You do not amortize the costs of raising equity. When raising equity funding, the legal and other direct costs associated with an equity fund raise should be capitalized and netted against the equity sections’ Additional Paid in Capital account. Accounting for Capital Raising - Early-stage startup FAQ’s What is the accounting treatment for capital raising costs? It’ll take your accountants some time and will cost you $$$ (we’re happy to do the work if you’re happy to pay, but we also want to be hyper cognizant of cost/benefit relationships), but if it’s what the investors want, give the investors what they want. Once you clear Series D, or your investors want to see APIC, or if your auditors demand it… then calculate APIC. Why do investors prefer to see the Equity section this way?īecause it’s easily recognizable to them and is cost effective. The lesson being is that you should check with your cap table, founders, lawyers and accountants about any potential overlap of funding and place the funds according to the prescribed funding rounds. So in Real Life, the Balance Sheet tends to look like the picture below. But we all know that there are always some early jumpers and laggards, and some funding rounds that last many quarters and other instances where a Series B hits just 6 months after a Series A. The picture above shows you what the Balance Sheet would look like in a Perfect World, ie all investors deposit their funds within a short window. I grayed out the numbers to show that the account essentially remains dormant once the round is closed. New funds are placed in a new fundraising Equity account. Notice that once fundraising round is closed, new funds aren’t added to it. If you haven’t really calculated APIC, don’t include it on your Balance Sheet because it give the impression that you’ve calculated the (Issue Price – Par Value) * Basic Shares Outstanding. Series B: Angel and VC funding (Less Series B Financing Costs).Series A: Angel and VC funding (Less Series A Financing Costs).Seed Series: Angel and VC funding (Less Seed Series Financing Costs).Common Stock: Common Stock purchases from the founders and employees still go against Common Stock, no matter which funding round you are in.Record each fundraising round as a new Equity account and net the Financing Costs against it, as seen below. How Investors Prefer to See the Equity Section: On the off chance that your startup raises debt, those costs would be amortized, generally based on the length of the loan. There is no need to amortize this permanent equity cost. GAAP accounting for the cost of raising capitalĪ note on recording the legal fees associated with the fundraise (and heavens knows that it costs serious legal $$ these days to raise VC funding): legal and other DIRECT costs associated with an equity fund raise should be capitalized and netted against APIC. But what about startups who are Seed, Series A-D? Calculating APIC is time consuming and costly… and has very little value to the management team or investors at this stage. For big public companies, calculating APIC is relatively easy to do: they have big accounting departments that can easily pull market/issue price, the par value and the Basic Shares Outstanding. Financing Costs are netted against this account. Additional Paid in Capital (APIC): calculated as the (Issue Price – Par Value) * Basic Shares Outstanding.Preferred Stock: most often this is the VCs and Angel Investors purchasing stock: should the company go belly up, their ownership is preferred and they’ll get their money back before Common Stockholders do.Common Stock: most often this is employees and founders purchasing stock, then the general public once the company goes IPO.So technically you’re supposed to report the Equity section in 3 accounts:
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