We sometimes see founders booking equity fundraises, such as preferred equity, SAFE notes, and convertible equity, inappropriately, specifically when booking it as revenue. Last week, when reviewing a founder’s income statement for a quote, Kruze’s Chief Operating Officer, Scott Orn, noticed a glaringly significant amount of revenue for a three-person company. It turns out, the founder had booked the entirety of his seed equity in revenue, meaning he was going to show a profit, and the startup would have to pay taxes on the reported revenue! That is pretty bad - you don’t want to pay income taxes when you are actually losing money. Founders should always make sure their equity, whether it is preferred, common, SAFE notes, or convertible debt, goes on their balance sheet. Not doing so could become a shockingly expensive mistake to make.
💡 Founder Tip: Equity Goes in the Balance Sheet!
Procrastination is completely natural. Everyone gets busy and leans into the temptation of putting something off until it needs to be done. However, when it comes to bookkeeping, procrastination can be hurtful to your startup, specifically when you need to produce reports for your board or your Venture Capitalist investors in a timely manner. A startup founder who is prone to procrastinate might rush the process resulting in avoidable mistakes. When investors ask for reports, it becomes you against the clock, especially when prospective investors would like to see your financials as soon as possible. This issue is bigger than the report. Prospective investors want to see your startup’s professionalism and organizational skills because it directly impacts your valuation. An easy way to stand out from the crowd is to stay on top of your books and avoid procrastination.
Additionally, we recommend updating and maintaining your books on a monthly basis. This ensures sound estimates and favorable visibility on your burn rate and expenses. For example, Kruze Consulting has seen founders who do their own bookkeeping often choose to maintain and update their books every three to four months, during which they will have made a significant amount of new hires causing their burn rate to go through the roof. Because they failed to do their bookkeeping in a timely manner and did not realize their cash runway was shrinking, Venture Capitalists became wary of continuing their relationship with the founders, often showing them the door at their own startup. This is why it is necessary to maintain your books in a timely manner and examine your burn rate and expenses every month.
💡 Founder Tip: Update Your Books on a Monthly Basis!
Booking expenses when cash comes in or out can lead to bumpy financials, making it hard to see how your startup is performing on a monthly basis. This is why GAAP (Generally Accepted Accounting Principles) requires accrual-based accounting for expenses and revenue. Startups need to recognize their revenue and expenses in the time period they were incurred. We see issues with revenue recognition with SaaS accounting, for example - even though a customer pays you upfront for a 12 months service, you only recognize revenue on a pro-rata basis over that year. Solely utilizing cash-based accounting can lead to procrastinating on paying your bills every month. Suddenly, you’re paying a stack of bills at one time, skyrocketing your burn rate in the third month, and shortening your time horizon on your burn rate. This appears peculiar to investors who are trying to get a steady read on your company. Ultimately, it is vital you use accrual-based accounting. It is labor-intensive, but doing so follows GAAP protocols and makes it easier to get correct diagnostics on your business.
💡 Founder Tip: Use Accrual-Based Accounting!
It is easy to feel as if Excel is the best software no one is talking about. Ask our COO, Scott Orn, who began using the software for investment banking when he was twenty-one years old. Excel presents as an easily accessible software; however, we do not recommend using it to do your accounting. Rather, we recommend QuickBooks. It’s a bulletproof, SaaS solution built in the cloud and set up to do accounting easily and correctly. Founders can do bank imports through Quickbooks, which is important if you become a client of Kruze Consulting because we go back historically and put everything into QuickBooks. You might as well do it yourself prior to hiring an accounting firm because it will most likely become a necessary step in the process as your business grows. And, because the software is fully integrated, it also makes it simple to compare bank statements against what is in QuickBooks and recognize what may be off-kilter. Whereas, inputting transactions into Excel opens the door for errors and an unprofessional perception for investors. Learn more about why QuickBooks online is the best bookkeeping software for startups.
💡 Founder Tip: Get Started with QuickBooks Right Away!
Oftentimes, founders are not taking advantage of payroll integrations such as Rippling, Gusto, and Justworks. If you use Excel or do the bookkeeping by hand, you are going to end up doing much more work than you need to do. Quickbooks has excellent payroll integrations. Payroll integrations like Gusto streamline your accounting processes, seamlessly integrate with leading accounting services, and serve as an employee time tracking software. As a founder, your time is better spent allowing SaaS tools to work for you.
💡 Founder Tip: Payroll Integrations Promote Productivity!
Sometimes, founders accrue for taxes and wages they are not paying themselves and want to show it on the profit and loss statement. In actuality, they should be booking it as a liability on their balance sheet. When tax season arrives, you are not allowed to write them off as a tax deduction. It is essentially phantom money, and the IRS will not recognize it. This common mistake has real-world ramifications. Your startup’s taxes will be incorrect, especially if you’re a profitable company. It is akin to committing fraud.
💡 Founder Tip: Book Deferred Wages as a Liability!
