value of equity awards, they serve different purposes and are governed by different rules. So you can’t just produce one and then reduce the cost! An ASC 718 valuation is used for accounting and financial reporting purposes, while a 409A valuation is used for tax purposes.
A CPA Firm Specialized in Startup Accounting & Finance
Startups are our niche, and our passion. Our clients have raised over $10 billion in venture capital financing. We are one of only a few outsourced accounting firms that specialize in funded early-stage companies - we only offer financial and tax services to fast growing startups in the Seed, Series A, Series B and Series C stages.
The Right Accounting Partner for Your Startup’s Next Round
We know how to de-risk your startup’s next venture capital round. Our team makes sure you are ready to fly through your next VC’s accounting, HR and tax due diligence. And when you use us as your bookkeeper, we set up and keep up-to-date a due diligence folder so you can get that next round of fundraising.
A Leader in Cloud Accounting Software
Our practice is built on best of breed cloud accounting software like QuickBooks, Xero, Netsuite, Gusto, Zenefits, Expensify, Avalara, Brex iand Bill.com. Technology makes us more efficient, saving our clients money and letting us offer higher value services like FP&A modeling, 409A valuation and venture debt consulting. Startups deserve to work with CPAs using modern software.
Trusted by Top Venture Investors
Top angel investors and VCs refer Kruze because they trust us to give the right advice. Our clients are portfolio companies of top technology and Silicon Valley investors, including Y-Combinator, Kleiner, Sequoia, Khsola, Launch, Techstars and more. With us, your books and taxes are in order when it’s time to raise another round of venture financing.
What types of startups does Kruze Consulting usually work with?
Kruze Consulting works with a variety of funded Delaware C-Corps, but the majority of our companies have secured Seed, Series A, Series B and Series C. We look to partner with our clients, going beyond the typical outsourced accounting relationship and seeking to provide a higher level advisory role. We feel honored to be a part of making the world a better place, even if it’s one debit and credit at a time.
Accounting, Finance, Taxes, & Payroll all in one solution
Startup CFO services, startup accounting and bookkeeping services, startup annual taxes, expense reports, payroll, benefits: we've got you covered. Our software provides custom tailored dashboards that can be provided weekly or monthly, depending on your preference and plan. Founders are often so busy building their company that they don’t have time to take care of their finances. Traditionally, these companies have had to work with a basket of people to get their work done, including bookkeepers, accountants, AP clerks, CFOs, consultants, and tax accountants. At Kruze Consulting, our founders have one point person, saving time and money.
We're huge fans of Vanessa and the folks at Kruze Consulting. They set up our books, finances, and other operations, and are constantly organized and on top of things. As a startup, you have to focus on your product and customers, and Kruze takes care of everything else (which is a massive sigh of relief). I highly highly highly recommend working with Vanessa and her team.
Co-Founder @ Superhuman
As a startup, moving quickly is a top priority for us and we just needed to get our tax return done. After we uploaded our docs, we got our tax return in 3 days! E-filing was confirmed by Day 4. Super responsive and helpful!
VP, Operations of Calm.com
Avochato has been growing rapidly in the past year – in fact, too quickly for us to keep up with books, taxes, and budgeting for growth. Partnering with Kruze Consulting has been fantastic to manage, track, and analyze our finances while we continue focusing on building our customer base. Kruze’s team knows what startups need.
Alex De Simone
CEO @ Avochato
Everybody, go to Kruze Consulting. They do a great job. I personally can tell you, they've done a great job for our companies, including Calm.com. I'm sure they’ll do a great job for you.