Overview

While preparing for a large round of equity funding, Praetorian identified several weaknesses in its existing accounting processes which, if left unchecked, could raise questions during investor due diligence. Management engaged with Embark to evaluate and address audit readiness, its stock compensation plan, and other critical reporting and finance needs that would all be essential for securing investment capital.

The big wins

Client challenges

Like many companies trying to attract investors, Praetorian was a smaller, younger organization with lean operations. As a result, they were comfortable with basic financial reporting processes but lacked sufficient expertise on more technical and complex aspects of financial reporting, particularly regarding their stock compensation plan. Since the company was preparing for their first round of funding, management established some critical objectives to achieve during preparation:

• Review previous third-party financial reporting & finance work to ensure compliance and accuracy
• Examine current processes and procedures, correcting any issues identified
• Revisit calculations involving their stock comp plan and adjust as necessary
• Solidify and substantiate their financial numbers in advance of an external audit
• Establish more rigorous reporting to comply with the needs & expectations of investors and auditors

How Embark helped

Staying within Praetorian’s budget was imperative for its management. To accommodate their needs, Embark completed the engagement in separate phases, focusing on particular objectives and issues for each over the course of a year.

Phase one

• Conducted walkthroughs to assess the effectiveness of their processes

• Identified key areas that required documentation for the audit and all necessary supporting information

• Reviewed previous outsourced work and identified issues that required resolution

• Provided guidance on audit preparation

• Reviewed and streamlined its revenue process and documented it with a new flowchart

• Ensured its chart of accounts was properly aligned to GAAP and reporting requirements

• Drafted a memo on its cost of goods sold policy and included relevant guidance to justify the high margins typical of a services firm

Phase two

• Reviewed calculations used within the stock compensation plan for compliance with GAAP, determined the correct financial reporting, and made adjustment entries to correct the account

• Built a model for the stock comp plan to quickly categorize expenses by COGS or SG&A and determine the appropriate monthly journal entry to record

Phase three

• Reconciled third-party administrator activity for all stock option exercises

• Researched journal entry treatment in the stock comp options

• Created a repeatable monthly schedule to simply download and plug-in activity from a third-party administrator, all within their existing financial reporting & stock comp software

Phase four

• Drafted an ASC 606 implementation memo, covering the company’s revenue recognition process and ensured its readiness for the audit

Results: Praetorian successfully closed its initial funding

By the time Embark completed the engagement, Praetorian was well-equipped for an investor’s microscope. Balancing budget constraints and a variety of needs to address, Embark helped Praetorian prepare its financials and processes for what would ultimately be a successful first round of private equity funding.