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Question posed on Linked in:

Assuming an online start-up company is looking to raise capital from VC, already has funding from Series A, plans to launch services over the web in January 2009, and will have a burn rate that will get them through May 2009 with current funding...when might one consider hiring a part time CFO to help prepare for the Series B raise of Venture Capital? Series B must close no later than May. Can anyone suggest considerations specific to contract terms, and hourly rate ranges?

It was interesting to see several responses with rates in the $50 to $150 per hour range, without consideration of what the CFO would actually be doing.  This range would include bookkeepers at the low end, and inexperienced accountants and CPA’s at the high range. The difficulty in raising capital should never be underestimated. Having someone who has raised capital in the past, and who can help provide credibility in the eyes of potential investors will not fit in this range. The range in my response assumed that the company was intending to be serious about their effort to raise capital.

Here was my response to the question:

I would suggest that if you need funding to close by May of 2009, you should contract with a CFO in the next month or two. Part of the timing depends on the condition of your accounting and corporate records, and how clean you are as it relates to providing due diligence materials. If your A round was to sophisticated investors, you may have already gone through due diligence and this will not be a problem.

The quality of your A round investors could also have an impact on the timing for your B round. If you already have connections with Venture funds, this will speed up the process.

If your burn rate takes you through May, you better target closing the next round in March or April. Working backwards from that timing, you need to be presenting no later than January. Nov or Dec would be better, but getting appointments in that time frame are harder to do because of holiday vacations.

A good CFO will be able to work with you on your models and ensure that they are in conformance with GAAP accounting (as it relates to P&L and Balance Sheet projections) and that cash flow projections are consistent with the GAAP model. The better these models are put together and supported, the quicker you can get through the due diligence process.

As to rates, you should expect to pay between $200 and $300 per hour, depending on level of expertise. Some CFO's may charge less, but you need to ensure they have the proper background - not just CFO experience, but experience in your industry and working with VC's and other institutional investors.

Contract terms are usually flexible, and can be on an as-needed basis, to a commitment of X number of hours per week. In either case, you need to get a commitment that they will be available when you are doing the "road show" and when responding to due diligence requests.

Having gone through the search for funding both for my own companies and as an outside advisor, closing a round never happens as fast as you expect it to. This is true even after you get a solid term sheet. It is better to raise the capital a little early, than to run short of cash.

There was a recent survey done for the Seattle Tech startup community asking if they had bookkeepers they would recommend, and what hourly rates these people charged.

I was very curious as to how this list would be categorized – although I actually expected that it would not be. This type of survey and list doesn’t do justice to accountants or the accounting profession.

Obviously (at least to us accountants), there are differences between bookkeepers, accountants, and CPA's. Each adds a certain level of value, for which there would be a price difference. To me, if you just had a list of individuals and firms with a price quote, it wouldn't reflect what they really do.
 
As a corollary, if I wanted to make a list of developers and showed what they charged, I might see a list with names and rates, without knowing what they do. The list would mix web developers, application developers, front-end, back-end, middle tier, architects, leads, etc. If I wanted a business application built that I could rely on for reliability and accuracy, I wouldn’t go to a generic list of developers and choose a developer based on a rate per hour. If I did so and went for someone at the lower end of the rate per hour scale, I would probably end up with an inexperienced web developer that may or may not be able to build a more complex application. And even if this was possible, would I have confidence that I could rely on the application that was built?
 
This may have already been taken into account when the list was developed.  However, it was interesting to me when we first decided to launch our accounting services firm and did a limited sampling of rates being charged. We found the range to be very wide, from $20 per hour to more than $75 per hour for the most basic of bookkeeping, with most being between $50 and $65. For those that I talked to under $50, they were rarely "accountants" and didn't know many of the accounting rules, and rarely, if at all, maintained their clients accounting records using full accrual accounting.
 
When you compare an individual's rate, to a rate that a "firm" would charge, the individual's rate will almost always be lower. There are several reasons for this, but generally it is due to the oversight of the bookkeeper. Any bookkeeper can post transactions, write checks, record payroll, and print off the financial statements. However, if they are a sole practitioner, there is no one to review their work, or help them with accounting questions (if they know enough to ask). At a firm, these same level of bookkeepers have all of their work reviewed before it goes out the door, and they have controller and cfo level people to ask accounting related questions. So as a comparison, a sole practitioner may charge $50 per hour for their work, while a "firm" bookkeeper might be at $65. What you get for your $65 is actually a part-time controller or cfo without having to pay for their time.

