In my consulting practice, I meet with experts in various aspects of startup strategy and operations. One area that occupies a significant amount of time for founders is preparing for a series raise. You’ll need increasingly robust financial documentation when taking your company from Angel to Series rounds, and this is often a point on which founders struggle. To help my readers address this gap in a series raise, I interviewed Hannah Franklin, Director, for her advice on common problems and how to avoid them. Hannah is a licensed CPA in Washington and California and one of the audit practice leaders for Armanino in Bellevue.

Hannah, please introduce yourself and tell us how you got to now in your career.

“I fell in love with chemistry from a young age, with Marie Curie as my inspiration. During my undergraduate education, I worked in multiple research labs and interned at Johnson Space Center. As I looked towards graduation, I considered a variety of career paths and ultimately decided to get my Master in Professional Accounting and become a CPA. This career path has allowed me to combine my passion for technical and quantitative work with real-world impact for business owners and the community. A significant amount of my practice revolves around startups and working with their founders in my role as Director at Armanino.”

In your CPA role, what do you do for your customers?

“As an auditor, I usually make initial contact with startups as they look to raise their Series A or B round. At this point in their lifecycle, there’s often additional complexity in funding (either debt or equity) and they may have audit requirements imposed by lenders or investors. There is a lot of education involved in an initial audit on both sides; I want to make sure my clients understand the audit process and are collaborating with our team to make it as efficient as possible, and I want to make sure the team understands the business, which allows us to better align with long-term goals.”

What are the top two or three problems you see at life science startups?

“Several issues usually arise during an initial audit of a startup. One of the biggest causes of delays in the audit is a poorly supported cap table, closely followed by improper accounting for complex debt and equity transactions like SAFE notes, convertible debt, mezzanine equity, and stock compensation, among others. Less complex transactions can also cause difficulties, especially accruals for expenses such as compensation, R&D, and firm purchase commitments for inventory and machinery. Finally, revenue recognition and contracts with customers is always a high-risk area.”

How can founders avoid these problems before they start?

“Accounting issues are always easier to solve when the underlying transactions are well documented. This documentation should include names, dates, and all other specifics and should ideally be created contemporaneously with the transaction. Specific to the cap table, it’s worthwhile to invest in a software solution that will help maintain a (digital) paper trail, generate accurate reporting, and automate certain tasks like calculation of stock compensation. When it comes to accruals, the first and most important step is ensuring that you understand what the entity’s total exposure is. Then, you can work on building out estimates specific to each accrual. Contracts with customers should be addressed proactively, as terms and conditions within can accelerate or delay revenue recognition. In general, lenders and investors want to see stable, predictable revenue – contract structure can help achieve this. Contracts should also be standardized as much as possible, and all agreements documented in writing. This helps streamline the process of recording revenue and supports any diligence efforts by lenders or investors.”

What is an underutilized resource you think we should know about?

“Your peers are hands down the best resource. No one will understand the unique struggles of a founder like another founder! Getting involved with organizations such as the Evergreen Bioscience Innovation Cluster is a great way to get plugged into the local startup ecosystem. There is also a wealth of free or low-cost resources online specific to different issues (accounting, finance, payroll/HR, legal, etc.). Just make sure you vet the source before relying upon anything that you find via Google or ChatGPT. Finally, many service providers are happy to have initial conversations or offer second opinions free of charge. As you build your professional network, keep in touch with CPAs, attorneys, and others who can provide specialized knowledge.”

In this article, Hannah Franklin offers some excellent advice on preparing for a series raise. If you want to discuss a pre-raise financial statement audit with her, she can be reached at Hannah.Franklin@armanino.com. 

Be sure to let me know who you would like me to interview for the next installment of this series!

Additional Reading

• Read Part I on dilutive funding here.
• Read Part II on dilutive funding here.
• Read Part I of my non-dilutive funding series here.
• Read Part II of the non-dilutive funding series here.

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Please feel free to contact Katrina at any time!