How a SaaS Startup Fixed Its Equity Compensation Books Before an Audit
Sam's List Editorial | 2026-07-21
How a SaaS Startup Fixed Its Equity Compensation Books Before an Audit This is an illustrative scenario, representative of the kind of equity compensation work described below. Details are anonymized and any figures are for illustration; results vary by company. Equity is the currency startups use to hire above their cash weight. It is also the line item founders are most likely to ignore in the books until someone asks to see them. This representative case study follows a SaaS company that had been granting stock options for years and had never recorded a dollar of the related expense, then had to fix it fast when an audit appeared on the horizon. The Problem The company had done what many startups do. It granted options to early employees, advisors, and new hires, tracked them loosely in a spreadsheet, and never booked any stock compensation expense in its accounting system. That worked until a term sheet and an audit requirement arrived together. Under US accounting standards, specifically ASC 718, the fair value of equity awards is supposed to be expensed over the period employees earn them. The company had none of that on its books. It also had grants with inconsistent dates and strike prices that did not clearly tie to a 409A valuation, the independent appraisal that supports the fair market value of common stock. The founders sensed the records were thin, but without an equity-aware accountant, they had no way to know how deep the gap ran. The Approach The work, representative of an equity-focused engagement, started with reconstruction before anything else. Every grant was gathered from board consents, offer letters, and the cap table, then reconciled into a single clean record with dates, quantities, strike prices, and vesting terms. Those grants were matched to the company's 409A valuations so each award's fair value rested on a defensible number rather than a guess. From there, stock compensation expense was calculated under ASC 718 and booked across the correct periods, with the catch-up entries the prior years required. Vesting schedules were built so future expense would flow automatically instead of being reconstructed again later. None of this was glamorous. It was careful, documented work of the kind auditors expect to see, done before the auditors arrived rather than during. The Outcome In this representative scenario, the company walked into diligence and audit prep with equity records that reconciled to the cap table, stock compensation expense recorded on a proper basis, and a clear trail from each grant to a supporting valuation....
