As companies scramble to pull together their year-end financial statements, emerging-growth companies often leave equity compensation reporting to the very last minute. But to report their numbers to investors and auditors, any company that has an employee stock option plan and reports in accordance with GAAP needs to determine how much compensation is related to options granted to employees in the current year and how much to amortize for previous grants.

CFOs and Controllers working on their compensation expense numbers have either already implemented a system for stock plan administration and reporting – or they’re still using old-fashioned spreadsheets. In either case, at this time of year, our support team at Corporate Focus gets a barrage of questions about certain common areas of stock option expensing under ASC Topic 718 (previously FAS 123R). Our customers – and those not yet using a system – are trying to figure out the variables that go into the Black-Scholes valuation equation and how to properly amortize equity compensation expense over the service or vesting period.

While a system or spreadsheets may be able to handle the heavy lifting, anyone doing stock option expensing needs to have some understanding of what they’re doing (even if it may be a lower priority than cash related items for fast growing, venture-backed companies). If that’s you, you’re in luck. When our customers and friends need a quick primer on stock option expensing, we refer them to a three-part series from our blog that explains the task in clear, concise steps. If you’re looking to get a better handle on this tricky topic, check out these posts:

Part 1: Valuation and Black-Scholes Variables. Explained.

The first part explains the six variables used by the Black-Scholes formula to determine the grant-date fair value for a stock option award.

Part 2: Expensing Stock Options. Demystified.

The second part explains the eight terms you need to know in order to properly amortize the fair market value over the service period, including the true-up related to option vesting and forfeitures.

Part 3: FAS 123R Reporting Disclosures. Clarified.

The third part explains the two disclosures related to the valuation summary and the nine disclosures related to option activity during the period, as required by ASC Topic 718-10-50 (previously para. A240 under FAS 123R).

Spend a few minutes reading each of these blog articles, and you’ll come away with a solid understanding of the basics of stock option expensing, including how the option value is determined, how it’s amortized each year, and the requisite disclosures. It will be a great investment of your time prior to moving ahead with your equity reporting.

Stock option expensing is highly complex and requires adjustments every reporting period. So if you don’t know it yet, it’s worth taking the time to learn. At a minimum, these articles will give you enough information to ask the right questions of your accountant or auditor. And you just may finally understand what’s going on in your stock plan administration and reporting system (or spreadsheet).

If you can recommend a great resource for stock option expensing that applies to privately-held companies, let us know and we’ll be happy to share it with others.

In case you are not aware of Section 6039 of the Internal Revenue Code, which details the Form 3921 requirements, there are three important dates you need to know. They relate to employees who exercised incentive stock options in 2010.

1. January 31, 2012 – You are required to send Form 3921, or an appropriate substitute form, to any employee who exercised an option during the calendar year in 2011.
2. February 28, 2012 – If you want to submit a printed form to the IRS for the ISO exercises, you have until February 28th to print Form 3921 and send it in to the IRS. You can order these from the IRS by calling 1-800-TAX-FORM or online at: http://www.irs.gov/businesses/page/0,,id=23108,00.html
3. April 2, 2012 – If you plan on filing these forms electronically with the IRS using their FIRE system, you have until April 2nd. Note: Companies with more than 250 ISO exercises in 2010 are required to file electronically.

You can download more information about Form 3921 from the IRS:

1. General Instructions for Certain Information Returns
2. Instructions for Form 3921 and Form 3922

If you would like to add this to your 2012 to-do list and quickly check it as done, Corporate Focus can assist with not only generating the substitute participant forms to send to employees with an ISO exercise, but can also create the form you can use to electronically file with the IRS using the FIRE system.

If you are already a Corporate Focus customer, email us at support@twostep.com to discuss how Corporate Focus can help you with this requirement.

If you are not a Corporate Focus customer, contact us to find out how we can help with these requirements, as well as with your complete stock plan administration.

A few of the key results:

• Stock options are granted at 66% of the companies.
• Restricted stock is issued at 29% of the companies. One interesting question the NCEO should explore in 2012 is how long the restricted stock plan has been around and what kinds of plans companies expect to have in the future.
• Half of these companies administer their plans internally. I’m sure many of these companies are using an equity administration system like Corporate Focus, although that would be a good question for the NCEO’s 2012 survey.
• 15% of the equity is held by non-founders through awards.
• C-Level executives receive 56% of the awards.

For those companies who want to use this information to see how their equity compensation stacks up against 201 other private companies, a nice summary of the results can be reviewed and the complete survey results can be purchased from the NCEO.

Corey Rosen, senior staff member of the NCEO, will be presenting a webinar with an overview of the survey results for the Corporate Focus community on Friday, December 16th at 2 pm eastern. Sign-up to hear about Equity Granting Practices for Private Companies.

I’m not sure what type of paralegal the author is referring to, but I can be certain it’s not a Corporate Paralegal working in a law firm or in-house legal department. Allow me to address each of the factors that landed paralegal in the number-one spot on CareerCast.com’s list of most underrated jobs, according to the Forbes article.

1. Relatively Low Stress – Corporate paralegals are often approached just before a closing with a minute book that hasn’t been touched in years. In order for the multimillion dollar deal to go through, the shareholder records must be updated, stock certificates must be printed, minutes must be generated, and cap tables must be created – all in a few short hours (no pressure, right?).
2. Little contact with the public – Paralegals are regularly in contact with officers, directors and shareholders of multiple business entities along with their accountants and consultants – all calling and emailing with endless questions about the status of their corporation or ownership status. And of course, they always need the information ASAP.
3. Don’t have to breathe toxic fumes – Working with old, dusty minute books of questionable origin in a small, enclosed room may not be toxic, but it sure can feel like it.
4. No need to lift loads of 50 lbs or more – Maybe they don’t quite reach the 50-lb mark, but lugging five or six minute books or a banker’s box full of corporate documents from room to room at midnight is no easy task.

