July 13, 2017 SDEE Workshop: Financial Operations for Startups
By Jared C. Hooks, PhD, Science Communicator
Imagine constructing a building. Not just any building but something sleek, modern and with enough amenities to make Google nod their head in appreciation. You toil away, getting investors lined up, commissioning special pieces of art to achieve that perfect image and atmosphere. You even make sure to have a room dedicated to those nifty napping pods everyone has been talking about. As you finally wrap up construction and populate it with good talent, something seems amiss. Every time someone flushes a toilet on the third floor, the sinks start running in the kitchen. Cheryl keeps flipping a light switch that doesn’t seem to do anything while Frank is having a heart-attack because the power to his office is cutting in and out. For all your effort, all that you envisioned and created, you overlooked the wiring and the pipes. It seemed like such a simple thing that you could worry about later, didn’t it?
Well, that’s what accounting and finance practices are to startups: the wiring and the pipes. It runs throughout your business from the first dollars that go into it until you’re ready for an IPO or fielding an acquisition. And if you neglect it, well… good luck getting to those latter stages. To help entrepreneurs navigate this, SDEE brought in a great group of financial consultants with experience in guiding startups from beginning to end. They tackled many topics throughout the session, but here I want to summarize the best pieces of advice from each of our speakers.
Lisa Mead is a CPA who works predominantly with life science companies and is the president of Mead Consulting Group. As the workshop began, Lisa spoke about what is alluded to above, “…choices you might innocently make now can have major consequences three years down the road, or five years down the road as your company matures.” The example that prompted this comment is how the company is initially structured as a legal entity. What an entrepreneur might consider the best avenue for structuring their business in the beginning could cause significant hurdles in both the complexity of assigning equity and limitations on who may possess equity (e.g. who may be considered eligible to be a stock holder). For most situations, a corporate form will be the easiest and most flexible for an entrepreneur.
Jeff A. Kieckhafer is a partner with Kieckhafer Schiffer & Company who specializes in income tax assistance with companies. It comes as no surprise then that Jeff spoke about what should be considered and avoided when thinking of tax opportunities. Regarding equity compensation, a commonly missed tax break is what is called an 83b election, which deals with taxation on granted stock (not options) that’s vested over time. For an example of how an 83b election works, let’s say a startup company hires their first employee as a chief officer and decides to grant them stock. That stock is vested over 4 years starting on the 1st year. Each time those stocks are vested it’s considered compensation and taxes must be paid on the amount the stock is worth. If you file an 83b election with the first 30 days of those stocks being granted (not vested), you pay tax only on what those stocks are worth currently. This would save a considerable amount in taxes considering the company’s stock is moving in the right direction.
In closing, we heard from Jodi Smith, who is also a CPA and life science audit partner with Ernst & Young. As your business grows from a fledgling startup that began with a dream and some elbow grease, to entertaining venture capitalists and becoming ready for an IPO or acquisition offer, startups need to transition from financial consultants to staffing an accounting department. Doing so allows you to ensure VCs that the money they’re investing is being spent properly, and the company grows, it demonstrates the type of strong management at all levels to pursue an IPO or acquisition. Even starting with a CFO provides the company with expertise to monitor financial health and keep accounting operation running smoothly.
Startups don’t have to “wing it” with their accounting and finance practices. Tapping into experts, like those on our workshop panel, can help you optimize resources for different stages of your company and help you plan for success.