Sarbanes-Oxley and Startups
June 6, 2005 by Booway Balhaajav
It looks like the Sarbanes-Oxley Act (2002) will affect not only the large and public corporations, but also the small, private firms, especially those with VC investments.
The FASB (Financial Accounting Standards Board) has recently mandated that public AND private companies start deducting the value of employee stock options from their profits. Compliance for the private firms is to begin on December 15, six months after the public firms. According to the National Venture Capital Association, calculating the value of options will be so costly and time-consuming that many private firms will forgo them to their detriment. This would be unfortunate, since for many startups, “stock options help motivate founders and managers as they try to build new businesses,” says Jim Breyer, former chairman of the NVCA (March 2005) and a managing partner with Accel Partners, a leading VC firm. The NVCA has turned to the U.S. Congress to step in and alter the FASB rule before it takes effect later this year.
If you don’t have time to read the whole Sarbanes-Oxley Act, this S-O summary covers many of the significant issues. For those seeking VC funding, make sure to also check out the “Venture Capital’s Comeback” article, recently published in the HBS Alumni Bulletin.
