Burkland’s fractional CFOs have years of experience leading finance at startups, large companies, consulting firms, and everything in between. They’ve done it, seen it, and lived it, which means our CFOs have a truly incredible wealth of collective knowledge and experience about all things finance. They also stay current on all the latest developments and changes around startup finance and this is shared through Burkland’s CFO Knowledgeshare program. We rely on one another and turn to each other for questions and guidance every day by way of our #CFO slack channel. We thought it would be interesting to look back through 2021 and feature, in no particular order, some of the best Burkland Knowledgeshare moments of the year.
How does an acquisition impact a 409a valuation?
This question was posed in September by one of our most experienced SaaS CFOs. The client, he said, was buying another company for stock and cash. The stock component used the preferred price to calculate the share count, but the stock delivered was common. Does this setup impact the acquiring company’s valuation? Does the client need a new 409a?
Only if it was a material change to the forecast or balance sheet of the acquiring company, one of our CFOs answered. This kicked off a great thread about materiality and the judgment thereof, and how significant the impact of the acquisition might ultimately be on the cap table of the acquiring company.
Another point discussed was the impact on the implied value of the stock. Depending on how many new common shares are issued as part of the deal, 409a values can be pushed up. The consensus? If the new shares are more than 5% of the fully-diluted equity capital of the company, yes, a new 409a should be done.
PPP Funds & EIDL Loan Questions
Much of our knowledgeshare in early 2021 was keenly focused on how to apply, account for, and utilize PPP funds and EIDL loans. Information about these programs was incomplete and fluid at best, even well into 2021, and the official guidance sometimes only made things more confusing. On a near-daily basis in Q1 2021, the CFO team turned to our slack channel to ask questions, compare notes, discuss new information and resources available to our clients. Together we determined the best ways to tackle things like qualified salaries, SBA affiliation rules and forgiveness calculations.
Burkland clients were able to navigate the PPP and EIDL programs better because their individual CFOs tapped into the overall team’s knowledge and experience along the way.
What’s the Best Way to Protect Newly Raised Capital?
One of our CFOs slacked a great question on startup cash management to the group. A client had just closed a $50M+ Series B financing and was now carrying more than $60M cash in the bank. What, she asked, are the best options for founders looking to protect that capital?
Our CFOs often run into this question since we work primarily with early-stage VC-backed startups. Many founders don’t realize that operating account balances at a typical bank are only FDIC-insured up to $250k.
The consensus: A laddered CD program, like CDARs, which fully cover large excess cash balances under FDIC insurance. There’s a small amount of yield available as well, and operating needs are easily managed by rolling maturities out anywhere from 4 to 52 weeks.
Another popular but less effective option: cash management/treasury services from banks and brokerage houses, which combine money market funds with other fixed-income securities (note…these products are not covered by FDIC insurance).
Should Startups Ever Consider ARR Financing Instead of Equity?
“Has anyone ever looked at modern ARR financing solutions to fund growth instead of using equity?”
This was the question posed in our #CFO slack by another of our top SaaS CFOs back in June.
“This isn’t grandpa’s venture debt,” she continued. “This is a new finance/fintech offering that is growing quickly.”
Several of our team had heard of this approach, and the ensuing back and forth was a great example of Knowledgeshare at work. Ultimately, lenders will evaluate a SaaS company’s customer and payments data and underwrite a revolving credit line to spend on user acquisition. It’s not typically a very cheap APR, but in the words of one of our CFOs, “It’s a way to grow and test ARR without spending equity, and it works best with companies with a history of customers and recurring payments.”
Best Practices for Reporting SaaS Contract Churn
Early in the year, the team discussed a question arising from a new SaaS client’s experience with contract renewals.
“This SaaS startup has several large customers and is going through its first year of contract renewals. How exactly should the company report those contracts which have lapsed and those still in negotiation?” This is an issue that every enterprise SaaS business out there eventually encounters.
SaaS contracts can be an expertise unto themselves, and several team members chimed in with valuable insights.
The team’s conversation looked at whether the company should churn the lapsed renewals at the end of the subscription period, or the date on which the company knew it churned. The problem with the former, as several CFOs pointed out, would be restating historical ARR after the month has closed. Better would be the latter – reflect the churn on the date the company knows the renewal negotiations won’t pan out.
Others on the team noted that footnoting the amount of lapsed revenue at the end of each month would be prudent for tracking purposes, and more than a few noted how such a situation could be gamed by a management team that was afraid to report actual churn.
Another CFO chimed into the #cfo channel with a different approach. One of his clients decided to craft a new category named “Lapsed, Pending Renewal,” or LPR, to clearly separate the dollars in the not-yet-renewed bucket and prevent it from skewing ARR. The startup then calls out the category separately in charts.
The examples in this post are just a few of the topics we covered in our Knowledgeshare function during the year. They illustrate how sharing knowledge, experience and best practices is built into the fabric of Burkland’s fractional CFO practice. Our CFOs are constantly learning and growing with each other, which translates directly into more valuable and efficient service for our clients.