On Software Capitalization...

The purist answer on "whether to capitalize software" is you don’t have a choice. Either you have to capitalize, or you don’t.  In SAAS companies, software is not licensed.  SAAS companies offer a service on top of developed software.  As such, software is deemed to be for internal use and hence capitalization is normal.  The difficulty is, if you have too much depreciation and you are valuing the company on an EBITDA multiple (and many early stage companies do value themselves on EBITDA multiple), you are missing a key part of your financials. Investors, over time, start to look at operating margins - and if this metric is not handled carefully, it can start to bite the management. The other challenge is the level of subjectivity in assessing capitalizable software.  Often managements use capitalization as a lever to manage P&L/margins, and auditors understandably tend to get uncomfortable with too much subjectivity.  As such, it is critical to have appropriate controls on this line item.