An Annual General Meeting (AGM) is a legal requirement for any corporation. For a tech startup with a cap table dominated by Founders and a few investors, the formal "in person" AGM process is generally waived by a legal Board resolution that achieves the same ends. Standard AGM functions include: 1) Board approval of annual financial statements distributed to all shareholders, 2) election of Directors for the upcoming year, 3) To either waive next year's audit, or appoint an accounting firm for the audit. In general, tech startups avoid the cost of an audit until it is imposed by a significant investor or financial institution.

Accounts Payable (AP) is part of accrual accounting. For goods purchased on credit terms, the related expense should be recorded as a "payable" (Dr. expense, Cr. AP) on the date the goods are received. Accrual accounting isolates the recording of expense on the Income Statement from the timing of the related supplier payment. As a supplier is paid (eg. during "batch AP payment" runs twice per month), the AP balance is reversed (read: eliminated) on the Balance Sheet (Dr. AP, Cr. Cash). Note that at the time of supplier payment there is no impact on the Income Statement because the expense was recorded earlier when the AP balance was set up.

Accounts Receivable (AR) is part of accrual accounting. Revenue is recorded as a "receivable" (Dr. AR, Cr. revenue) according to strict GAAP revenue recognition rules (price is known, collection is probable, terms of the sales arrangement are clear, delivery has occured) by issuing a customer invoice. Accrual accounting isolates the recording of revenue on the Income Statement from the timing of the related customer payment / bank deposit. As a customer makes a deposit, the AR balance is reversed (read: eliminated) on the Balance Sheet (Dr. Cash, Cr. AR). Note that at the time of the customer payment there is no impact on the Income Statement because the revenue was recorded earlier when the AR balance was set up.

ARR is generally used in the context of a SaaS business model, and referrs to revenue which recurrs each year (assuming the customer continues to renew) with no additional sales effort. The classic example of a SaaS business model is an annual B3B enterprise software license renewal. Since the cost of providing a new customer with a software license is next to nil, SaaS based software business models can be very profitable if Customer Acquisition Costs (CAC) are modest in comparison to LifeTime Value (LTV) of the recurring customer profit margin. A rough rule of thumb for a successful SaaS business model is LTV > 3x CAC.

The best software choices for a Canadian tech startup are either Xero or QuickBooks Online (QBO). Both are web based, affordable, and offer a wide selection of 3rd party plug-ins for features like dashboard reporting and inventory control. QBO is the 90lb gorilla incumbent in North America. Xero (from New Zealand) is more popular internationally, more powerful (therefore my preference), easier to use (according to surveys), and has the fastest growing user base. These are my opinions offered in the spirit of providing practical guidance to tech startup Founders. There are other valid accounting software options in the market which will do an adequate job. The proper design of a customized GL structure (including segmented revenue and functional expense departments) is more important than the choice of accounting software. On a related theme, it is best to use a web based 3rd party payroll service, and not the payroll service integrated with the accounting software. A 3rd party payroll service is generally cheaper, has better functionality, and provides a natural barrier to keep sensitive payroll data confidential.

Accrual accounting means revenue and expense is recorded when the commitment is made, rather than when the cash payment is made. Accrual accounting requires revenue to be accrued when GAAP revenue recognition criteria are met, triggering the issue of a customer invoice (Dr. AR, Cr. revenue). In a similar manner, expense is accrued as the expense is incurred (Dr. expense, Cr. AP). Accrual accounting isolates the Income Statement from cashflow, which is captured on the Balance Sheet. For example, when customer payments are deposited the entry is Dr. Cash, Cr. AR, causing the customer receivable to be "reversed" to nil. In a similar manner, when supplier payments are made, the equivalent reversing entry is Dr. AP, Cr. Cash. Accrual accounting can be a difficult concept for Founders with no accounting background to grasp, but it is fundamental to GAAP, and it is required by CRA for tax compliance. In contrast, simple "cash accounting" (not allowed by GAAP or CRA) is simple but intuitive logic used at lemonade stands, where revenue = cash in the jar (even if someone created a timing problem by drinking their lemonde the day before, on a promise to pay tomorrow). Reality comes with many revenue and expense timing issues that have to be resolved using accrual accounting. See also items "CF" and "EBITDA".

Accrued Liability accounting is a part of accrual accounting that comes into play when a service has been "consumed" during the month, but the related supplier invoice or receipt is delayed. For month-end expense cutoff to be accurate (especially important at YE and quarter-ends), expenses that are material (have significant $ value) must be recorded in the month the service is performed. In the absence of an invoice being received, this involves accruing an estimate (Dr. expense, Cr. accrued liability) on the last day of the month. Typical accrued services that can be material include legal / accounting fees, consulting fees, and travel expenses like airplane flights and hotel stays. Accurate monthly expense cutoff is the foundation for useful monthly trend reporting on the Income Statement, which is a critical part of transparent management reporting. Accrual accounting isolates the recording of expense on the Income Statement from the timing of the related supplier payment. As a supplier is paid (eg. during a "batch invoice payment" process run twice per month), the accrued liability balance (aka "accrual") is eliminated (or "reversed") on the Balance Sheet (Dr. accrued liability, Cr. Cash). Note that in theory, the timing of service provider payment has no impact on the Income Statement because the expense was recorded earlier when the accrued liability (aka "accrual") was set up. In practice, there is often a small expense correction if the accural estimate was different than the actual expense on the service provider invoice. [NOTE: A recommended shortcut (no need to set up and then reverse an accrual) for recording consulting invoices in the correct month in the accounting software is to replace the consulting invoice date (which is normally issued the month following the service being performed) with the last day of the month that the service was actually performed. If this shortcut is taken, a memo field in the accounting entry should be updated with the actual consulting invoice date, to support a complete audit trail).]

In the context of a tech startup, an Acquirer is typically a NASDAQ Strategic Investor (SI) purchasing 100% of the shares of a tech startup in an M&A transaction to gain ownership of a complimentary new product / service innovation which will help the NASDAQ company sustain long-term revenue growth. An M&A acquisition involves a "change in control" exit to an SI, where the tech startup shareholders are paid out in cash or publically traded shares of the SI.

An Advisor is typically a seasoned veteran (ideally with a successful tech exit in their past) who is engaged by the Founders in the early stages of a tech startup (eg. before an Angel / Seed financing) to help cover organizational holes left by the Founder team. Advisors can be unpaid Mentors giving back to the community, or they can be engaged in a contractor relationship of some kind. Advisors have no formal legal connection to the tech startup in the absence of a specific contractual arrangement. CRA imposes punishing tax treatment on option grants to Advisors, Consultants or Contractors. If Advisors graduate to become formal Board members (aka Directors) with legal obligations, the situation flips. CRA deems legally appointed Directors to be employees for tax purposes, so they are eligible for highly advantageous tax treatment on CCPC option grants.

An Angel Investor is typically a High Net Worth (HNW) individual (>$1M of investment assets excluding real estate) who uses the "accredited issuer" exemption to purchase shares of a private tech startup. Angel investors often have a tech startup background, and are investing in part to "give back" to the local tech community. Angels accept the risk of losing 100% of their investment in exchange for a chance at a >10x return (hopefully within 10 years). Private share investments are generally not liquid until a highly unpredictable exit transaction. Most tech startups fail, so most Angel investments are write-offs. Government incentives can play a critical role in reduce the risk for Angel investors. For example a BC resident investor can earn a 30% refundable EBC tax credit (meaning they effectively invest at 70 cents on the dollar after they file their T1 personal tax return) if the BC tech startup issuing shares (or a SAFE) has qualified under the EBC program prior to the Angel investment.

A business model where the end customer is another business.

A business model where the end customer is a consumer.

