Accounting tends not to be a strong suit at pre-seed companies. It’s okay if you own it and get better over time.
Here are the most common accounting errors I have seen in Pre-seed (fix them if you have them).
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Cash accounting vs GAAP.
Getting paid a one-year subscription up front and counting all the cash in the month you received it as “revenue”. This overstates revenue. Revenue should be recognized pro-rata over the life of the contract. Use Accrual accounting.
Mixing services and Software revenue into ARR/MRR
Many enterprise companies have set up fees, onboarding, customization, etc. When you lump those into “revenue,” you overstate Recurring revenue. Hold these in a separate line. Your ARR is ONLY your software revenue that may renew.
Including Cloud Credits as cash
Yes, just saw this today. Cloud credits should be an asset on the balance sheet, but they are NOT cash.
Understating employee expense
Many times, founders defer salary or employees work for options. This can be good initially, but if you are “ramen profitable” without entire expenses, you are not profitable. Note this for investors if you expect expenses to go up with funding.
Incorrect Expense Classification (R&D vs Operating Expense)
What happens: Costs related to product development might be incorrectly treated as regular operating expenses rather than being classified (or capitalized) in accordance with accounting standards.
Why it matters: Mixing R&D, marketing, and administrative costs obscures the true nature of expenses and can reduce the accuracy of financial reports. Over time, it can also affect how investors view the efficiency of your operations.
Forgetting or Mismanaging Deferred Compensation (stock options)
Stock-based compensation must be recognized as an expense (at fair value) over the vesting period. Missing this step can result in significant adjustments later and possible tax complications.
Not tracking Sales Tax or VAT properly.
Companies may assume digital sales are exempt or ignore differing tax obligations across jurisdictions.
Misclassifying Contractors Vs Employees
What happens: A lean early-stage team may hire contractors for engineering, design, or marketing roles but treat them like employees—without the proper employment taxes or payroll withholdings.
Why it matters: If regulatory agencies determine the relationship is actually an employer-employee one, this can lead to tax penalties and legal complications.
Neglecting proper accounting for Debt Instruments (Convertible notes, SAFES)
Use one of the cap table software applications not Excel. Treating convertible notes or SAFEs simply as equity without considering the specific legal and accounting nuances (e.g., beneficial conversion features, derivative liabilities).
If as a founder you have one or more of these, don’t worry, you are in good company! Just fix them. Your investors will thank you.
Losing trust in the financials is a top reason your investors may lose confidence in the company. Stay on top of these!
