As mentioned, financing is a crucial area of focus and scaleups are increasingly interested in capital sources with more flexibility. To find this, they are looking to venture capitalists, alternative lenders, or other private investors to raise money instead of seeking traditional bank loans. As a result, the financing agreements end up resulting in more complex accounting than for a typical loan.
Simple Arrangements for Future Equity (SAFEs) are becoming a common type of financing arrangement for companies scaling up. SAFEs may seem simple from a legal standpoint, but they are anything but simple from an accounting perspective. SAFEs are a type of equity financing often used by startup or scaleup companies in the early stages as a form of bridge financing. Investors make up-front payments in exchange for the right to future shares issued by the company in the next equity financing, typically at a discount.
“Often, these complex financial instruments have aspects of both equity and liability and therefore determining if it is a liability, equity, or both is the big issue,” says Anne-Marie Henson, Assurance and Accounting Partner at BDO. “For example, if you think you are issuing equity, but in fact the instrument is a liability that needs to be measured at fair value, this will make financial statements look a lot different than you thought they would look,” she adds.
To build confidence with investors, scaling companies must strengthen their finance and accounting functions, ensuring that accurate information is reflected in their reporting. It's important to note that having a strong finance function does not always mean having a finance team. Fast-growth, agile companies are outsourcing everything from cloud accounting and bookkeeping to payroll to CFO services in order to grow—unhindered by the slow pace of hiring.