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A "snapshot" in time of Assets, Liabilities and Shareholder's Equity. The BS is the first half of the Trial Balance (TB), with the second half being the Income Statement (IS).

A statistical algorithm developed to value option compensation based on variables including the number of options granted, per share FMV at the option grant date, option exercise price, option expiry date, share volatility estimate, and the risk free interest rate (eg. 1 year treasury bill). The Black Scholes model calculates an estimated value for the option grant which gets amortized (read: expensed) over the life of the option, and accumulates in Contributed Surplus in the Equity section of the Balance Sheet. This amortization of option expense is roughly analogous to expensing depreciation over the estimated useful life of a fixed asset, with the balance sheet capturing the resulting accumulated depreciation.

A group of individuals annually elected by shareholders at an AGM to provide legally required oversight and governance to a tech startup corporation. In the early days, the Board tends to consist only of Founders. A significant Angel / Seed investment in a tech startup may trigger the first external Board member. VC Series A investments in the >$5M range are generally conditional on granting the VC a seat on the Board. With an ongoing series of VC investments, voting control shifts from the Founders to a VC control group.

see "Director" below

CAC is generally used in the context of a SaaS business model, and refers to the estimated Customer Acquisition Cost for a new customer (roughly, the S&M effort focused on customer acquisition for a period of time, divided by the number of new customers acquired). In a SaaS business model the CAC cost is compared to customer LifeTime Value (LTV), which is an estimate of the lifetime profit margin per customer. To ensure profitability, a SaaS business should maintain LTV >= 3x CAC. If almost all customers reliably renew annual software license agreements each year (low churn rate with a "sticky" SW service) the SaaS business model has a better chance of being profitable. There are many possible SaaS metrics - I am only mentioning the basics in this acronyms listing.

CCPC is a corporate tax designation used by CRA that is highly relevent to Canadian tech startups. CCPC's have significant tax advantages, including favourable tax treatment of employee stock option grants, and refundable SRED tax credits under CRA's flagship R&D incentive program. Refundable SRED tax credits are claimed through a T661 filing with an annual T2 corporate tax return. SRED claims do not involve a pre-approval process (ie. eligible SRED expenditures will always qualify if they meet uncertainty, technological advancement and documentation requirements). To qualify as a CCPC, fully diluted voting shares from the cap table have to be majority controlled (50% + 1 share) by Canadian residents. Some US investors will invest through a related Canadian legal entity to help the tech startup maintain its CCPC status.

The CashFlow (CF) Statement shows how various balance sheet items have shifted over time to either increase or decrease the current asset called "cash". Since the Balance Sheet must always balance, if any item other than "cash" on the balance sheet changes, it implies an offsetting change to cash (debits = credits). Changes on the Income Statement (IS) can also impact cash, but efforts to forecast cashflow from an "Income Statement only" perspective (eg. using EBITDA) are always of limited value. Many Founders unfamiliar with accounting theory have difficulty understanding why cashflow is not the same thing as revenue and expense recorded on the IS. See also "Accrual Accounting" and "EBITDA" to understand more about cashflow.

Cost of Goods Sold are direct costs closely related to revenue where a physical good is sold. The classic cost allocations to COGS in a traditional manufacturing setting include materials, direct labour and allocated overhead. For most tech startups, COGS includes only materials, installation, training and related costs such as shipping. To keep the audit trail simple for a tech startup, labour (typically immaterial, especially where a contract manufacturer produces the unit) and overhead (typically immaterial, where physical inventory is modest) are not allocated to COGS. If there are no physical goods being sold, the term Cost of Revenue (COR) is used instead of COGS. In a SaaS based tech startup, the main COR cost will be for the hosting server.

Direct costs of generating revenue, where a service is being provided (no physical goods sold).

An individual with a legacy CA, CMA or CGA accounting designation who now qualifies under a unified "CPA" professional accounting designation in Canada.

A professional accounting designation in the USA, equivalent to "CPA" in Canada, except the first two "CA" letters represent different wording in the USA (Certified Public) vs. Canada (Chartered Professional).

Canada Pension Plan is a mandatory employee payroll deduction (includes both employee and employer contributions). CRA requires Contractors to self-assess CPP when they file a T1 annual personal tax return. CPP has an annual contribution limit.

Canada Revenue Agency is the Canadian federal tax authority (formerly called Revenue Canada). The USA equivalent is the Internal Revenue Service (IRS).

A cap table is a list of equity ownership showing ownership of each class of shares in addition to any option or warrant holders. A well organized cap table will reconcile the number of shares and options / warrants with the legal record, and the amount paid for each class of shares with the accounting record. It will also show % ownership by individual on both an issued and fully diluted basis. A cap table is a close cousin of the legal share register kept by a lawyer, which includes the full chronological legal history for each class of shares issued, including structural changes such as cancelled shares and share splits.

Cash runway is the time remaining (typically measured in months) before a tech startup will burn through its available cash resources given its current monthly burn rate (roughly: cash based expenditures - cash deposits), and assuming the CEO takes no corrective action (by either raising financing, increasing revenue or reducing expenses). A tech startup fails when it runs out of cash runway. A rough rule of thumb is to always maintain a minimum cushion of 12 months of cash runway against unexpected events. The 3 classic financial variables for a tech startup to manage carefully once revenue begins are cash, revenue and net income/loss. In a pre-revenue tech startup, the focus will be on cash, R&D milestones, launching a prototype, and evaluating Product Market Fit (PMF).

The Board Chair is an individual Director (aka Board member) responsible for leadership on all Board of Director (BOD) obligations, including setting high level strategic direction for the tech startup, hiring / terminating the CEO, meeting tax / payroll obligations, and Board governance issues.

Churn is generally used in the context of a SaaS business model, and referrs to software license revenue which fails to renew at the end of its term because customers have chosen to discountinue the service. If a SaaS service is "sticky", it will have low churn. If a SaaS service fails to meet customer expectations, it will have high churn.

In the context of a tech startup, Common Shares are the simplest form of shareholder equity, and the ultimate denominator to determine how a private company M&A "exit pie" is divided among equity holders. Preferred shares , vested options and vested warrants are converted into common shares according to their respective terms, prior to any distribution of an "equity pie" exit. After all equity is converted to common shares, the value of a common share = total company value per the M&A agreement / number of common shares oustanding. Prior to a Series A financing, VC's often require the cap table to be reduced to a simple foundation of "vanilla" common shares on which to add their preferred share terms.

In the context of a tech startup, confidential information must be shared only on a "need to know" basis to support a healthy corporate culture (eg. avoid salary comparison gossip), and defend the tech startup against aggressive competitors trying to discover company secrets or probe for weaknesses. Confidential information should only be shared with potential investors at a summary level until sufficient trust is established (especially in the absence of a signed NDA). Even then, the most sensitive information should be withheld until Due Diligence is underway, with lawyers from both sides actively engaged. Sensitive information for a tech startup is normally: 1) Cap Table details, 2) Salary / Option grants and other compensation details, 2) Future Product Roadmap Strategy details, 3)Trade Secret details, 4) Strategic sections of the 5 year business plan (especially PMF and GTM strategy), 5) Customer lists and/or supplier lists and/or employee lists, 6) Detailed 5 year forecast model with full formula logic. At a high enough level, information can normally be shared with minimal risk. Information that should be shared with all employees "inside our walls" includes high level data (except nothing on employee compensation or employee performance evaluation), and an honest SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis which employees should critique.

An expert paid either hourly or by milestone achievement for a specific project.

An expert paid either hourly or by milestone achievement on an long-term basis. Often used by a tech startup as a way of avoiding a more complicated employment relationship they can't afford. In particular, a Canadian tech startup often can't justify the complexity of hiring US employees directly, so they establish US contractor relationships. There are special contractor vs. employee tax rules which must be followed to ensure a contractor is not deemed by CRA (or the IRS) to be an employee for tax purposes.

