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Financial Misstatements

blog.samaltman.com

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Re: Financial Misstatements

#151

Post by lmm »

teisman wrote: post #68
exelius wrote: post #52

Earlier quoted context omitted.

It's not YC's job to teach executives anything. Their entire model is self-service: they give founders access to people who know this stuff, but you have to ask for help to receive it. At the same time, a lot of these founders don't know what they don't know, so IMO this blog post is a way of saying to current and prospective founders "Hey, you need to be careful about this because creative accounting is often illega…

It is interesting how this blog-post directly follows the "The Post-YC Slump" post [0]. One can easily make the mistake of considering time spent on financial statements "fake work", fake work being identified as one of the reasons for the slump. The fact that there are financial misstatements indicates that there is more need for this type fake work, or perhaps the whole fake work thing isn't so fake after all. [0]…

Depends how much these financial misstatements end up costing them. Plenty of successful startups base their business on breaking the law, to a lesser or greater extent.

Re: Financial Misstatements

#152

Post by stevewepay »

unreal37 wrote: post #34
duaneb wrote: post #18

Earlier quoted context omitted.

IANAL, and Sam mentioned a felony charge. Are there any legal protections for investors (or.... whoever this is protecting) for e.g. misrepresenting "signups vs users vs active users"? Surely that falls under subjective fraud rather than a straight up objective lie, especially for sites e.g. reddit where the line between "active user" and "lurker" is extremely murky. EDIT: Clearly I have no understanding of fraud.

RE: "Subjective fraud". Regardless of whether the fraud is intentional or accidental, misstating something to investors (i.e. "our revenue was $1 million last month" when you're talking about GMV) will still subject you to a lawsuit and/or arrest.

I think this is vastly over-exaggerating.

Unless you specifically state that you are using the GAAP term "revenue", revenue could mean anything, just like "made" could mean anything, like saying "we made $1M last month".

I highly doubt if you were making a presentation and you said "We had 1M in revenue last month", and it wasn't actually GAAP revenue, I find it hard to believe you would be subject to lawsuit or arrest. In fact, arrest is even more of an over-exaggeration.

Even Groupon had a hard time defining exactly what its "revenues" were pre-IPO, and yet no one got sued or went to jail.

Re: Financial Misstatements

#153

Post by adevine »

evo_9 wrote: post #121

Mr. Altman is talking about the basic misunderstanding of these terms and it's surprising to me that he didn't take a bit of time to define the terms himself. Maybe I'm naive and those terms are a lot harder to define than I'm imagining, but even then some references linking to other sites could have been provided. I really enjoy reading Sam's posts and I'm usually bookmarking and/or forwarding his articles to a ton…

I think the more important thing is to make sure that a company clearly defines exactly what it means by certain financial terms. Someone correct me if I'm wrong, but IIRC during the original .com boom Priceline counted the entire sales price of an airline ticket as "revenue", which should clearly be considered GMV. More recently, I've seen terms like "gross revenue" and "net revenue" used by the financial press to describe total booking volume vs the cut a company takes.

Re: Financial Misstatements

#154

Post by Havoc »

>misunderstanding or misusing basic financial terms

Well if you stick the average finance guy in front of a python JIT compiler anyone looking over his shoulder will conclude he's an idiot. Yet somehow the average IT guy thinks it just takes a bit of terminology to "get" the finance side.

Re: Financial Misstatements

#155

Post by Havoc »

kevin wrote: post #8

Here's the biggest offenders I see when talking to founders: revenue vs GMV (if you give GMV, give me your cut/margin) contract vs LOI burn vs expenses users vs customers (customers pay) signups vs users vs active users (you should give active with time interval and measurement of active. eg. logged in last 30 days) profitable vs cash flow positive Others people should know: diff between retention rate vs churn rate…

>“GMV” (gross merchandise volume)

Interesting...been in finance all my life & dealt with pretty much every industry out there...never heard this one before. Must be some type of startup slang so to speak.

Re: Financial Misstatements

#156

Post by Tloewald »

stevewepay wrote: post #152
unreal37 wrote: post #34

Earlier quoted context omitted.

RE: "Subjective fraud". Regardless of whether the fraud is intentional or accidental, misstating something to investors (i.e. "our revenue was $1 million last month" when you're talking about GMV) will still subject you to a lawsuit and/or arrest.

I think this is vastly over-exaggerating. Unless you specifically state that you are using the GAAP term "revenue", revenue could mean anything, just like "made" could mean anything, like saying "we made $1M last month". I highly doubt if you were making a presentation and you said "We had 1M in revenue last month", and it wasn't actually GAAP revenue, I find it hard to believe you would be subject to lawsuit or arre…

Even Groupon?