But truth be told, there is a way to make the corporate paralegal’s job lower-stress. Law firms and legal departments should consider investing in online information management systems which would allow paralegals and attorneys – and their clients – immediate access to all the answers and documents they need on a daily basis. Paralegals would be able to spend less time fielding calls and emails, and more time on tasks that truly add value for their employer.

In fact, if more law firms and legal departments started using online systems, like Corporate Focus, more of the factors mentioned in the Forbes article could become true. Here’s what I mean:

4. No need to lift loads of 50 lbs. or more. Instead of working with boxes and books full of documents, an online system allows you to upload those documents and link them to all the company’s related entity and ownership data. When you need those documents for due diligence, a paralegal, attorney or client can access them with their laptop no matter where they are.
3. Don’t have to breathe toxic fumes. When all the relevant corporate documents and closing binders are uploaded to an online system, three-ring binders and minute book storage rooms can become a thing of the past. No more dusty, outdated books.
2. Little contact with the public. Paralegals will always be in close contact with clients, of course. But with an online system, the client can be given direct access to their corporate information and documents – so they can find what they need, when they need it.
1. Relatively low-stress. An online system like Corporate Focus gives law firms and legal departments peace of mind in knowing that all the information they need is accurate and up-to-date – not to mention the easy-to-generate reports, stock ledgers, stock certificates and cap tables that can be ready in minutes, instead of hours.

If you’re interested in making the corporate paralegal job a little less stressful, take a look at
Corporate Focus and see what an online system can do for you.

Whether you’re a CFO or attorney, cleaning up your records never seems to be a high enough priority – until the final hour. At that point, the pressure is on to deliver an accurate set of reports on who owns each class of stock, convertible securities and stock options with vesting to show you have control of your capitalization or so you can update your option expensing reports.

Recently, I was trying to explain to a colleague why companies of every type and flavor call Two Step on a regular basis for equity consulting services. And I realized it was primarily based on their desire to focus their time and limited resources on what they do best.

After all, why should a CFO or Controller with sophisticated finance and reporting know-how spend time managing their stock and option records – if this work can be transferred to an equity professional with the expertise and experience to do it faster, better and at a lower cost? Similarly, at law firms, why should lawyer and paralegal time be spent on tracking and reporting stockholder and stock option records – which requires little high-value legal analysis or advice?

The essence of why companies call on our Corporate Focus Services team for equity administration and accounting assistance was nicely explained in a blog post I read recently about outsourcing bookkeeping work for law firms. It said firms retain third parties for help with accounting work so they can get experience, expertise, and additional resources at a fraction of the cost of hiring someone to do the work. The article stated that outsourcing typically makes sense if the work is not an important part of a firm’s core business function – and requires a high level of expertise in a specialized area. As an extreme example, imagine if your regular physician was asked to do open heart surgery once a year. It just wouldn’t make sense.

Using the reasons stated in the article mentioned above, it’s clear why companies turn to our Corporate Focus Services team for equity administration and reporting:

1. Experience: Imagine if you could hire someone only for the hours needed to get the work done – and that person brought 10 years of experience using a consolidated equity administration and reporting system like Corporate Focus. Wouldn’t you feel confident in knowing they had already tracked every type of equity you can think of – and had already been through hundreds of audits?
2. Expertise: Imagine if the person doing your equity administration was a certified equity professional and understood the process, the difference between stock and stock options, vesting and fair market values, termination policies, forfeitures, and true-ups. Most people never have to even think about that jargon in a lifetime (lucky them).
3. Resources: Imagine if someone was readily available to do the work – and not distracted by a thousand other things on their to-do list. Rather, equity administration and accounting is their top – and only – priority. Remember, your staff already has a backlog of work – and those areas where they have the least comfort tend to get procrastinated the most.

As our customers approach 4th quarter crunch time, I’ve noticed the large number of companies that have turned to our Corporate Focus Services team and the diversity of the equity administration projects that we are handling for them. Let me share three examples that articulate some of these concepts:

1. One new customer recently purchased Corporate Focus – and brought with them a tangle of complex and confusing spreadsheets. They did not have the manpower to go through the spreadsheets to get them moved into a new system, but realized they needed a system other than Excel to report their year-end option expense. So, the customer turned to our experts to get the information imported in a timely manner.
2. One existing customer of ours has had Corporate Focus for several years. Recently, the workload for the main user has exploded – and she hasn’t had time in the last six months to update the system. This customer’s lack of resources made it impractical to continue to do the data entry and reporting work. Instead, they turned to our team to get them caught up with many months of data entry.
3. Another customer had a Corporate Focus user who has been entering information and keeping it up-to-date, but had actually used the wrong information. Lacking the time to correct all of the mistakes, the customer turned to our Services team to clean up their data so they can use it going forward.

In all three examples above, the company did not have the bandwidth to do what needed to be done (in today’s economic climate, aren’t we all asked to do more with fewer people?). These customers needed someone who was an expert, had experience doing the type of work they wanted, and most importantly, had the time and resources to get it done efficiently.

If you’re faced with equity administration or accounting challenges and don’t have the experience, expertise or resources to tackle them in-house, the good news is you’re not alone. The bad news is that when this kind of problem occurs, you may have little time or resources to fix it.

Let us know about your current equity adminstration and accounting challenges, and we’ll show you how the Corporate Focus Services team can make your problems go away. It’s that easy.

Will it Work?
David’s bottom line: “If you have complex or industry-specific information technology needs, you may be better off with packaged or custom-designed software.”

Corporate Focus users tracks complicated capitalization tables, perform option expensing work required under ASC Topic 718, and generate reports and documents for counsel, employees, and auditors. Cloud offerings like Corporate Focus not only perform complicated functions and tasks, but developers can easily patch bugs that all users receive immediately. Try getting a patch to all users of an installed system. Definitely not an easy task. I’m also an avid user of Google Apps. Their patch system is so robust that I’ll see features pop-up as I’m working in their system. It is pretty amazing.

