A front-page article in this week’s Mass High Tech (MHT) highlights the costs of filing for an IPO for Boston-area startups. In it’s listing of IPO filings, MHT noted IPO issuance costs ranging from $500K to as much as $4.2 million for these startups.

MHT quoted Janice DiPietro of Tatum LLC, a CFO services firm, as saying that the IPO costs vary from company to company depending on the strength of the company’s management team, its record-keeping history, and the size of its market share and customer base.

Of these three, I think the biggest factor is the record-keeping. With the advent of the Sarbanes-Oxley Act of 2002, companies are subject to more rigorous financing reporting requirements than ever before.

Many startups often make the mistake of not taking SOX compliance seriously. As a result, when the time does come (as in the case of an IPO or an acquisition), there is a scramble to get everything in order and in compliance. And this is what costs money — accountants and lawyers don’t come cheap.

In consulting with startups, I am always surprised when I hear about a startup that isn’t paying attention to SOX. Seeing that SOX compliance is required for a successful exit event (an IPO or just about any form of acquisition), why wouldn’t a startup be paying attention to it? Don’t these startups (and their investors) believe they will eventually reach one of these exit scenarios?

If you are a startup, get your house in order to comply with SOX. If you are an investor, demand that your portfolio companies have a plan to address SOX compliance.

Unless, of course, you’re not thinking of a successful exit. <g>

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