Contributed Surplus is a GL account in the Equity section of the Balance Sheet. It has a credit balance which accumulates stock compensation expense amortized (read: expensed) on the Income Statement. Stock compensation expense is normally calculated using a Black Scholes statistical model to estimate the FMV of stock options (or warrants) at the grant date. Stock compensation is amortized over the estimated life of the option (or warrant), much like depreciation expense is recorded over the estimated life of a fixed asset.

Convertible Debt is a detailed legal agreement which enables an Angel / Seed investment to be made without a negotiated valuation (normally used to price shares being purchased). Convertible Debt typically provides a number of alternatives for a future conversion to shares, including setting the conversion price in relation to a future qualifying investment (eg. a VC Series A Preferred Share investment) supported by a full Due Diligence exercise. Convertible debt earns a nominal rate of interest (say 6-8%) from the investment date. Convertible Debt is an alternative to a SAFE investment, but BC resident investors with Convertible Debt are not eligible to apply for a possible 30% EBC tax credit until their debt has been converted to shares.

In the context of a tech startup being reviewed by a sophisticated potential investor (such as a VC doing a Series A Preferred Share investment, or a NASDAQ Strategic Investor anticipating an M&A acquisition) Due Diligence refers to the process of a deep review of legal, financial, tax, administrative, IP, strategic, and planning documentation required to evaluate the potential for the tech startup to successfuly execute on its market opportunity. The Due Diligence exercise includes an extensive review of all functional areas including Product / Service Development, Sales & Marketing, and Finance & Administration. Potential investors try to evaluate the ability of the Founders / management team to navigate around the inevitable challenges it will face. Documentation supporting the DD process is maintained in a secure Data Room in the cloud.

Data Room refers to a highly confidential store of the complete legal, financial, IP, administrative, and other documentation required to support a full investor Due Diligence exercise. Normally the virtual data room is highly organized, and stored on a secure server in the cloud. Read-only access is granted to potential investors engaged in Due Diligence on a tightly controlled, time limited basis until the investment deal either closes, or fails to close. A Data Room can be manually organized and stored on Google Drive for free, or it can be set up under one of several SaaS Data Room applications that provide features such as tracking what data has been viewed by each authorized investor.

In the context of a tech startup, dilution refers to existing shareholders getting a shrinking % of the equity exit pie (becoming diluted) as the tech startup issues more shares from treasury. Shares are generally issued to either raise financing proceeds from new investors, or on the exercise of vested options / warrants.

A Director is a member of the Board of Directors (aka "Board", or "BOD"), elected by shareholders during the annual AGM. DIrectors are legally responsible for staying aware of key corporate developments through regular "Board package" reporting (normally quarterly) and Board meetings. Directors are legally responsible to guide the high level strategic direction of a tech startup, evaluate / hire / replace the CEO based on performance, and participate in Board governance (audit committee, compensation committee, etc.) as a tech startup matures. Directors are personally liable for any unmet tax / payroll obligations if a tech startup goes bankrupt. CRA deems Directors to be employees for tax purposes, so Directors enjoy generous CCPC tax treatment on any stock option grants they receive.

Under BC's Venture Capital Coporation (VCC) Tax Credit Program, a tech startup CCPC qualifing as an EBC in BC can enable it's investors to receive a generous 30% refundable tax credit. Individual BC residents can invest in a pooled VCC fund (such as WUITF, eFund) or invest directly in BC tech startups that successfully apply to the BC Investment Capital Branch for an annual EBC allocation under the VCC program. The 30% refundable tax credit is claimed by a BC resident when they file their annual T1 personal tax return. Other provinces offer similar LSIF investment tax credit programs to reduce the risk of investing in tech startups.

EBITDA is a rough attempt to estimate operating cashflow from an Income Statement (IS) only perspective, while removing the impact of interest and taxes. Non-cash items (eg. Black Scholes option compensation, depreciation, unrealized foreign exchange) along with interest and taxes are reported below the EBITDA subtotal to calculate GAAP Net Income. EBITDA is not a true measure of cashflow because it fails to consider the cashflow impact of changes on the Balance Sheet. EBITDA is an optional non -GAAP (not part of accounting standards) metric, but it remains popular with investors who find it useful for evaluating tech startup performance, and as a default method to estimate the valuation of a non-SaaS business with an EBITDA multiple. See also items "Accrual Accounting" and "CF" to understand more about cashflow.

Employment Insurance is a mandatory employee payroll deduction (includes both employee and employer contributions). In the context of a tech startup, Founders who control >40% of share capital are exempt from making EI contributions, and are ineligible to receive EI benefits. EI has an annual contribution limit.

For private tech startups, an ESOP is a less common name for an employee Option Plan. For publically traded companies, an ESOP can refer to an employee share purchase plan involving payroll installments, and company shares purchased at a discount to FMV (say 10%) listed on a public stock exchange. Cash proceeds from an employee share purchase plan go directly to the company, in exchange for new shares issued from treasury. Employees who own company shares are generally more committed to overall company performance.

A term used to describe tech startups that can clearly demonstrate the potential for a minimum >$250M future exit required by VC investors. VC's are motivated to find "baby elephant" tech startups that match their tech sector specialization. To provide clarity with a numerical example, when a tech startup has matured to a valuation of ~$20M through the Angel / Seed financing stage, they are ready for a ~$5M Series A Preferred Share VC financing for ~25% (= 5/20) of the pre-money equity pie, or ~20% (=5/25) of the post-money equity pie). A post-money valuation of $25M for the tech startup can only be justified if it demonstrates clear potential for a 10x return (~$250M exit) to the VC investor within 7-10 years. Some VC's may nurture an "adolesecent elephant" with a Seed financing in the $1M range, prior to a planned >$5M VC Series A financing.

A key legal document for all tech startup employee hires from inception onwards, but it is especially senior management hires and all technical employee hires. It covers critical employment terms including probationary period, confidentiality, 100% IP ownership by the tech startup, non-compete arrangements following termination, compensation, non-statutory employee benefits, vacation days, and termination. It can include a description of option compensation (with 3-4 year vesting normally subject to a 1 year cliff), especially for senior management hires. In general, if there are any concerns about proceeding with a hiring decision, the relationship should start with a Contractor Agreement that can be cancelled by either party on short notice, instead of an Employment Agreement.

Enterprise software is sold to large organizations. It is often supported by other revenue generating services like integration, customization and training.

In the context of an M&A transaction, key Founder / Executive team members may have a portion (up to 50% is not uncommon) of their exit proceeds locked in an Escrow arrangement, where the proceeds are only released after clearly defined performance milestones have been achieved. Founders / Executive team want to minimize any Escrow restrictions on their exit proceeds, while the Acquirer wants to maximize the Escrow to keep Founders / Executive team members motivated to perform after the acquisition. Founders must seek experienced legal guidance to ensure unethical lawyers working for the Acquirer don't manipulate the legal agreement to make anticipated payouts from Escrow highly unlikely.

FMV is the best possible estimate of fair value. The best source is a public market (such as a stock exchange which sets FMV for publically traded shares). Other ways to support FMV are a 3rd party comparable transaction, or a negotiated price between a fully informed and independent 3rd party buyer and a seller, with both acting in good faith.

FOMO is an informal term used to describe how investors can become motivated to follow a trend away from traditional financing metrics because they would rather assume more risk than miss out on a chance to participate in the next big financing exit. FOMO generally follows one or more spectacular "Unicorn" tech startup exits, which sets equity valuations on a rising tide, triggering a flow of new investor money. During the Unicorn parade of 2021, COVID inspired tech company valuations soared as stay-at-home consumers temporarily increased demand for personal recreation items including computer games, personal exercise equipment, boats and RV's. At the same time during 2021, other sectors of the economy got punished, such as air travel, hotels, retail, and restaurants.

