What Tech Startups Need to Consider
Over the last few years, the technology sector has enjoyed substantial growth. As tech companies open shop and begin to grow, there are several important items to keep in mind to ensure these startup technology companies have everything they need to succeed. Some important items to consider are listed below.
Proper entity selection is a critical first step in a tech company’s life cycle. It sets the stage for future financing and tax implications for founders and employees. Choosing between an LLC, C-Corp or S-Corp structure should be carefully considered with both short-/long-term goals in mind. Bringing your attorney and accountant into the fold early is extremely important to arriving at the correct selection.
Compensation in the form of stock options is typical in the tech industry. A common mistake that companies make is failing to obtain a third-party valuation (or “409A valuations,” named after Internal Revenue Code 409A) to substantiate the strike price used when issuing options to employees that will protect both the Company and the employees should the IRS review the option plan. Companies should update this valuation annually if they are actively issuing options.
Tech companies often turn to PEOs (Professional Employer Organizations) to streamline the payroll process. A PEO is a third-party payroll provider that, unlike typical payroll providers, pays your employees directly (under the PEO’s name), then issues an invoice for the total cost of the payment. PEOs provide one stop shopping with bundled payroll, health insurance services and myriad other benefits.
The services provided by tech companies have to be examined closely for state sales and income tax exposures. Management needs to determine what states the company should be filing in and whether or not the company’s goods/services are subject to sales tax. Many of the revenue activities of tech companies give rise to complexities in sourcing revenue and should be addressed early in the business’ life cycle to prevent unfavorable tax repercussions in the future.
There are a number of federal, state and local tax credits that are specifically geared towards tech companies. Company founders should talk to their accountants about what credits are available in the states where they operate or surrounding states. It is not uncommon for some of these credits to result in refunds even if there is no tax liability, which can certainly help with cash flow.
Budgets and forecasts are essential to the business plans of tech companies. Proper forecasts provide indicators for the right time to plan for additional venture or debt financing. Failure to properly plan for cash shortfalls can put companies in a stressed position and result in lower valuations from outside investors. A forecast format should be addressed early on and constantly reassessed to ensure that is it properly reflecting the state of the company.
Online accounting applications have proven to be invaluable resources to new companies as they are affordable solutions which provide 24/7 access for both management and investors. Founders should consider using cloud-based solutions for their accounting software as centralized and easily accessible records are critical to staying organized and transparent in a quickly evolving company.
This was written by Melissa Crowe, CPA from our Morristown, NJ office and originally appeared in the Summer 2014 issue of the WithumSmith+Brown, PC Journal.
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