Is the Monthly Fee a Deal?
David’s bottom line: “Functionality is paramount, but choose the cloud if you prefer to avoid large short-term expenses.” Here David seems to be pro-cloud, but there is a but as he mentions a user of QuickBooks who went for the installed version, because “I have it forever.”

Unfortunately, you do not have installed software forever. Operating systems change, computers die, and additional functionality is needed. In all of those cases, you’ll need to purchase additional software, especially if you don’t have that original CD the software came on.

The fee people pay for a cloud offering like Corporate Focus is used to continue to improve the software and give users what they need. In fact, cloud providers release updates to their software 3 or 4 times a year. When was the last time you received (or wanted to deal with) installing 4 updates to software you install?

Will You Always Get Access?
David’s bottom line: “The cloud is ideal if you and your employees need access to tools and data from different computers and devices. The cloud can be a problem, though, if you do not always have fast, reliable Internet access, especially if you upload or download large files.”

First, the cloud is more than ideal for giving access to employees. Corporate Focus customers range from attorneys and paralegals to CFOs and controllers to auditors. These people have to work together to ensure capitalization tables are up-to-date, option expensing information is correct, and employee notifications are sent out. The old way of sharing this information was to pass Excel files back and forth. With Corporate Focus, they all log into one place. Of course, that is true about all cloud offerings. Plus, how many companies have all of their employees come into the office everyday to do their work and expect them to only work those hours? Answer…not any that I know. The cloud makes it easy for them to connect from anywhere. I’ll confess that I’ve connected to a cloud offering while on the beach.

The Internet Service in this country could definitely be better, but I’d say we’ve come along way since the days of the 14.4 modem to access the internet.

Will You Get Support?
David’s bottom line: “If you need handholding or if you are not comfortable trying to find advice on user forums, the cloud probably is not ideal.”

This is the item I take the most umbrage with. In our case, users call into support and talk to highly trained individuals who can assist customers in their questions. We do supply FAQs and other online content, but it is to bolster the personal support we give customers…not to avoid it.

Any company who provides a cloud offering who does not provide adequate support for their customer’s needs will have the same type of feedback as companies of installed software who do not support their customers … Bad feedback.

Is Your Data Safe?
David’s bottom line: “If you do not like the idea of trusting anyone but yourself to keep your data safe, the cloud may take you out of your comfort zone.”

Cloud providers will ensure data is secure by utilizing SSL certificates, data encryption, policies and procedures, and SAS 70 Type II documents. It is their job to keep your data secure and any cloud provider who does not and breaks that trust will quickly be out of business.

He mentions one user who keeps financial and HR data on their servers and will not put it in the cloud. I’m guessing their servers are not physically monitored 24/7, require fingerprint access to get into the building, nor track all of the incoming and outgoing traffic. Cloud providers provide that type of security, which most business owners simply cannot do.

In summary, cloud offerings are the way to go in almost all cases. They are flexible, secure, feature rich, and constantly improved. By the way, I practice what I preach. All of Two Step’s business services utilize cloud systems, such as Salesforce, Google Apps, and Quickbooks Online.

If you would like to start your stock plan administration and option expensing work in the cloud today, sign up for a free trial of Corporate Focus.

Here are the five types of documents you need to review to confirm that your ownership data and related capitalization tables are 100% accurate:

1. Charter Documents
Your articles or certificate of incorporation describe the number of shares authorized for each class of stock. You should confirm how the number authorized has changed over time for original classes and new classes. You should confirm that, at any point in time, you have sufficient shares authorized to cover the issued and reserved shares. To confirm this information, make sure that you have a complete set of the charter or incorporation documents for your company that have been filed with the Secretary of State, from inception to the current date. Begin with the original charter and track forward in time through all the amendments that have been filed. You should list the authorized shares for each class and the effective date of each change. Check that at the end of each reporting period, there were sufficient shares authorized to account for the number issued and reserved. Finally, confirm that the number reserved for each class is correct at each reporting period.

2. Stock Option Plans
The number of shares reserved for stock options and other convertible securities should be correctly reflected for the each class (typically common stock) into which the grants are exercisable or convertible. Since the option pool can be counted in certain reports as part of the number deemed to be outstanding (even if not yet granted), the size of the option pool can have a major impact on the fully-diluted cap table numbers. It also changes over time based on Plan documents and board actions. To verify the number of shares that should be reserved for shares that could be issued under the plan, look first at the original Plan document and then look at any Board resolutions that may have changed the Plan over time.

3. Board Minutes and Consents
Every stock, option or warrant issued or granted must be authorized by appropriate Board actions. From the initial founders’ stock to the most recent stock issuance, you should have written and signed resolutions authorizing the shares. For financing rounds, this may be in the form of Board resolutions authorizing a financing with the details further described in a stock purchase agreement. For options, there should be Board resolutions authorizing every grant with a list of who got the grant, how much, when, what has to be paid, and how will it vest. To confirm your records, you will need to compare each record to the related Board actions. For example, with respect to stock option grants, confirm the date of grant (the board date), the exercise price, the vesting schedule, and the vesting start date. To confirm qualified options, check the exercise price against the current fair market value.

4. Stock Option Awards
After having confirmed that the Board resolutions correctly reflect the intent of the Board actions, the next step is to review the signed option grant documents and compare these documents to the Board resolutions and your options records. You’ll want to confirm that the grant document conforms to the Board resolutions and that your records correctly reflect the signed grant. Any discrepancies should be cleared up immediately. One common problem is when the vesting schedule as written in the option agreement is not consistent with the Board intent. Mistakes in or misinterpretation of the wording of the written vesting description can result in problems down the road, particularly when an employee is terminated and there is a disagreement about the number of shares vested. If you find these kinds of errors in advance, it is much easier to resolve the discrepancy.