In the context of a tech startup, the term "Financial Statements" describes the Balance Sheet (BS), Income Statement (IS or "P&L") with Retained Earinings at the bottom, and CashFlow (CF) Statement. All Balance Sheets follow a roughly common pattern regardless of company size. In constrast, the Income Statement should be customized for each tech startup. For management reporting purposes, the income statement should offer different perspectives using the same revenue and expense GL account structure. For example, total revenue can be segmented in different ways to show splits by product type, customer type or channel. Expenses can be captured by functional department (Development, Sales & Marketing, Admin) or in a detailed consolidated list.

An individual who makes a core contribution to launching a tech startup with sweat-equity, and is rewarded with common shares priced at a nominal value (normally $.01/share or less) on or shortly after incorporation. There can be a single Founder, or mulitple "co-Founders". Having 3 equally treated Founders (one being the Founder CEO) is a pattern commonly found with many successful tech startups that wisely choose to focus on external customer pain points, rather than internal squabbles over how to share the Founder equity pie unequally. Founders should protect themselves against premature co-Founder termination by assigning a reverse-vesting buyback right to all Founder shares, where the tech startup can buyback any unvested Founder shares at their original cost in the case of a premature Founder exit (say within 4 years of the Founder shares being issued). Reverse vesting of Founder shares should work in a similar manner to option vesting, including having a 1 year cliff.

A Founder CEO is a Founder who holds the CEO title. If the tech startup is on a "Moose exit bootstrap" path, the Founder CEO will normally remain in place until an exit which they control. If there are a series of VC financings shifting Board control from the Founders to a VC group, the Founder CEO is often replaced by a more seasoned CEO with experience scaling tech startups to a >$250M exit valuation.

In the context of a tech startup, a Fractional CFO is a contractor trained in finance and accounting who has accumulated sufficient operational experience with tech startups to guide a Founder team through the financial and administrative pitfalls every tech startup must navigate around. Fractional CFO's generally have a front-end loaded job to upgrade financial and reporting systems, before settling into a longtail period of reduced monthly effort. This initial hump of billable "cleanup / infrastructure investment hours" can present a cashflow challenge for tech startups. This cashflow challenge can be mitigated by a negotiated fixed monthly fee, where in early "lump of activity" months the Fractional CFO is underpaid, and in the later "longtail" months they are overpaid until all unbilled hours are resolved. Unbilled hours can also be resolved in a lump payment as cashflow permits.

In the context of a tech startup, early "love money" that helps the Founders develop an early MVP prototype and collect initial feedback from potential customers. Founders also typically invest at this stage, especially if they are a serial enterpreneur with a successful past exit. Friends & Family normally invest in a priced common share round at a relatively modest starting valuation. The investment has to be considered high risk, as most tech startups fail.

The Administration (ADM or G&A) department is one of at least three expense departments that should be segmented out in any tech startup General Ledger structure. The other essential expense departments are Product Development (DEV or R&D) and Sales & Marketing (or S&M).

Accounting rules set by professional accounting bodies such as Chartered Professional Accountants (CPA) of Canada to ensure financial statements are presented fairly. Canadian Private GAAP is called ASPE (Accounting Standards for Private Enterprises). Canadian Public GAAP uses a global accounting standard called IFRS (International Financial Reporting Standards) which originated in Europe. US GAAP is called FASB (Financial Accounting Standards Board). The US is slowly migrating towards IFRS GAAP.

The General Ledger (GL, aka Chart of Accounts) is an account listing with no transaction detail. A Trial Balance (TB) is the same GL account listing combined with a snapshot of General Ledger (GL) balances at a specific date (typically at quarter-end or year-end).

Go To Market strategy is a Sales & Marketing (S&M) term used to describe how to position a tech startup's innovative product / service as an essential "pain relief /must-have" item (vs. a "vitamin pill / nice to have" item) to a large target market. The GTM strategy not only includes a plan to develop customer awareness, but also to deliver the product / service in sufficient volume, and at low enough cost to satisfy shareholder demands for a potential 10x return. Revenue momentum, enthusiastic referrals from existing customers, and low churn are metrics which help to validate a successful GTM strategy.

A High Net Worth individual can qualify for a securities exemption as an "accredited investor" if they have >$1M in investments (excluding real estate). Having a securities exemption means accredited investors are legally allowed to purchase shares in a private tech startup that has not provided a detailed legal Offering Memorandum (OM) document (because HNW individuals are assumed to be sufficiently "sophisticated", or assumed to have enough money to afford to lose their investment). Angel / Seed investors are often HNW individuals who have had a successful tech startup exit, and are well aware their tech startup Angel / Seed investment could be a future write-off. They accept this risk to contribute back to the tech community, and to have the potential for a high risk 10x return. A few other securities exemptions are possible for non-HNW individual investors, such as a "Friends & Family" exemption sometimes used in the earliest days of a tech startup.

Any physical device or component being sold, including medical devices, silicon chips, etc. Most tech startups developing a HW platform still generate the bulk of their revenue from Software (SW) services enabled by that HW platform. For example, over the lifetime of an iPhone Apple makes more margin on its "30% Apple tax" applied to all APPs sold / renewed through the iStore, than it does on the HW margin Apple originally earned from selling the iPhone.

Legal rights to Intellectual Property (IP) can be in the form of patents, copyright, trademarks, or trade secrets. IP can play an important role in building a tech company's "moat" (sustainable competitive advantage). IP is generally a critical component of the value in a university spinoff tech startup. IP tends to be less important in a B2B SaaS tech startup leveraging open source code.

An IPO signals the "birth" of a new company listing on a regulated public stock exchange (typically TSX-V for a Canadian tech startup). An IPO follows a lengthy regulatory approval process featuring a "full disclosure" public Prospectus document. Since Sarbanes Oxley level regulation in the late 1990's, the cost of regulatory compliance for public companies (pubco's) increased dramatically, and the number of tech startups chosing to exit through an IPO decreased accordingly. The vast majority of private company tech startups now exit through an M&A transaction. Being publically traded means the spotlight is on a tech startup's quarterly performance, and it has to be consistently good or the stock price will be taken for a wild ride (especially if active short sellers are smelling blood). Tech startups normally have lumpy revenue and volatile growth trajectories, which are not a good fit with shareholder expectations of consistent quarterly performance. It can be difficult for a tech startup to recover from a loss in shareholder confidence. On the other hand, a well managed tech startup pubco establishing a consistent trend of profitability and revenue growth will be appropriately rewarded with a rising share price.

The US federal tax authority (the USA equivalent of Canada's CRA).

A "video" of revenue and expense activity over a specified time period (eg. month, quarter, YTD, YE). The Income Statement (IS, aka P&L) is built up from the second half of the Trial Balance, with the first half being the Balance Sheet. The IS clears to nil at YE, with the "bottom line" NI figure flushing into RE. Accounting firms will use the term "Statement of Operations" to euphemistically replace the term "Income Statement" when there is a Net Loss (vs positive Net Income).

A US Internal Revenue Service (IRS) tax designation for stock option plans that allows US residents to get favourable Incentive Stock Option (ISO) tax treatment on qualifying stock option compensation. Stock options issued by a CCPC can qualify for ISO treatment with the IRS if the tech startup's Option Plan is structured properly for both CRA and IRS tax requirements. This requires a law firm experienced with tech startups.

