Working Together: How Law Firms Share Corporate Focus With Clients
A law firm uses Corporate Focus to track ownership for a client company. That company also needs to calculate its option valuation and expense, but may be using spreadsheets to calculate the valuation even though the law firm has a Corporate Focus database that is already tracking the options. The law firm cannot do the option valuation work–that must be done by the company.
The law firm still needs to know and trust that the company’s outstanding shares are validly issued in order to give an equity opinion for a later transaction. For this to be true, the law firm needs a degree of control over the company’s stock ledgers.
There are a few aspects to this situation that affect both parties:
- The law firm wants to control the issuance of stock certificates (and in some cases the option grants), to ensure that they are properly tracked and the appropriate documents and certificates are issued. This could be for a financing, a direct stock purchase, or an option grant or exercise;
- When option plan Participants leave the company, someone needs to terminate the Participant so that unvested options are cancelled;
- The company needs to calculate option valuation using the ASC 718 functions of Corporate Focus;
- Both parties need 24/7 access to the company’s online electronic minute book, and both parties need to be able to add documents to the database.
What’s the best way for the law firm to work with the client company to share the same capitalization and ownership information with client, without maintaining two separate copies of the data?
Since the law firm copy of Corporate Focus will not be used for stock option accounting under ASC Topic 718, and that function is a critical part of the company’s financial reporting, the company may choose to license Corporate Focus directly to use the equity accounting functionality.
From this point forward, it’s easy for both parties to use the same consolidated database. The company can create a user ID for the responsible paralegal at the law firm. The law firm may even mark their copy of the company in the central firm database with a “Do Not Use After [Date]”.
From the law firm side, it’s best to iron out an agreed-upon process for the law firm to handle some functions and leave other functions in the company’s control. In some respects, this is not a change of procedure–the law firm has always depended on the company to provide information for maintaining the ledgers–this will continue as before. For instance, the law firm may continue to control the issuance of new ownership records or share that work with the company if the company is handling the stock option administration.
Items to be handled only by the responsible paralegal at the law firm may include:
- Stock issuances
- Stock transfers
- Entering new option grants (or the company may be responsible for this)
- Setup of new classes of stock (i.e., new preferred classes)
- Stock splits and conversions
- Printing of stock certificates
- If desired, production of new option grant agreements
Items that the company can handle on their side include:
- Entering new option grants (unless the law firm is responsible for this)
- Maintaining the Names database and contact information for all the owners
- Scanning and uploading documents such as signed minutes and consents to the electronic minute book, signed option grants, and signed stock certificates and receipts. Documents that come into the control of the company can be uploaded by the company; documents that come into the control of the law firm can be uploaded by the law firm; or one person could coordinate all the uploads.
- Performing the valuation and expense reporting on the option grants
- Running any reports as needed.
It’s very important that the paralegal at the law firm understand what not to do regarding valuation records in the ownership ledgers. Some training on both sides may be required.
The most important thing needed for this arrangement to succeed is for both sides to maintain clear and open channels of communication and cooperation. Once the process and procedures are agreed upon, future maintenance of the capitalization table will flow smoothly.
This solution has proven to work very well between law firms and companies. It balances their differing needs, and to ensures that all parties are working from the same information. It’s much more efficient and removes the need to constantly reconcile law firm records against the company’s records.
This method allows the law firm and their client to share one Corporate Focus database to ensure that all parties have insight into the capitalization and the client can run their option expensing reports. All parties are working with the same data, so there is no longer a problem with one party having one set of data and another party having a different set. It is a win-win for both the client and the law firm.
How to Get Started
If you have a client that might like to use Corporate Focus for stock option tracking or accounting, let us know. We’d love to help them work more efficiently with you.
If they’d like to learn more about Corporate Focus, they can see a few videos on stock option administration, accounting, compliance and reporting by taking a Product Tour.