5. Stock Purchase Agreements
Your ownership records should accurately reflect the intent of each stock purchase agreement. For each agreement, compare the terms with your records. As an example, compare the Schedule of Investors in a Preferred Stock purchase agreement to your stock records. Confirm that the number of shares issued and price paid as reflected in your records are consistent with what is stated in the purchase agreement. Then, review the conversion ratios or each preferred or convertible class to make sure it converts into the right number of common stock when it was first issued and as dilutive issuances may have changed that number over time. Finally, look at the fully-diluted capitalization table reports to confirm that the fully-diluted numbers for all classes accurately reflect the as-converted numbers for each class of convertible stock at each reporting period.

If you examine these types of documents and validate the information against your ownership records, you will help to ensure the accuracy of your equity reports and the information provided in your financial statements. You’ll have confidence that your auditors can review your data and find the legal document back-up. By doing so, you will avoid last-minute errors and additional calculations and be able to devote your time to more important reporting matters.

If you want to have 100% accurate capitalization tables that are supported by a complete set of legal documents, let us know. Whether you want us to clean-up your existing ownership records or convert them to our system Corporate Focus, we can help you get organized so you can report your capitalization numbers with complete confidence.

For as long as corporate paralegals can remember, stock certificates were ordered, pre-printed with the company name, certificate numbers and authorized stock, in batches of 25 or 50 certificates at a time. As new issuances and transfers occurred, the shareholder and stock issuance information was hand-typed onto the face of these pre-printed certificates. Additionally, restrictive legends had to be typed onto the back of the certificates A time consuming and frustrating process. I always seemed to run out of certificates just when the client needed the new certificate immediately. I had to put everyone on hold until a new order came in a few days later. If the company name was changed or the authorized stock amended – again – new certificates would need to be ordered, or even more time consuming, the new information would need to be hand typed onto each certificate form. There is no erasing or “write-out” allowed. One typo would cause the certificate to be marked as “issued in error” and the paralegal had to start with the next pre-numbered certificate.

Today’s technology presents a new challenge for corporate paralegals. As law firms focus on equipping their offices with the most cutting edge computers, printers and scanners, typewriters have become a thing of the past and paralegals are hard pressed to find a working typewriter in their office.  Unfortunately, even with all this great new technology, pre-printed or border only stock certificates are one of those old standards that law firms and clients are having a hard time giving up.

Typically, paralegals and legal assistants have managed to work around the lack of typewriters in their office by creating a template in Word that matches the spacing on their pre-printed certificates. These are tricky to create and almost never line up with the certificate quite right, resulting in a lot of “Issued in Error” certificates filling the minute books.

A much easier option is to invest in a software system that provides professional looking certificate templates that can be easily populated with your shareholder and ownership information. Corporate Focus is this type of system that, among a number of other features such as entity tracking, online minute book documents, and ownership administration, can solve all your stock certificate printing problems. It uses the stockholder information entered into the system for tracking and reporting purposes to also easily create professional looking certificates with, literally, a click of your mouse. Of course the system has templates for the most of the commonly used pre-printed stock certificates, such as such as Goes and Corpex, as well as templates for the “border only” certificates and “blank eagle”certificates. It adds all the necessary legal text and restricted stock legends, as well as the shareholder and other ownership information directly from the stock ledger data.

But, there really is no need to spend your time and your client’s money on expensive pre-printed or border only stock certificates.  For a fraction of the cost, you could just purchase some high quality white paper and use the certificates that can be printed directly from Corporate Focus. It’s a remarkable breakthrough to see a white sheet of paper become a color stock certificate template filled in with all the legal text, the shareholder information, and the legend on the back. You can choose your favorite color too – green, orange, blue, red, or gold. You have to see it in action to understand how fast and easy stock certificate printing can be when you don’t have to line up to anything. You simply print it all.

If you’d like to see why Corporate Focus has become the #1 stock certificate tracking and printing system, and why the last few typewriters have been thrown out the window, check out this short video. It shows how professional looking stock certificate can be created with just a click of your mouse.

• Greater use of alternative fee arrangements
• More transparency between law firms and clients
• Increased reliance on network technology
• Improved knowledge management within firms
• Focus on responsiveness to clients’ needs

This does not mean that legal clients are trying to cut corners or nickle-and-dime their law firms. They are still willing to pay premium dollars for high-value work. What they don’t want to see are legal bills that are needlessly plumped up with the inefficient use of time. Meanwhile, lawyers don’t want to spend any time that could be considered wasteful and might require hours to be written off or discounted.

The trend we’ve seen that is consistent with the goals of both lawyers and their corporate clients is self-service – in other words, direct access to legal information and documents. No matter what field of law, every time a client can find his own information or documents online (just as they might check their bank account online), it’s good for the client – and good for the firm. Good for the client because they can find what they need at no cost and with no time delay. Good for the law firm since self-service impresses clients, reduces the chance of any time being written off, and lowers their fixed expenses (i.e. full-time staff).

And, even if clients can’t find their information in a self-service manner, at least the lawyer or paralegal should be able to find the relevant information online quickly.

Does self-service come at no cost to a law firm or client? Not quite. The cost is either in the internal information and knowledge management systems that track, store, and provide the data or the time and effort that was required to enter, update, and manage the information. However, the investment in information systems and human resources is minimal compared to the ROI of long-term, high-value clients. Given that you increase the risk of losing a client’s business each time they have to wait for something a little too long or the bill is a little too high, the payoff is clear. As the survey confirms, it is much easier to get ongoing and increased revenue from a client you have than trying to find that next client who has never done business with you. And don’t forget about referrals from current clients who are impressed with your capabilities.

Through our Corporate Focus customers, we see the payoff every time a client logs in and retrieves a minute book document, capitalization table, or current data sheet without phoning their lawyer (other than to say how delighted they were to not have to call or email their attorney to get something they needed).

As Cesar Alvarez, Executive Chairman of Greenbert Traurig, puts it: “We’re always looking at how we can get greater efficiency out of our information systems.” This is true today and also promises to be true over the next five years. Says Robin Sangston, Vice President of Legal Affairs at Cox Communications, “We’ll eventually become paperless, completely Internet-linked, and even more reliant on technology in performing our jobs.”