Under CRA's flagship R&D incentive program for Canadian corporations, eligible Scientific Research and Experimental Development (SRED) expenses are deductible against taxable income, and accumulate in a SRED pool with no expiry date. A portion of the SRED pool qualifies for Investment Tax Credits (ITCs), and for a CCPC, a portion of these ITC's can be refundable. If these 3 layers seem confusing, the key point is that SRED eligible expenditures are a good thing. Tech startup CCPC's that are losing money (ie. no tax payable) can receive a refund from CRA for a maximum of $1.05M on eligible CCPC SRED expenditures up to a $3M limit, after applying a 35% refundable ITC rate. Most tech startups can't come anywhere near spending $3M annually on eligible SRED project expenditures. The SRED pool (which never expires) reduces taxable income (nice), but any non-refundable ITC's (which also never expire) reduce future tax payable (nicer). CCPC's with refundable ITC's can get a substantial cheque from CRA (nicest of all). See also "SRED" to understand more about what qualifies as a SRED expenditure.

A term related to stock options (or warrants), where the FMV of the share being purchased exceeds the strike price, so there is an immediate benefit to exercising the option if the share can be sold. In contrast, if the strike price of the option is above FMV, the option is said to be "underwater", and it will likely expire unexercised if the situation persists.

Date of incorporation. In Canada, incorporation (the birth of a new corporate legal entity) can either be under provincial leglislation, or under federal Canada Business Corporations Act (CBCA) legislation. In the USA, incorporation is only done at the state level, with Delaware being the generic "business friendly" state to incorporate in if there are no other overriding considerations.

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In the context of a tech startup, an Investment Banker acts as an advisor to help the Founders prepare for a financing transaction. Initially an Investment Banker will focus on the Data Room, financing strategy, and pitch. If a Fractional CFO is involved with the tech startup, these steps go quickly. The Investment Banker then leverages it's network connections and internal resources to populate a funnel of potential investors active in the relevent technology sector, before filtering them down to a small number of (theoretically) still interested parties the Investment Banker will actively engage with. Ideally the Investment Banker will coordinate a competitive bid process (two or more buyers actively competing to bid) which is often how to maximize a tech startup's valuation. The financing typically involves a Strategic Investor (SI) such as a large NASDAQ company. If the tech startup has a track record of stable cashflow (which is relatively rare), the investor might be a Private Equity (PE) firm. The financing transaction may be a full M&A exit (100% sale of tech startup shares), or a smaller direct investment by the SI (possibly leading to a future M&A exit). Investment Bankers are generally paid a fixed monthly fee for services, and a % success fee if a financing transaction is successful.

In the context of VC's investing a >$5M Series A preferred share financing for a tech startup, a common way to spread the considerable risk of failure is to share or "syndicate" the investment deal among two or more VC's. There is normally a "lead VC" who does the bulk of the Due Diligence (DD) effort on behalf of all VC investors. If there are a series of VC financing rounds, syndication becomes increasingly common as a way to spread the risk (but it also spreads the anticipated investment return).

Individual Canadian residents are eligible for a generous Lifetime Capital Gains Exemption (LCGE) on capital gains from the sale of qualifying CCPC tech startup shares held for a minimum of two years. The LCGE limit was $913,630 in 2022, and is indexed to inflation. Employees holding vested CCPC options need to have exercised their options (converted them to shares) at least 2 years before a tech startup Exit event (such as an M&A acquisition by a NASDAQ company) to take advantage of the LCGE tax exemption.

The "Labour Sponsored Investment Fund" label for Canadian investor tax credit programs in various provinces is somewhat misleading, as most of the related tax credit programs are based on financial organizations (vs. labour organizations). BC's version of an LSIF is its flagship VCC program which offers 30% EBC refundable tax credits (to a limit of $120k on a $400k investment) to BC resident shareholders (and SAFE holders) who invest in qualifying BC tech startups that have successfully applied for an annual EBC allocation before the Angel / Seed investment was made.

LTV is generally used in the context of a SaaS business model, and refers to the estimated LifeTime Value of a new customer (very roughly, the present value of all estimated future margin generated from a customer over their lifetime). In classic SaaS business models, the LTV margin is compared to another metric called CAC (Customer Acquisition Cost). To ensure profitability, a SaaS business should maintain LTV >= 3x CAC. If most customers reliably renew annual software license agreements each year (low churn rate) the SaaS business model has a better chance of being profitable. There are a large number of SaaS metrics - I am only covering the basics in this acronym listing.

In most cases an M&A refers to an Acquisition (read purchase) of 100% of a tech startup's shares by a large (eg. NASDAQ listed) Strategic Investor (SI). Proceeds for tech startup shareholders can be cash, shares in the NASDAQ Acquirer, or a mix of both. An M&A deal involves a "Change in Control" for the tech startup. It is fairly rare for a tech startup to "Merge" with another roughly equivalent sized tech startup for mutual benefit. It is also uncommon (and not recommended) for the "Change in Control" to involve less than 100% of a tech startup's shares. Drag-along clauses in the Shareholders Agreement (SHAG) normally force the sale of 100% of tech startup shares if a super-majority (66%) of the shares are in favour of the "Exit / Change in Control" transaction. An M&A transaction generally represents a long awaited liquid "Exit" for tech startup shareholders (especially the Founders).

A common SaaS metric. MRR x 12months = ~ARR.

An early "bare bones" prototype used to start collecting future customer feedback on a new product / service innovation. The idea is to get early feedback on customer pain points, and course correct the design early towards removing that pain.

A Mentor is a typically a tech startup serial entrepreneur with one or more successful exits on their track record, who provides coaching support to a younger tech startup Founder CEO. The coaching role is similar to that of an Advisor, except the term Mentor implies a personal and somewhat casual 1-on-1 relationship, whereas an Advisor is generally consulting to the tech startup's Board. A less experienced Founder CEO should nurture a few "quarterly coffee chat" Mentor relationships to get strategic guidance on any organizational holes left by the Founder team and hired management. In the early days of a tech startup, there is usually not enough financing to hire managers that can cover off all organizational holes exposed by limitations in the experience of the Founder team. In particularly the Finance and Admin function is often underfunded, and incorrectly assumed to be something that can be fixed later without paying a large penalty for the delay. Experienced tech startup CEO's (or Mentors for less experienced CEO's) will keep their tech startup balanced over its lifetime by paying adequate attention to Finance & Admin from inception. They will have been exposed to the consequences of failing to do so from earlier Exit experience(s).

"Moose exit" is a term I've coined to describe the silent marjority of tech startup exits, where the Founders can't realistically demonstrate potential for a future $250M "Elephant exit", which is a minimum target for VC investors. Most tech startups that generate multi-million dollar exits for Founders follow this "Moose Exit" bootstrap path, which results from raising up to $2M from Angel / Seed investors to focus on a business model shaped by listening very carefully to what customers are willing to pay for. By focusing on early profitability (rather than the rapid growth path favoured by VC's), the tech startup is more likely to discover a realistic path towards long term sustainability. Bootstrap business models tend to leave the Founders in control of the majority of voting shares, while VC backed business models do not. Exit values for bootstrap business models can cover an extremely wide range from $1M to >$80M, but a classic median target for a "bootstrap Moose exit" is $20-$30M.

The main US "big tech" stock exchange regulated by the Securites and Exchange Commission (SEC). While the NASDAQ is not exclusively used by tech companies, the very largest market cap companies currently listed on NASDAQ are all tech companies, including: Apple, Microsoft, Amazon, NVIDIA, Tesla, Alphabet(Google) and Meta(Facebook).

Net Income (NI) is the "bottom line" on the Income Statement (IS, or P&L). It is a key GAAP item (unlike EBITDA, which is a non-GAAP item), and is called Net Income if in a credit balance (revenues>expenses), and Net Loss if in a debit balance (expenses>revenues).

IRAP is Canada's second most important federal R&D incentive program for tech startups (after SRED). IRAP projects must be pre-approved, and tend to favour full time Canadian engineering salary costs to stimulate job creation. There can be a lot of overlap in project critera between eligible SRED projects and eligible IRAP projects. Stacking rules prevent the same R&D project expenses from being claimed under more than one different government incentive program.

