Startup CXO. Matt Blumberg

agreementsStock option plans and grants signed by employee/companyStock ledger with appropriate signed documentsBoard minutes since inceptionBoard books from the last 12 monthsComplete transaction closing sets (financing rounds and M&As)

       Employee documentsOrganizational chartSigned offer letters and appropriate termination agreementsSigned commission agreementsForm 5500 for 401(k) plansEmployment agreementsBenefit plan contracts

       Intellectual propertyPatents and trademark documentationDomain namesAny licensing agreements

       Financial documents and analysisBank account informationFive years of financial statementsAccounts receivable ledgerAccounts payable ledgerFixed asset listKey metrics historySales pipeline history with relevant segmented win rates and sales cycleRelevant revenue/sales information. For example, if you are a recurring revenue business, you will need to be able to produce month‐to‐month analysis showing starting recurring revenue, revenue added, revenue lost, ending recurring revenue.Historical client count, revenue, and retention rates

       Outside agreementsAll client agreements with understanding of any non‐standard clauses like Most Favored Nation status or marketing restrictionsAll material vendor agreementsAll real estate leasesAll non‐disclosure agreementsAll compliance filings in US and other countries

      Once you assess your status based on the list above, you can begin to use that information to help create several plans. For example, you can create a plan to amend any real missing items in your history. It may be that you don't need to have a copy of that lease that expired five years ago, but if you are missing large segments of current client agreements or Board minutes, you will need to have a plan to address it.

      You can also create a plan on how to build a process going forward so you will not create any new problems, especially around storing corporate, employee, client, and compliance agreements. When you are going to be in a transaction, you will receive from the other party's lawyer a long list of disclosure requests. You can imagine that you are going to have to organize a bunch of folders in a data room for all appropriate parties to review. How quickly will you be able to do that? What are going to be the big problem areas? Having this thought of well before a transaction and partnering with other team leaders will help you avoid a lot of future stress.

Chapter 11 Using External Counsel

      Even when you end up hiring in‐house lawyers, there are a few areas where you will still use external counsel. These areas include real estate, intellectual property, litigation, and transactions. There are a lot of critical clauses in your assorted corporate agreements that you'll want an experienced advisor to help with—either in creating them or in helping you understand their impact on the company. There are a couple of useful things to keep in mind when using external counsel for a transaction.

      First, before you even think of contacting outside counsel, have an outline of all of the tasks and responsibilities that you want them to analyze or review. Lawyers, for all of their experience and intelligence, can be a bit reactive when it comes to a mountain of work that is under a deadline. Especially during a transaction, a law firm will often involve many partners, associates, and paralegals to get the transaction done in a timely fashion. By creating a project plan at the very beginning you will at the very least have some sort of transparency around the tasks and timeline. If this is your first time on a topic, the process may be a bit iterative with your counsel, but they should be able to quickly work with you on the key pieces.

Second, send over your detailed outline and project plan to your outside counsel so that they can provide you an estimate on the total fees for the transaction or at least give you a heads up when the fees reach a certain number. You don't want the shock of opening up an email and seeing a six‐figure bill when you were expecting something in the low five‐figure range. An estimate is helpful not only for your legal accrual on your financials but helps provide transparency and avoids nasty surprises.

      If you have an in‐house counsel, it is a good idea to bring them along for the ride whenever possible. Because the CFO is often directly involved and is managing the external counsel, the internal counsel may miss out on some opportunities to learn about transactions, or on contributing their financial knowledge.

      For some deals, venture capitalists will put in the term sheet that the company will have to pay their legal fees as well. If you have to agree to this, I would suggest instead that you work with investors to see if they're open to the idea of capping the amount you will pay. Of course, this cap will be the exact amount you will end up covering. But at least it's a known number that you can budget for.

      Overall, keep your external counsel relationship in perspective. They are there to provide legal advice and leverage their deep experience and expertise to help you make good decisions. But the decisions are yours, you have the final say.

Chapter 12 Operational Accounting

      During the startup journey, establishing a scalable accounting back office will pay dividends later on. It's a lot easier to create an accounting back office early and modify it as you grow than find yourself scrambling to put something together under a tight deadline. An alternative to doing all the work yourself is to outsource some standard tasks, and many firms outsource bookkeeping, for example, but keep other activities in‐house. The benefit of this plan is that (1) you will not need to focus on basic vendor payments, expense logging, and revenue recognition, and (2) the third‐party company will typically set up a default chart of accounts and expense tagging approach that makes the most sense for your type of business. But there are few areas you want to keep an eye on even in the early days.

Early on, you will likely use a lightweight accounting system, especially if you're using a third‐party bookkeeper. During the onboarding of the bookkeeper, you will want to cover a few areas, most notably the chart of accounts. Review the chart of accounts to make sure you have the appropriate detail in them in order to do your required financial reporting. A useful process is to lay out what you would like your income statement and balance sheet to look like and ask yourself what questions you will need to answer. For example, how will revenue need to be broken out? Each journal entry needs proper support ideally attached to the entry in the system, or stored in a systematic way. Account reconciliations need to be performed regularly and reviewed, and documented. Those two simple things will make the audit so much easier so you're not scrambling to figure out “wait, why did we book this, what does this tie to?” And then from there you can get more advanced on what the audits/diligences need. You'll want to make sure you have accounted for things like subscription revenue, setup revenue, service revenue, transaction revenue, and any other revenue streams you might have. As the business scales, the analysis will require that sort of segmentation of the economics. On the cost side you may want to consider how to break out accounts like Marketing which might have advertising, brand, and digital components you'd like to track separately. Other areas to think about might include legal costs, and you could track transactions, intellectual property, contracts, or litigation. On the balance sheet, I'd suggest keeping it simple early on but make sure you have enough detail on your more important accounts.

      Once you have a good sense of the accounts, you'll next need to consider the dimensions. For example, do you want to have a dimension for product and region? It is helpful to have the dimensions thought out as these will enable you to keep a scalable chart of accounts as you add new products to the business.

      A second thing to organize within operational accounting are system integrations and even the earliest setups will need some integration with their financial system. The most common system integrations that startups will have to deal with are travel and expense (T&E) software and billing software. It is worth spending some time early on making the integrations work as it will save time with the accounting close as well as give you accurate and timely information. I'd also suggest creating custom tags in your expense software that match up with your accounting system and chart of accounts. Also, if you are going to be charging sales tax, it's super helpful to integrate it early on with other systems.

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