The landscape is clearly shifting. Just like we’re organizing our personal lives on Facebook and Gmail and our business lives on cloud-based applications like Salesforce and Zoho, legal professionals are organizing their records in online systems like Corporate Focus, Netdocuments, and CaseCentral. Over the next few years:

• thousands of lawyers, in-house counsel, and CFOs will be finding their own information and documents when they need it – without asking someone else;
• legal fees related to administrative work will be reduced; and
• lawyers at firms and in legal departments will be working better and more efficiently than ever before with their appreciative clients.

How can a system like Corporate Focus help you deliver enhanced service and get more business from your favorite clients? Watch this short video to find out.

What’s the inherent conflict? Corporate paralegals are constantly pulled in different directions by a client who needs an answer yesterday and a partner who needs the work done an hour ago. As a result, important tasks that should be done today are often put on the back burner; they end up being done at the last minute (which frequently means at transaction time), as a deadline approaches, or even when it’s too late.

The ultimate question for many law firms or legal departments is whether they can stop for a moment today and invest the time to help their paralegal staff get organized and work more efficiently or whether they will just continue to struggle through last minute fire drills year after year, searching for the same information and repeating the same tasks that took too much time in the past. Those who choose to use the right systems have a competitive advantage–they are able to reduce the demands placed on their paralegal staff by streamlining and automating many of those tasks previously done manually.

Common tasks where wasted time and effort could be reduced or even eliminated include:

• Searching for minute books and copies of basic entity information, such as minutes of meetings and lists of board members;
• Emailing documents to colleagues and clients and instead using self service/direct access;
• Manually calculating ownership reports and capitalization tables for due diligence or investor requests; and
• Keeping track of upcoming due dates, deadlines and follow up activities.

Of all these tasks, the most time consuming and error prone is ensuring there are 100% accurate ownership records. Unfortunately, discrepancies in tracking, reporting, and knowing what happened at board meetings and with transfers of ownership tend to be discovered at transaction time – just when you don’t want to find any problems. Well, why does it have to be that way when systems are now available to insure that everyone is looking at the same set of reports, documents, and cap tables?

Imagine your paralegals spending less time searching for answers and manually updating spreadsheets and more time responding to critical client matters. It’s what your clients and attorneys want. Increasingly tech-savvy clients are pushing their lawyers for faster answers and direct access to their own information and documents.

For most of us who are faced with the question of improving the way we work, the biggest challenge is making the decision to do it today. It’s far easier to postpone getting organized since inevitably change involves something new, something to learn, and at times re-thinking what is the best way to do it in the long run. But, just for a moment, think about how much less stressful your work life would be if your entity and ownership information was easy to find and up-to-date and everyone on your team had access to it wherever they were, whenever they wanted to see it.

If that sounds like an improvement, let us know whether we can show you how so many others have done it already with Corporate Focus. Your paralegals will thank you. Your attorneys and clients will make you feel like a hero. I know that’s how I felt every time someone needed an answer to a question or an updated report for a new transaction–when I knew I could give them the right answer in moments just by looking at the data in Corporate Focus.

In her article, Macy concludes:

• Scanned minute book documents are much easier and faster to find than traditional paper minute book binders.
• Based on easier sharing and text-search capabilities, cloud-based systems work better for managing minute book documents than storing the digital files in a network folder.
• Custom minute book solutions offer more than just document storage. They also allow entity information tracking, stock and option administration, managing compliance information and due dates, and reporting for a single company or many companies.

Reading Macy’s article brought to mind a question I frequently hear, which is: “What is the difference between organizing my minute book documents and organizing my minute book information?”  In other words, what are the benefits of an online minute book information management system over a minute book document storage solution? After all, if you only need to store and retrieve scanned documents, there are less costly options.

Here’s my response regarding the five key benefits of an integrated online minute book system:

1. Information that comes out of the minute book documents, such as the officers and directors of the company or who owns the company, can be tracked. That way, you are not wasting time flipping pages to find the exact details you need.
2. Scanned minute book documents can be linked to the information being tracked for easy confirmation or audit; for example, the minutes of the meeting during which officers were elected.
3. Reminder dates and filing dates can be linked directly to the information and documents. So, you can view last year’s annual report as you file this year’s – or you can see the stock records when you’re preparing the annual stockholders’ consent.
4. Instead of just copies of the documents, you can generate reports and calculations in seconds rather than the hours it would take to do them manually. For example, you can instantly produce a corporate data sheet, list of officers or directors on a previous date, or the percent held by an investor of the fully-diluted ownership.
5. When it’s time for an audit or due diligence, you can export copies of the scanned documents out of the system. You can also provide reports that show you have proper controls, such as how officers and directors changed over time, accurate up-to-date capitalization tables and stock ledgers, lists of meeting dates, governing documents, minutes of meetings, qualifications, and key agreements.

While you’re scanning your minute book documents (which is a great first step), why not also collect and organize the information found within? That way, you don’t have to go back and find it later – and you can get your work done more efficiently, more accurately, and share it more easily with others.  As you scan a new document into your system, take an extra moment to enter or update the lists of officers, directors and stockholders.  I guarantee your time will pay huge dividends down the road when you need to retrieve or report on the information – and you don’t have to even glance at the original scanned document.  

To see how others have saved substantial time in tracking more than 200,000 entities with Corporate Focus, take a look at this short video.

But what about a firm’s minute books? Since they are in three-ring binders, these take up even more precious real estate in a law firm – space that could be better used as an office, small conference room, or “war room.” In addition to the minute books themselves, many of the original documents contained within are stored in multiple locations, taking up even more coveted capacity.

A wise decision for anyone maintaining minute books or tracking entity information for many companies would be to store the books electronically. Yet due to the nature of the information that needs to be retrieved from a minute book, a simple electronic filing and storage system is not enough. The ideal solution is a system that allows easy retrieval of the scanned historical documents, as well as instant sharing of the entity information that comes out of the minute book documents.