A popular arrangement related to the vesting of stock options (or reverse vesting Founder shares) where there is no vesting during a 12 month probationary period, followed by 12 months of lump vesting on the first anniversary, followed by month-end vesting starting in month 13 and continuing to the end of the vesting period. For example, in the case of a 4 year vesting period: 12/48th (25%) would vest on the first anniversary, and 1/48th would vest on the last day of each following month for the next 36 months.

A right granted to an option holder (normally an employee or director) under the terms of an Option Plan, and authorized by the Board. The right is to purchase a common share at a fixed "strike price" after the option vests (becomes exerciseable), but before it expires. Options generally vest monthly over a 3-4 year vesting period, with a 1 year cliff. The 1 year cliff means no vesting during the first year, followed by a lump 12 months of vesting on the first anniversary of the grant date, followed by month-end vesting starting on the 13th month and continuing for the remainder of the vesting term. Options normally expire within 30-45 days of termination, or at a fixed expiry date which is typically up to 10 years from the grant date. Options are granted to a specific individual, and are not transferrable. CRA's tax treatment of CCPC option grants is geared towards being the most generous if the strike price is >= FMV on the grant date. If the strike price is <FMV at the grant date (eg. in the case of a $.01/share strike price), there is an embedded T4A "pregnant employment benefit" at the grant date, which is ultimately taxed as employment income, although for a CCPC option the tax is deferred until the underlying shares are sold for cash proceeds. See other terms starting with "Option...".

Formal legal notification of a stock option grant to an employee (or Board member, which CRA deems to be an employee). It provides details of the option grant (vesting terms, expiry date, exercise price). It can be signed by the employee in acknowledgement, but the employee signature that really matters is a future request to exercise vested options sent with exercise price cash proceeds, at which point the tech startup's Board is obligated to issue common shares from treasury.

An option exercise is triggered on vested options by the option holder (option grantee) submitting a signed notice of option exercise along with cash proceeds (= strike price x number of options exercised). A valid option exercise request obligates the tech startup's Board to issue common shares from treasury. Shares can't be legally issued before the related cash proceeds are deposited. Expired options can't be exercised. An option exercise converts the options to issued common shares, and starts the 2year LCGE clock running on the issued shares. See "LCGE" and other terms starting with "Option...".

Options normally expire within 30-45 days of termination, or at a fixed expiry date which is typically up to 10 years from the grant date.

An option grant is normally given only after an employee has passed a probationary period and is perceived by the Founders to be making an important long-term contribution to success. Options grants must be authorized by the Board before they are legal, and must specify the number of options being granted, vesting terms (say 3-4 years with a 1 year cliff), expiry date (say 8-10 years) and exercise price (normally FMV at the grant date for favorable CRA tax treatment). Option grants are authorized by the Board under an umbrella Option Plan which specifies detailed terms.

An Option Plan is an umbrella legal document approved by the Board before any option grants are made. The Option Plan has detailed terms that apply to all options granted under it.

The size of the Board approved Option Pool determines the extent to which option grants to employees are able to dilute existing shareholders. There is a natural tension between shareholders wanting employees to be motivated with option grants, and shareholders not wanting further dilution. In the early days of a tech startup when cash is limited and the company valuation is low, option grants are a way of attracting talent while paying below FMV salaries. The option pool of a tech startup is normally limited to 20% of issued shares to keep the cap table attractive to Angel / Seed / VC investors. If the tech startup goes public through an IPO, the option pool is normally shrunk down to 10% of issued shares of the public company. This shinking of the option pool down to 10% for a public company is partly offset by the number of issued shares increasing following the IPO financing, which causes the option pool to expand (10% of a larger number of issued shares).

An Option Strike Price is the amount paid per share to exercise a vested option. CRA's tax treatment of CCPC option grants is geared towards being the most generous if the strike price is >= FMV on the grant date. This is consisent with option theory, which says the option holder should only benefit from increases in tech startup valuation they contributed to. By setting the strike price = FMV at the grant date, any increases in tech startup valuation prior to the grant date do not benefit the option holder. In contrast, if the strike price is set <FMV at the grant date (especially in the case of a $.01/share strike price), CRA will deem an embedded T4A "pregnant employment benefit" at the grant date, which is ultimately fully taxed as employment income. Due to generous tax treatment for CCPC options, this T4A taxable "pregnant employment benefit" is deferred until the underlying shares are sold (at which time there are cash proceeds available to pay the tax). See other terms starting with "Option...".

Options have to "vest" to become exerciseable. Vesting is often time-based, for example at each month-end over a 3-4 year period. At the discretion of the Board, vesting can also be immediate, over other time periods, or triggered by milestone achievement. Time based vesting often comes with a 1 year cliff, where no option vesting occurs during a first year probationary period, followed by 12 months of lump vesting on the first anniversary, followed by equal straight-line month-end vesting starting from month 13 to the end of the vesting period.

P&L (Statement of Profit & Loss) is a widely used term referring to the Income Statement. See "IS" above.

A PIER Review is a year-end payroll assessment by CRA to ensure the accuracy of CPP and EI payroll deductions (both employee and employer portions), and employee personal tax withholdings. If a tech startup is using a 3rd party payroll service (recommended), there should be no material differences uncovered by CRA's annual PIER Review assessment.

Product Market Fit (PMF) is a Sales & Marketing (S&M) term used to describe a strategy for validating the fit between the tech startup's innovative product / service, and what potential customers are eager to purchase. If the tech startup is relieving serious customer pain, the PMF strategy should offer compelling "pain relief", and customer demand should be consistently strong. If the tech startup is offering a "nice to have" product / service (more like a vitamin pill), the PMF strategy is less compelling to investors. Having said that, a lot of vitamin pills get sold. The PMF strategy reflects the atractiveness of a tech startup's "better mousetrap" innovation. The related Go-To-Market (GTM) strategy defines how customers will become aware of the innovation, and the logistics of how it will be distributed to them.

Perpetual software licenses were the traditional way personal computer (PC) software developers generated revenue from the 1980's until roughly 2000-10. Customers could use the software stored on their PC until they decided to purchase a software upgrade (often forced by the purchase of new computer hardware with more memory and a faster processor). Almost all software developers have now converted to Software as a Service (SaaS) revenue models, where the software resides on a server in the cloud, is regularly updated by the sofware developer, and requires the customer to purchase a recurring annual software license.

Post-money valuation = Pre-money valuation + invested cash. In a classic example with numbers to demonstrate the logic, a VC buys 25% of a tech startup's pre-money share capital for $5M at a pre-money valuation of $20M. The added VC investment of $5M cash increases the post-money valuation to $25M (with the VC now holding 5/25=20% share capital). The financing happened because the tech startup pitched a compelling case for a $250M in 7-10 years, which would give the VC a 10x or $50M return ($250M exity * 20%) on it's 20% share of the tech startup. In this example, there is only a single VC investment of $5M prior to the exit. More VC financing rounds would imply the potential for an even bigger exit.

The pre-money valuation of a tech startup is negotiated between a motivated investor following their Due Diligence (DD) exercise, and motivated Founders who need to raise financing. Each tech startup valuation involves a unique negotiation guided by industry standard valuation parameters. A sophisticated investor minimizes their risk by performing (or relying on others to perform) a Due Diligence exercise including meetings with the tech startup Founder / management team, and a review of comprehensive documentation provided in a secure and confidential virtual Data Room. Existing shareholders (including the Founders) accept dilution (thinner slices) of the equity pie in accepting new shareholders. If the investment proceeds are spent wisely by the tech startup, all prior shareholders will be better off with a slightly thinner (diluted) slice of an expanded equity pie.

