Capitalization Matters

On my way to the International Legal Technology Association’s 2009 conference, I read the Wall Street Journal’s front-page article, “Billable Hour Under Attack – In Recession, Companies Push Law Firms for Flat-Fee Contracts,” with great interest. The initial talk about a change in the ways law firms bill their clients came as the financial markets were on the brink of collapse. Now, almost 12 months later, the evidence shows that there is a real shift taking place—and it may not be as temporary as the current economic downturn.

An outsourced CFO called me the other day. He said he’d heard about how easy it was do to FAS 123R equity compensation accounting in Corporate Focus—and he was anxious to get started. His high-tech client was actually being sold or refinanced the following week, and he needed to provide updated financial statements in accordance with GAAP. Because the company had not been tracking its equity compensation expense over the past few years, this involved updating the compensation line items.

Let me ask you a question: do you brush your teeth every day? Or just the week before a dental check up?

Imagine if the only time your teeth were brushed was twice a year at the dentist. It wouldn't be a very pleasant visit (not that they ever are, actually). Well, that's the situation too many law firm clients find themselves in when they’re ready for a corporate event or transaction. Right before a financing or annual meeting, everyone rushes around in a mad dash looking for documents and updating capitalization tables. Why?

Corporations depend on their CFOs to report "the numbers" each period. But what happens when these numbers are based on data that’s being tracked at the company's law firm—instead of internally?

When a company is initially formed, all of the legal and ownership records tend to be maintained by their law firm because, frankly, it's just easier. Over time, the organization begins to grow, and as it does, the complexity of its capital structure tends to grow as well.

In the past few weeks, I’ve met two corporate paralegals who have been using our product, Corporate Focus, to track minute book and capitalization information for many years. Because they’re each tracking upwards of 1,000 client companies for their firms, they keep pretty busy.

We estimate that paralegals like these have tracked more than 1 million stock certificates for privately-held companies in our system over the past decade.