If you’re ready to do away with your growing stacks of minute books, here are three things you’ll need to get started:

1. A system – Invest in an online system for entity and minute book management. The system should allow you to quickly and efficiently track your entity information and the related documentation – and then easily share that information with others.
2. A scanner – If you haven’t already, buy a good scanner. Regular readers of this blog know that Jeremy Wright, our COO, recommends the Fujitsu ScanSnap scanner. This is a great scanner for regular use in scanning minute book documents, stock certificates, and option agreements. You name it, the ScanSnap can scan it … one-sided, two-sided, OCR. When you pair this scanner with Corporate Focus, you create a streamlined process that allows you to easily scan documents, organize and track them, and share them with clients.
3. A plan – Take some time to consider your goals in storing your minute books online and create a plan that fits those objectives. Is your goal primarily to save space? Or, is it to increase your firm or department’s level of efficiency, accuracy and collaboration, whether you’re working on annual meetings and reports – or stock plan administration and capitalization tables?

The result – An online minute book system can significantly reduce or eliminate the storage space needed for your corporate documents, freeing up costly square footage for better use. Donate your three-ring binders to a local school and recycle the paper. If you’re not comfortable letting go of those original documents just yet, store them in a fireproof safe. Imagine it – an entire office filled with minute books, reduced to one secure filing cabinet. What could you do with all that extra space?

If you’d like to see how Corporate Focus can help you create electronic minute books (and de-clutter your office environment), check out this short video.

We have always recommended that Corporate Focus users use complex passwords to access Corporate Focus, but we also recommend it for any other site where they maintain confidential information. A complex password is one with at least 8 characters and a combination of letters, numbers, and symbols. I’d recommend all readers of this blog read “The Only Secure Password is the One You Can’t Remember” at Lifehacker.com to understand why using complex passwords in all aspects of your online life is important.

This post contains several suggestions that I recommend not only for anyone using Corporate Focus, but also when shopping, facebooking, or using other legal online systems to protect passwords for any online applications that contain confidential information:

1. While Corporate Focus follows the industry standard to require you to use an 8 character password with a combination of letters and numbers, I’d recommend that users take it a little further and consider using at least a 12 character password with a combination of letters and numbers.
2. Do not use the same password you use for other applications. The reason is that if another account is hacked and a hacker gets your password there, they then can compromise your login not only on Corporate Focus, but anywhere else you use that password.
3. Use a password manager tool such as lastpass or 1password to manage your passwords, so you can more easily manage unique passwords for each of your sites.

When users log into Corporate Focus Version 6.7 for the first time, they will be required to reset their password and choose a more complex password than they might have previously been using.  I am sure we will receive a lot of questions about why we are asking users to reset their passwords. The reason is simply to make Corporate Focus more secure for our customers’ confidential information. By asking you to reset your password, we ensure that any non-complex passwords that existed previously are replaced with a complex password.

In addition to requiring more secure passwords, Corporate Focus continues to maintain the highest standards for security, including the following:

1. An SSL connection for all data that goes in or comes out of Corporate Focus;
2. Users are locked out of Corporate Focus after 10 unsuccessful logins;
3. All data passes through a fully-managed, Cisco firewall and Big-IP F5 load balancer; and
4. All incoming and outgoing traffic is monitored 24/7 looking for suspicious traffic.

For more information on Corporate Focus Version 6.7, check out the press release.

The highlight of the one day event for me was the lunch time question and answer session moderated by Emily Cervino of the CEPI with the speakers Lora Blum, Corporate Counsel of LinkedIn, and Mike Taylor, Vice President of Finance of Tesla Motors.  Lora and Mike shared their experiences in getting organized for and working through their respective IPO processes.

I presented on a panel with Josh McGinn from BNY Mellon and Marianne Snook from Stock & Option Solutions.  Our presentation covered how a private company should get their ownership records organized pre-IPO, how a private company goes about selecting a transfer agent, and common issues private companies will run into when going public and transferring their ownership information to a transfer agent.

I took away these five items from Aspirations:

1. There is a lot of interest in IPOs.  We can see this in the number of companies that are going public this year and at least from the crowd at Aspirations, that interest has not waned.  It will be interesting to see how the next six months pan out.
2. As you approach a possible IPO date, make sure to switch to a quarterly 409A valuation and only grant options within a month of each valuation.  Both LinkedIn and Tesla did this, so that they had a more reliable stock price for their grants as they went public.
3. Get your stock ledger organized today. If you are using Excel or even an equity administration system and do not know if you have the following information or whether the information is accurate, you should start organizing and reconciling your data today:
1. An accurate list of all of your outstanding equity;
2. Correct names and spelling of names, SSN, mailing addresses, and email addresses for all of your stakeholders;
3. Scanned documents including board resolutions, option agreements, stock certificates; and
4. Historical information on splits, stock and option transactions, Topic 718/FAS 123R audits.
4. Private companies need to take their time finding a good transfer agent.  Make sure to to talk to your associates, research your options, talk to the person who will be doing the transfer agent work (besides the sales person), and get a good price quote including all of the fees involved.
5. The secondary market for private companies is growing with companies like SecondMarket and SharesPost.  In these markets, individuals who hold stock and options in private companies can sell their ownership to other people.  This can lead to challenges for stockholder administration, as you try to confirm who actually holds the stock of your company following transfers that you may not have been aware of.

And one bonus item….the IPO process is a lot of work, so it is better to start getting all of your ducks in a row early.  If you get organized years before you are ready to go public, it will make the process a lot easier.

If you plan on going public in 2011, good luck and enjoy the process.  If your plans are to go public (or even get sold) in one – four years, there is no time like the present to make the transition to an equity administration system and start getting organized.

As we all know, this is a crazy time for any company with an IPO strategy. As I noted in last week’s blog posting, IPOs are happening at a faster rate than ever before. Not only has the volume of IPO and M&A activity picked up, but the length of time for a company to start the IPO process is shorter than ever.