Re: Financial Misstatements

#157

Post by patmcc »

stevewepay wrote: post #152
unreal37 wrote: post #34

Earlier quoted context omitted.

RE: "Subjective fraud". Regardless of whether the fraud is intentional or accidental, misstating something to investors (i.e. "our revenue was $1 million last month" when you're talking about GMV) will still subject you to a lawsuit and/or arrest.

I think this is vastly over-exaggerating. Unless you specifically state that you are using the GAAP term "revenue", revenue could mean anything, just like "made" could mean anything, like saying "we made $1M last month". I highly doubt if you were making a presentation and you said "We had 1M in revenue last month", and it wasn't actually GAAP revenue, I find it hard to believe you would be subject to lawsuit or arre…

If someone invests in you because of a revenue claim when no one else in the room would agree with your definition of revenue, you might end up getting sued. That's pretty reasonable. If it's in a casual conversation, they should have plenty of time to look over the books later, so it's not a big deal.

That said, why not use appropriate GAAP values? You should already know them, assuming you're keeping proper books, so it should be the easiest value to give.

Re: Financial Misstatements

#158

Post by liyanchang »

kevin wrote: post #8

Here's the biggest offenders I see when talking to founders: revenue vs GMV (if you give GMV, give me your cut/margin) contract vs LOI burn vs expenses users vs customers (customers pay) signups vs users vs active users (you should give active with time interval and measurement of active. eg. logged in last 30 days) profitable vs cash flow positive Others people should know: diff between retention rate vs churn rate…

I am not an accountant - I was looking most of these up so do let me know if I got something wrong and I'll edit as needed. Just trying to compile things in one place.

Gross Merchandise Value is how much money flows through your system while Revenue is how much lands in your bank account. For instance, a payments processor like Stripe might have a GMV of $100 million while their revenue would only be the 3% commission (in this case $3 million).

A contract is a legally binding and enforceable document. A letter of intent is when one party outlines what they are likely or would like to do - with some bits of it being enforceable like non-disclosure agreements. A memorandum of understanding is a letter of intent signed by all parties involved - it is still non-binding. A term sheet from a VC is like an LOI - however, it doesn't actually happen until after due diligence, negotiation, etc and only official when signed.

Burn rate is the delta in your bank account. Expenses is how much money left your bank account and revenue is how much entered. Thus burn rate is expenses - revenue and is -1 * profit.

Users are people on your site. Customers are paying users.

Signups are how many people created an account. Active users are how many people logged in over a certain period of time.

Cash flow positive means you have more in your bank account than you did before. However, a kickstarter which raised 1 million would be cash flow positive but not be profitable as it has many outstanding obligations.

Churn rate is the percentage of your users/customers who left over a certain duration. Retention is 1-churn.

Involuntary churn is when the customer leaves because they go out of business or in the case of dating apps, no longer need your services. Voluntary churn is all other churn.

Gross refers revenue - expenses of the product. Net is revenue - expense of the product - administrative costs - depreciation - payroll taxes etc.

Top line is referring to gross while bottom line refers to net. Top line growth means more revenue and bottom line growth means cost cutting.

Re: Financial Misstatements

#159

Post by far33d »

kevin wrote: post #8

Here's the biggest offenders I see when talking to founders: revenue vs GMV (if you give GMV, give me your cut/margin) contract vs LOI burn vs expenses users vs customers (customers pay) signups vs users vs active users (you should give active with time interval and measurement of active. eg. logged in last 30 days) profitable vs cash flow positive Others people should know: diff between retention rate vs churn rate…

I would add bookings vs. revenue.

If you sign up a $120k yearly contract, you have $120k in bookings, but can only recognize $10k of revenue each month.

Re: Financial Misstatements

#160

Post by sumanthvepa »

Havoc wrote: post #155
kevin wrote: post #8

Here's the biggest offenders I see when talking to founders: revenue vs GMV (if you give GMV, give me your cut/margin) contract vs LOI burn vs expenses users vs customers (customers pay) signups vs users vs active users (you should give active with time interval and measurement of active. eg. logged in last 30 days) profitable vs cash flow positive Others people should know: diff between retention rate vs churn rate…

>“GMV” (gross merchandise volume) Interesting...been in finance all my life & dealt with pretty much every industry out there...never heard this one before. Must be some type of startup slang so to speak.

It's a term of the trade in the retailing (and by extension e-commerce) industry. It refers to the value of the goods sold. If a retailer sells a widget for $100 at 50% margin, then the GMV is $100 and revenue to the retailer is $50.
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