In the context of a tech startup, Preferred Shares come with special rights that help protect large$ investors such as VC's who are investing at a significantly increased valuation after the tech startup has demonstrated sufficient progress towards commercializing its innovative product / service aimed at a large market opportunity. An Angel / Seed investor may have sufficient leverage to negotiate "Lite Preferred" shares with an investment starting in the $1M range. VC's making a >$5M investment expect the full range of standard Series A preferred share terms, which are based on tech industry standard legal templates widely used in the US and Canada. Classic preferred share rights include: drag along, tag along, right of first refusal, co-sale, pre-emptive rights, protective provisions, information rights, change in control veto, and participation on the Board of Directors.

Prepaid Expense is part of accrual accounting. If an expense is material (ie. has a significant dollar value), it must be recorded on the Income Statement at the time the expense is incurred. In some cases suppliers insist on pre-payment, such as for an annual insurance premium, an annual SaaS software license, trade show deposits, or cheap airfares booked months before the flight. In these cases, "Prepaid Expense" is recorded as a current asset on the Balance Sheet (Dr. prepaid expense, Cr. cash). In he month when the expense is finally incurred, the related "Prepaid Expense" shifts to the Income Statement (Dr. expense, Cr. prepaid expense). Note that some annual invoices are expensed on a monthly straight-line basis (eg. 1/12 of an annual insurance premium may be expensed monthly over the life of the insurance policy).

A company listed on a public stock exchange.

In the context of a tech startup's product, Quality Assurance (QA) typically involves a series of test procedures on products produced by a contract manufacturer. Products are typically produced at small volumes in North America, or at larger volumes in Asia. In the early days, a tech startup often directly manages QA inspection and configuration before shipment to a customer. In a more mature contract manufacturing relationship where trust is established, the QA role can be performed by the contract manufacturer, with the product "drop shipped" directly to the customer. Direct shipment of hardware can still allow the tech startup to do remote configuration and some testing to monitor quality control and customer satisfaction.

Measure of change over the immediately preceeding quarter. (eg. Q3'23 vs. Q2'23).

For an "in sync" fiscal year-end (recommended for all tech startups) quarters will end on either Mar31, Jun30, Sep30 or Dec31, AND the year-end date will be one of those. "Out of sync" year-ends cause ongoing confusion when reporting quarterly financial trends to both internal management and external investors, and are generally not recommended even if they are better for negotating discounted fees with acounting firms. Quarterly trend reporting always has to follow the fiscal year-end (even if it's an "out of sync" year-end), because that is how the accounting system produces the actuals.

The Research & Development (R&D) department [aka Product Development (DEV) department] is one of at least three expense departments that should be segmented out in any tech startup General Ledger structure. The other essential expense departments are Sales & Marketing (S&M) and Administration (ADM or G&A).

Accumulated Income or Losses from inception to the immediately prior fiscal year-end (YE), resulting from the annual YE flushing of Net Income (Loss) from total revenue and expense to the Balance Sheet (BS). For a tech startup, the Statement of Retained Earnings is typically just Beginning RE + Net Income (Loss) = Ending RE, and it is often tacked on to the bottom of the Income Statement (IS).

A Reverse TakeOver (RTO) happens when a public shell company takes control of a viable operating company to simplify their process of listing on a public stock exchange. For example, Toronto Stock Exchange Venture (TSXV) supports a Capital Pool Company (CPC) program which has no comparable in the USA. It enables individuals with public company experience and seed financing to launch a public company shell (CPC), which must seek an active business to take over and promote through a qualifying RTO transaction.

The product roadmap is a plan showing how a tech startup's innovative product / service will evolve over time to expand revenue generating opportunities while providing new functionality to customers. At the detailed / strategic level, this information can be highly confidential and shared only on a "need to know" basis. Having said that, sharing a high level version of the product roadmap is a normal part of the financing pitch process to demonstrate expanding market potential to investors, and a normal part of healthy communication with employees.

A SaaS B2B industry standard metric comparing annual SaaS Year-Over-Year (YOY) revenue growth% + EBITDA% > 40%. If the calculated value is less than 40%, the SaaS business model is at risk of being unsustainable.

The Sales & Marketing (S&M) department is one of at least three expense departments that should be segmented out in any tech startup General Ledger structure. The other essential expense departments are Product Development (DEV or R&D) and Administration (ADM or G&A).

A SAFE is a relatively short legal agreement which enables an Angel / Seed investment to be made immediately without a negotiated valuation (normally used to price shares being purchased). A SAFE converts to shares in the future based on a qualifying Preferred Share investment supported by a full Due Diligence exercise used to price the shares. The conversion of the SAFE investment is typically at the lower of a 10-20% discount to the future Preferred Share valuation, or a negotiated valuation cap. A SAFE is a close relative to Convertible Debt, except that it earns no interest and gives the SAFE investor less alternatives to convert to shares. A SAFE agreement can trigger complicated circular share dilution calculations if multiple SAFE financing rounds are required before enough progress is made to attract a qualifying priced Preferred Share investment. BC resident investors in a SAFE may be eligible for the 30% EBC tax credit if the tech startup has successfully applied for an EBC allocation prior to their investment date.

A SAFE cap sets a valuation limit for converting the SAFE investment into shares. If the tech startup performs well after the SAFE is issued, causing the valuation to soar above the valuation cap, SAFE investors get to participate in that lift by converting at the valuation cap. If the tech startup performs poorly after the SAFE is issued, SAFE investors generally convert to shares at a 10-20% discount to the next qualifying Preferred Share investment.

A critically important legal agreement used by a tech startup to clarify the relationship and obligations between different shareholders. It is especially important in setting boundaries for unexpected events such as a premature Founder termination, a disgruntled shareholder, or a "drag-along" clause needed to commit 100% of a tech startup's share capital to a proposed M&A deal favoured by a 66% super-majority of shareholders. The SHAG is also used to define any shareholder information rights beyond statutory requirements.

In the context of a tech startup, a Strategic Investor (SI) is normally a large US NASDAQ company which can leverage its existing sales distribution channel to grow revenue using the tech startup's innovative product / service. Large tech companies are often forced into M&A activity to ensure their long-term survival, because their internal politics and budget processes may be effective for incremental product improvements, but they are not effective for the kind of significant new product / service innovation required to opens up new market opportunities. The risk of product obsolesence means large NASDAQ tech companies aren't safe in sticking with the status quo for an extended period of time.

Canada's flagship R&D incentive program operating through CRA's T2 corporate tax return (schedule T661). All eligible SRED expenditures must involve technical advancement, uncertainty, and documentation supporting a disciplined R&D process. Eligible SRED project expenditures written up in a T661 form will automatically qualify with no CRA pre-approval, but they are subject to a SRED technical and financial audit at CRA's discretion. Eligible SRED expenditures (primarily Canadian salary and contractor fees) must involve R&D efforts to gain proprietary knowledge not available in the public domain. The SRED program provides over $3B in annual tax incentives to over 20,000 Canadian corporations.

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SWOT analysis is a simple analytical framework for organizing strategic thinking. Strengths and Weaknesses are under direct management control, and involve self-awareness and emotional maturity to be evaluated properly. Opportunities and Threats are external environment factors that aren't under direct management control.

Software as a Service (SaaS) operating from a secure cloud server through a web browser is the currently dominant software revenue model where customers generate a recurring stream of annual software license renewal revenue as long as they continue to renew (no churn). In earlier times, perpetual software licenses were common and software stored on a personal computer (PC) hard drive often didn't get updated until the user was forced to purchase a new PC to get more memory and/or processing power.

SaaS Metrics help diagnose the health of a SaaS business model to optimize customer acquisition, retention and profitability. Key SaaS metrics include LTV, CAC, and Churn. All three are described in this Acronym listing. Other SaaS metrics can be researched on Google.