I gave a presentation at the Seattle Technology Startup meeting regarding accounting issues for early stage companies. Attached is the PowerPoint presentation I used.

Download Presentation: start-ups.ppt

You are the primary owner or CEO of a company and you have been approached to discuss a potential merger or acquisition. What should you expect and how should you approach the initial meeting.

While I was at Ascentium I approached more than 20 companies to see if there was a fit or opportunity to acquire them. The first meetings were generally to get a high level understanding of what they were doing, to assess the technical capabilities of their management team (at least the ones that we were meeting), to get a general idea of their culture and long range plans, and to build a vision of how they might fit with us if they decided to join us. We always tried to get them excited about the advantages of joining us and if the meeting seemed to go well, set up follow up meetings to flesh out more of the details.
 
Additional things to consider in this first meeting:
 
Start with the signing of a Non Disclosure Agreement. They should already have provided you with this form. If you don't have one, send me an email and I can send you a template.
 
Get a feel for their culture and values. What is important to them? Are they technology centric, or do they put more value on employees and customers? Does this match with your culture?
 
Does what you are doing seem to fit in with their company? Are they putting something together quickly to build toward an exit, or are they trying to build a lasting company.
 
Since they are approaching you, feel free to ask them just about anything. The honesty or openness of their answers can tell you a lot about them.

Don't talk valuation or "ideal" exit numbers at all at this meeting. Often times what you may say will form the basis for an offer if they believe it is below the true valuation of your company (their opinion of course).
 
If the meeting seems to go well, then is the time to set up a next meeting to go more into details. This is where you should be coached by your attorney and accountant as to structuring, valuation, risks, etc.

A recent post on the STS mail list asked the question whether an LLC or an S Corp would be a better corporate structure from a tax view. Various concerns were expressed regarding the taxation of S Corps and that the tax liabilities flowed through to the shareholders via their K-1’s. Also, if a company had “paper profits”, it is possible there would not be cash available to distribute to the shareholders to allow them to pay their taxes.

Here are some things to think about. There certainly is some truth to the payment of tax issue under an S corp. Since you are personally taxed on the "profit" of the company, you will need to pay the taxes whether the company distributed cash or not. However, this is generally true for LLC's as well. Most LLC's are setup for pass-through to the members, very similar to partnerships and S corps.
 
As to the situation where taxes were owed for one year from an S Corp, and then it went out of business the next year, presumably there would be losses in the second year that would pass through and could be used to offset the previous income.
 
In most well run S Corps and LLC's, the company commits to its shareholders and members that it will distribute a minimum of 30% to 35% of its profits each year to cover the shareholder's taxes. When negotiating financing agreements with banks and or other institutional lenders, be sure that the covenants are written in such a way as to allow for shareholder distributions to cover taxes. In all of the financings that I have done, I have been able to allow for distributions of up to 50% of profits, before I needed to get approval from the banks.
 
As to which entity is the best for a certain type of business, you will rarely get the same answer from two attorneys or two accountants. In general, if the intent is to remain closely held, we give more recommendations to use an LLC than most other types of entities.
 
S Corps are very simple structures, whereby the profits and losses flow through pro-rata to the shareholders. These are decent vehicles if a company will have only a few shareholders. Many service companies are set up as S Corps. The down side is that you are limited to 75 shareholders, none of which can be a corporation. In addition, S Corps can only have one class of stock, which would rule out preferred stock, and most outside investment. However, if outside investment is required, it is very easy to convert an S Corp into a C Corp.
 
LLC's are generally pass-through entities, similar to partnerships and S Corps. The advantages of LLC's are that you can have multiple classes of stock that would allow for outside investment, and you can allocate profits and losses on a basis other than pro-rata to the ownership.
 
C Corps are the most understood by outside investors, and are most commonly used by Start-ups that intend to look for venture funding in the near future. Since the taxes are calculated and owed at the corporate level, there is no direct impact on the shareholders. However, when "after-tax-profits" are distributed to the shareholders, it is in the form of dividends, which are again taxed at the personal level (currently at 15%). This is what is referred to as the double taxation of C Corps.
 
Finally,  it is more complex to convert from a C Corp to an S Corp. It can be done, but there are inherent tax issues which require the help of tax accountants and lawyers, and leave baggage in the S Corp that a future buyer would have to deal with.
 
This is very high level. There is more to consider when making the final decision as to which entity to incorporate as, but hopefully this will help.