Some of the hottest social media companies like Facebook, Living Social and LinkedIn have seen their valuations sore as investors battle over a limited number of shares and new pre-IPO investment opportunities are created with secondary market trading platforms.

Based on all the excitement with VC-backed pre-IPO companies, Stock & Option Solutions, a leading equity-based compensation consulting firm located San Jose, CA, has created a new conference called Aspirations 2011. This conference marks a first for Silicon Valley since it is designed specifically for financial executives and stock plan administration staff from privately held, pre-IPO companies that expect an IPO within the next few years.

Two Step Software COO Jeremy Wright will present a panel discussion “Tracking Your Stock: Cap Table Basics Pre-IPO and Transfer Agent Details Post-IPO,” along with Josh McGinn, Vice President of BNY Mellon Shareowner Services, and Marianne Snook, Founder and Principal of Stock & Option Solutions.

This panel will discuss the process of preparing a private company for an Initial Public Offering (IPO) and how to transition to a public transfer agent. They will explain how a company’s financial officers should organize stock and option plan information well in advance of a liquidity event. The presentation will also include information on common issues that arise as part of the IPO process. Panelists will speak about selecting a transfer agent, standard reports to send to the transfer agent, and working with the transfer agent during the IPO process.

Featuring more than two dozen industry experts, including Barbara Baksa, Executive Director of the National Association of Stock Plan Professionals, Elizabeth Dodge, vice president of Product Management for Stock & Option Solutions, Inc., and Dan Walter, president and CEO of Performensation, this years conference will be held on July 26 in Santa Clara, California.

Other topics to be discussed at Aspirations 2011 include stock plan vendor selection, equity plan design, international considerations, equity accounting practices, participant communications, stock plan tracking and data management, and an overview of the complete IPO process for equity plans of privately-held companies.

If you are a pre-IPO companies interested in getting your stock plan records organized and reconciled in advance of your next equity event or exit, let us know how the Corporate Focus team can help or take a look at: http://www.twostep.com/product-tour/videos.

2011 is shaping up to be the most active year for IPO and M&A activity since the financial meltdown in 2007. According to Market Watch, in the second quarter of this year, there were 22 venture-backed IPOs valued at $5.5 billion, more than triple the dollar value seen during the second quarter of 2010 and a 29 percent increase by number of offerings compared to the same period last year. While some industry experts point to high profile social networking companies such as Living Social and Groupon as the cause for such elevated interest, it appears that overall transactional activity is back.

What we have learned from companies like Living Social and Groupon is that companies are skyrocketing to an IPO faster than many imagined possible (the traditional IPO time-frame). Some have commented that without R&D, brick and mortar, patents, product development or marketing, the initial investment needed by a social media or ‘lifestyle’ company is much lower and therefore the ability to turn a profit quickly or just grow revenue is often realized sooner.

As the IPO fever continues to grip VC-backed technology start-ups, investors are looking to cash in on the current craze as fast as possible. This ‘gold rush’ of start-ups eager to launch the next iPhone app or social media tool has created record keeping concerns for many investors and their portfolio companies. As a result, any VC-backed company should be mindful of what systems it has in place to track and manage its capitalization and other corporate records and put these systems in place early on. This will enable them to accurately track the information before any major transaction is on the immediate horizon (IPO, M&A or even initial investment).

We have helped many Corporate Focus customers reconcile and clean-up their records when they are not sure if their capitalization tracking and record keeping is 100% accurate. We have seen on too many occasions the embarrassment, frustration and loss of credibility that happens when a team of advisors (accountants, lawyers, bankers and VCs) during the due diligence process is using a set of spreadsheets that contains one “small” error buried in a formula.

This is where systems like Corporate Focus for stock plan administration and capitalization reporting come into the picture. Every time a spreadsheet is updated manually or by a different person, the risk of an error or inconsistency increases. In addition to reducing the risk of an error or mistake, systems like Corporate Focus provide easy access to the information and reduce unacceptable waiting time. Entrepreneurs and VCs can reduce headaches and misinterpreted numbers from accountants, attorneys and bankers by maintaining accurate information and reconciling the information between the company and its advisors before the numbers are shared with the other side.

If you have a question, please let us know: www.twostep.com/contact-us or just leave us a comment with your thoughts below.

We make a promise with each Corporate Focus customer that they will always work with someone who is friendly, knowledgeable, and most importantly helpful. When you call us, you speak with a highly trained, friendly, and courteous support representative who can help you quickly.

Terrie Williams

Roberta Jones

To continue to meet that customer support promise, we hired two experienced Senior Paralegals to be part of our support team this year. I would like to take this opportunity to introduce Terrie Williams, ACP and Roberta Jones, CEP to current and future Corporate Focus customers. Both Terrie and Roberta used Corporate Focus for many years as active paralegals. They bring a combined 30+ years of paralegal experience in the areas of corporate governance, minute book tracking and equity plan administration to the Two Step support team.

With Two Step support, you will receive Corporate Focus help, and you will speak with someone who has been in the corporate governance and equity administration trenches before.

I am thrilled to have both Terrie and Roberta as part of our support team and know that when you call us, you will enjoy working with them as much as I do.

Read more about Terrie and Roberta joining the Corporate Focus support team.

George Halsey is the owner of GRH Law, a Boston-based specialty firm focused on business and technology ventures. With over 20 years experience, he draws on extensive knowledge in the high-technology industry to help fledgling software and internet companies grow to the Series A funding. Recently, George’s firm implemented Corporate Focus to help streamline and simplify the start-up process for its legal staff and its clients.

George Halsey explained during a recent interview that traditionally, the start-up process leaves company principals and lawyers overwhelmed with paper records. “They start off with the best of intentions, yet soon find themselves tangled up with all kinds of documents, trying to keep track of records and getting things signed and out the door. As a result, they reach a state of chaos quite early in the cycle and legal services becomes extremely time-consuming and costly.”