Restrictive US securities laws (named after 2 US Senators) passed in 2006 that followed in the wake of massive investor losses from financial manipulation and fraud. High profile examples of bad public company behaviour included Enron's accounting manipulations leading to a $63B bankruptcy in 2001, and weak risk management at Worldcom causing $175B in cumulative stock and bond losses by 2003. Sarbanes Oxley legislation made the CEO and CFO of public companies personally liable for the accuracy of their corporate disclosure to shareholders, and in the process helped drive public company executive compensation to record levels. Higher audit standards were also imposed, leading to significantly increased accounting fees for public company audits. Canadian securities laws became tougher in parallel with Sarbanes Oxley regulations, which made a tech startup's path to an IPO on TSXV more complex and expensive. Following Sarbanes Oxley, private tech startups increasingly favoured M&A exits over IPO exits for their shareholders.

Seed stage investing happens after "Friends and Family" love money. It is enabled by having a Minimum Viable Product (MVP), and some early progress with Product Market Fit (PMF) and Go To Market (GTM) strategy.

VC's making a >$5M investment expect the full range of standard Series A preferred share terms, which are based on tech industry standard legal templates widely used in the US and Canada. Classic preferred share rights include: drag along, tag along, right of first refusal, co-sale, pre-emptive rights, protective provisions, information rights, change in control veto, and participation on the Board of Directors.

Preferred Series B,C,D… terms generally follow the pattern set by Preferred Series A terms, but they tend to involve larger investments at lower levels of expected return because risk has been reduced. Series B and following rounds are generally used to finance growth following an established pattern of profitable operations.

A legal document reflecting shares held by a shareholder, as recorded in the legal Share Register and authorized by the Board. For a tech startup, share certificates are normally held in trust by the lawyer, with a .pdf copy going to the shareholder on request. This "held in trust" arrangement eliminates logistical headaches in gathering 100% of the share certificates to complete a future M&A exit transaction with an Acquirer.

Stock compensation for a tech startup normally comes in the form of an option grant to an employee. Options are valued at the grant date using a Black Scholes model, and the resulting estimated option value is amortized as Stock Compensation over the life of the option, and accumulated in the Equity section of the balance sheet under "Contributed Surplus". See also "ESOP", "Black Scholes", and items beginning with "Option..." above.

Personal T1 tax return filed in Canada

Corporate T2 tax return filed in Canada

Trust T3 tax return filed in Canada, or a personal tax slip from the distribution of Trust income

Personal income tax slips issued in Canada and registered with CRA. T4 = employment income from salary and commission, T4A = consulting or other sources of personal income, T4P = pension income, T4OAS = old age security income, etc.

Investment income tax xlips issued in Canada. They includes bank interest, mutual funds distribution of capital gains, etc.

Total Addressable Market. A Sales & Marketing (S&M) term commonly used in pitch decks to describe the significant market opportunity a tech startup is aiming at. VC's are only interested in "Elephant" (home run) sized markets. Angel / Seed investors may be willing to consider "Moose" (2nd or 3rd base) sized markets.

A Trial Balance (TB) is a Chart of Accounts list with General Ledger balances at a specific date, always adding to a total of zero (total +debits = total -credits). The TB includes a list of all GL accounts that make up both the Balance Sheet (BS) and Income Statement (IS). The TB is the foundation for all standard financial statement preparation.

A term used in reporting financial trend data.

In the context of a tech startup, the Term Sheet is a legal framework outlining financial terms negotiated between a motivated investor and a tech startup that is raising financing. Term Sheets are signed at a critically important stage in a financing negotation. Prior to Founders signing a term sheet, the tech startup is free to discuss a deal with competing investors, and has its maximum negotiating leverage with the current investor. Following a term sheet signing, negotiating power shifts to the investor as the term sheet deal becomes exclusive for a period of time deemed sufficient to close the deal. Experienced lawyers working for the tech startup will insist on a detailed term sheet that leaves as few loose ends as possible. Lawyers working on behalf of the investor(s) want to keep the term sheet brief and flexible, so they can control any unspecified details in the follow-on legal paperwork they draft following the term sheet signing. In particular, any Founder / Senior Management escrow arrangements (% exit proceeds held back until future performance milestones are met) in an M&A deal are sensitive to manipulation, and need to be defined carefully at the term sheet stage.

A term related to stock options (or warrants), where the FMV of the share being purchased is less than the strike price. In contrast, if the strike price of the option is significantly less than FMV, the option is said to be "in the money", and will likely be exercised before it expires.

Unearned Revenue (aka Deferred Revenue) is an accrual accounting concept commonly used by tech startups with a SaaS business model, or another form of of license / service revenue with an expiry date. In these cases, Unearned Revenue is a liability recorded as the customer invoice is issued (Dr AR, Cr unearned revenue). The revenue is then recognized on a straight-line basis spread equally over the 12 month software license period (Dr unearned revenue, Cr revenue), as the "unearned revenue" becomes "earned" with the passing of time.

A "Unicorn exit" occurs when a tech startup has an exit valued at >$1B. A tech startup can also achieve "Unicorn" status by attracting a financing investment based on a valuation over $1B. To put this in context, VC's will target a minimum "Elephant" exit value of >$250M to generate a 10x return on a minimum $5M VC investment in a tech startup. See "Post Money Valuation", "Pre Money Valuation, "Preferred Shares".

Venture Capital (VC) investors are typically a small team of tech industry experts specializing in analyzing and investing in maturing tech startups that operate in the VC's chosen tech sector(s). The VC itself pitches to raise a "VC Fund" from sources like institutional investors, pension funds and HNW individuals. VC's add value by filtering down to the best tech startup investment opportunities in their specialty area, making >$5M investments in tech startups (usually in milestone based traunches), and helping to guide their investees by serving on the tech startup's Board. Ideally VC's want to close out their Fund in 8-10 years by producing a return for their investors, so they can raise a new VC Fund and repeat the cycle.

BC's Venture Capital Corporation program enables a refundable 30% EBC tax credit to BC resident shareholders who invest in qualified VCC funds (such as WUTIF, eFund) that invest their proceeds in BC resident tech startups that qualify as Eligible Business Corporations (EBC's). The same 30% EBC tax credit is also available directly from qualifying CCPC tech startups that have successfully applied to the BC Investment Capital Branch for an annual EBC allocation. BC's VCC program operates under the federal LSIF umbrella. Other provinces have their own spin on LSIF tax credit programs to encourage high-risk investments in tech startups.

A warrant behaves like a stock option, but is typically granted to a 3rd party service provider as an incentive for financial services. For example, warrants can be granted as a "finders fee" to an agent attracting new shareholders to the tech startup.

The best choices for fiscal year-end are Mar31, Jun30, Sep30 or Dec31. The most logical / "big company image" choice of Dec31 is in perfect sync with the calendar, but it is also the most popular which creates peak demand for accounting firm services. Tech startups with limited ability to afford high accounting fees will struggle to get the attention of accounting firms if they choose a Dec31 year-end. Therefore the recommended YE choices for a tech startup are typically Mar31, Jun30 and Sep30. Accounting firms are more likely to discount their fees for out-of-sync YE choices (especially Apr30, May31, Jul31, Aug31, Oct31, Nov30), but they cause quarter-end timing confusion for both internal management reporting and external investor reporting. In my opinion, the quarterly trend confusion is not worth the savings in accounting fees. Some businesses have a natural seasonal cycle (like agriculture) which can inform year-end timing, but most tech startups aren't heavily influenced by seasonality.

YOY is a measure of change over a 12 month period. The most obvious YOY comparison is between consecutive year-ends, but YOY can also be used to compare to the prior year's corresponding quarter (eg. YOY Q1'23 vs. Q1'22).

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