Contractors can be disorganized and bill you multiple times for the same amount of work. Other times, you may pay a contractor, they lose track of their own accounting, think they didn’t get paid, and pressure you to pay them again. If you do not have enough eyes on your accounting processes, you may end up paying the contractor again, ultimately losing money. Double-paying contractors is an easy mistake to avoid. Accounting firms like Kruze Consulting are here for that purpose - to save money from funneling out of your business. If you don’t yet have the money for an accounting firm, make sure you are triple-checking how and when you pay your contractors so you can avoid double-paying them.
💡 Founder Tip: Keep Multiple Eyes on your Financials!
More often than not, we see businesses who are not collecting on their invoices, not invoicing on time, and/or not invoicing at all. This is a major issue if you are doing the accounting yourself or have a bad accounting firm working for you because invoicing and collections can be a pain. When you invoice incorrectly or invoice two to three months too late, it can make your customers upset. They want to be invoiced on time because a late invoice can throw off their burn rates. Another issue could be forgetting to collect money that belongs to your business. We see this most often with companies coming over from poor accounting firms; they forget to collect on a $20,000 invoice or a $100,000 invoice. It sounds impossible, but we see it all the time. We also have seen invoices in draft form that were never sent and never collected. While these types of mistakes are accidental, they are usually indicative of a business that is overwhelmed by doing their own books.
💡 Founder Tip: Stay on Top of your Invoices!
It is imperative you do an annual 409A Valuation in order to issue stock options. Some founders are unaware that they need to do 409A Valuations annually and end up doing them late causing their 409A Valuations to be outdated. It’s a simple mistake that can be mitigated with an informed advisor like Kruze Consulting. If you don’t yet have an accounting firm, make sure you do your 409A Valuations on time every year.
💡 Founder Tip: Complete 409A Valuations Annually!
You didn’t make any money this year. You actually lost money. That means you don’t have to file taxes, right? Not so fast. Whether you didn’t make any money this year or you lost money, you still have to file your taxes. When working with a fully integrated bookkeeping and tax firm like Kruze Consulting, we make sure to remind you of this. We can even do the tax return for you! However, if you’re doing your own bookkeeping, please remember to always do your taxes, even if you lost money that year.
💡 Founder Tip: Always File Taxes - Even If You Lost Money!
Delaware Franchise Tax defaults you to a surprisingly high number when you pay via their website. We field multiple calls a year from startups worried that they owe $40,000 to $80,000 towards their Delaware Franchise Tax. It is rarely ever the case that a business would owe such an exorbitant amount of money towards their Delaware Franchise Tax. Rather, this mistake is due to inputting the incorrect share count and asset information on the Delaware website. It’s as easy to make this mistake as it is to fix it. Enter the correct share count and asset information to their website, click the recalculate button, and you’ll see this issue dissipate immediately. Most likely, you owe anywhere from $400 to $3,000. If you haven’t yet raised a substantial amount of money, the amount you owe is going to be nominal. Delaware’s website defaults founders into large numbers when errors are made. Kruze has seen companies pay the $40,000 to $80,000 and call us afterwit, frustrated and pained. We have been able to get their money back, but it is a stressful and tiring process that can create unnecessary issues for the founders.
💡 Founder Tip: Avoid Overpaying Delaware Franchise Taxes!
When founders do their own books, we often see them farming out their tax compliance. They have their lawyers attempting to do Delaware Franchise Tax and their local, small-town CPA doing their tax return. Due to experience (or lack thereof), the CPA inadvertently leaves out the R&D Tax Credit. They also may forget to do the California Franchise Tax or the New York Annual Filing or the Massachusetts Annual Filing or the Texas Annual Filing. They may even leave out city filings. Please avoid this! We highly recommend having your taxes done by one person or one group who holds expertise in the subject and understands the nuances of tax compliance through and through. This will be beneficial to your startup long-term. If cash is tight and you are doing your own bookkeeping, beware. These mistakes can be quite common.
💡 Founder Tip: Prioritize Expertise in your Tax Compliance!
If you’re tired of doing your own bookkeeping or want to buy back a few hours out of your week, talk with us. Kruze Consulting is here for you. We will not judge your startup if you’ve made some of these mistakes in the past. We see it all the time. However, we will correct every mistake and get you back on track!
At Kruze Consulting, we are in your corner to make your life easier so you can concentrate on scaling your business and innovating in your field.
Our clients have secured over five billion dollars in seed and venture funding; close to a billion in the past year alone. Top tier VCs trust our clients’ books, and Kruze knows how to prepare startups’ financials for VC due diligence. Our clients know that they’ll be ready for their next round.
On average, one to two of our clients are acquired every month. Our team has experience producing accounting and tax due diligence requests for the biggest public companies. Every month we help founders navigate the most important transaction of their life.
Right now, our clients are saving almost $10 million in cash expenses from our R&D tax credit work. Our startup tax experts know how to help startups navigate taxes to reduce their burn. Hundreds of funded startups trust Kruze to deliver the right advice, on time, at a reasonable price.
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