“Once a start-up gets close to Series A, that’s when larger law firms that handle SEC-related issues become involved,” George Halsey explained. “Our use of Corporate Focus ultimately makes the due diligence process extremely efficient.”

To remedy this issue from day one, GRH Law keeps all of its client documents and processes online in “the cloud,” where the information is immediately accessible to the right people who have secure access. “When we create a stock option plan or issue stock to optionees, we capture all that data in Corporate Focus,” George Halsey said. “As a result, the principals, CFO and CEO of the start-up have that information instantly at their fingertips and don’t have to keep any files.”

George Halsey shared some of the other key benefits his firm has discovered with Corporate Focus:

Access and Sharing: “Corporate Focus is easy to get into; you access it through the web and there it is. And having everything online means you can have a very dispersed group of people participating in the process. I have clients in Latvia, Cairo and London. It makes no difference, because all the data they need is in the cloud.”

Speed and Efficiency: “Corporate Focus accelerates the cycle time by allowing management to focus on the business–and not get tangled up with a lot of paper. We recently worked with an emerging start-up that went from not existing to receiving a very large Series A infusion in just two months. The due diligence process was simplified to providing password access to our systems. It’s absolutely amazing, because these individuals are used to going into that process just kind of holding their breath and clenching their knuckles, expecting to be up all hours of the night. Using GRH Law’s process, none of this came to pass.”

Capitalization Tables: “For some start-ups, the idea of producing capitalization tables is kind of traumatic. They know they are supposed to have them ready, but have difficulty getting them together. Previously, producing cap tables would involve managing a lot of spreadsheets that are never stable, because the data has been re-entered multiple times and the danger of error is always present. Using Corporate Focus, you can view the cap table in multiple formats, so investors can see who the participants are and what form of participation they have. All the data is there and easily accessed.”

According to George Halsey, Corporate Focus is a key component of GRH Law’s services designed to reduce the legal-related costs of bringing a start-up to Series A. “We accelerate the contract cycle and bring extremely high-quality results to our clients at a fraction of the legal cost,” he said. “We are able to do things that large law firms have talked about doing, but are just unable to do with their paper based systems.”

With Corporate Focus, we are able to reduce the due diligence cycle time for an acquisition or large investment from hundreds of hours to just a few seconds – the time it takes to send out a user name and password. This really is a break-through change in efficiency.”

To learn more about GRH Law, visit: http://www.grhlaw.com

Prior to Corporate Focus, tracking Dart’s entity and ownership information and related documents was time consuming. Creating paper reports and updating those reports was repetitive, inefficient and the information was never current. Moreover, without a centralized data repository, there was no easy way for Dart’s legal staff to share information and documents with people across different departments and locations. Bottom line: Dart’s legal team had too little control over the quality of the information being maintained – and even less control over who had access to this information.

Stanley knew his staff could operate smarter and more efficiently if they had immediate access to accurate information–and the ability to share that information with the other departments that need it–when they need it. He shared some of the primary benefits realized by Dart after the implementation of Corporate Focus:

• Efficiency: “Corporate Focus centralizes all of our information so we don’t have to re-enter it multiple times. When you’re in there looking at a particular company, it’s a cinch to cross-reference things and make sure that where you show that company A is a subsidiary of company B, that company B shows it’s a parent of company A. CF saves time in confirming information, updating information and then disseminating that information to everyone else, since the rest of our team has instant access to it.”
• Accuracy: “The system is literally up-to-the minute accurate. We are forming some entities right now for a transaction, and within an hour of receiving confirmation that the entity is formed, it’s in Corporate Focus. Within minutes of our tax department obtaining our EIN, it’s in Corporate Focus. You can always find the latest and correct addresses, names, officers, and who is authorized to sign a document on our behalf.”
• Sharing: “Multiple people can have access to information and transactional documents even though they may not have the physical minute book. This is the first year we put transactional documents in Corporate Focus. In years past, I may have made a year-end closing file or closing book and shared that with different departments, and invariably, over the course of the year, those documents got lost. So, I was constantly getting phone calls asking for another copy of this or that. This year, those calls are eliminated.”

Today, 30 people at Dart have instant access to their entity and ownership information and the related documents through Corporate Focus. Stanley notes that the more people use the system, the more the demand for it grows. “We’re not talking about a ton of documents and it’s not time-consuming to enter the information,” he says. “We finally have a system that works for our business, and it’s working extremely well.”

Although cap tables look complex, the process of creating them basically involves two steps:

• Step 1: Tracking – The careful tracking of who got what when, i.e. Investor A purchased 1,000 shares of Series A Convertible Preferred Stock on June 15, 2010 and the Preferred Stock converts into Common Stock. See sample Stock Ledger here.
• Step 2: Calculating – After you’ve carefully tracked the ownership for every owner or rights holder (such as an option or warrant), you need to report how much each person owns in total and as a percent of the entire company. While the reporting could be done in many ways (by date, by class, fully diluted, across a few classes or the entire company), it is always referred to as a “capitalization table” or “cap table” for short. See sample Cap Table here.

As we talk to our customers, what becomes clear is that Step 1 is easier than Step 2. There are many reasons for this, often related to changes in who owns the shares. For example, a parent may transfer shares to his children, or an investment limited partnership may distribute shares to its limited partners. The difficulty of Step 2 might also relate to the complexity of the rights provided under the terms of the preferred stock or the vesting schedules for the employee stock options. Finally, creating cap tables involves some number crunching that gets more difficult the more holders and the more classes of stock.

If you find cap tables to be more somewhat intimidating, please take a look at the article Cap Tables Explained which offers a straightforward explanation for the novice equity administrator. Although I certainly recommend using a system to automate the creation of more complex cap tables from your equity records, this article is a great start for those who are still using spreadsheets or just looking for the basics.

Whether you’re tracking a few complex cap tables or the ownership information for many companies, click here to see some of the cap table screens from Corporate Focus. And as always, if you have questions, please let us know at: www.twostep.com.