Maintaining a healthy and up-to-date cap table is an important aspect of a business’s operations, particularly for one that plans for growth. In the early day of a business, tracking equity ownership percentage in the company is relatively easy. There are a few shareholders, and the number of shares they each own is easy to track. But as the company grows, its ownership structure, and therefore, its cap table management, becomes more challenging.
The realistic necessities of cap table management will mount as your business scales and matures – that much is a no-brainer. Implementing a few of the best practices and nice-to-haves in cap table management doesn’t hurt, and that’s why we came up with 3 methods that will help you better manage your startup’s cap table.
What is a Cap Table?
A cap table offers organizations with data laid out practically, such as the company’s debt and equity rights, liquidation orders of all lenders and investors who have invested in the business. As a great number of startups don’t have traditional debt lenders, the list typically consists of data of the shareholders and the owned percentages. Although equity has different forms like preferred stock, common stock, and convertible notes, all of these have an impact on the present and potential future stakeholders.
As a business, a cap table is important because you will eventually make decisions that will have an impact on your business’s capitalization. For instance, while running activities of the business, having a cap table will assist you in running through various possibilities such as pre-money valuations and available options faster.
If you’re planning to hire a new chief operating officer, the applicant may ask for an option of getting percentage ownership in the company. To quickly check if that option is available or not, determine and calculate the percentage you are ready to give, you will need a cap table. That’s why a cap table is crucial for modern businesses. A well-structured cap table management will help your early-stage business attract investment and reduce the chances of diluting stakes.
1. Assess and Implement Tools to Help You Manage It
To better understand how detailed your cap table needs to be, compare it to your financial statements. In the early day of a business, financial statements don’t necessarily feel as important as they do in later stages of growth. It’s less critical to the business because it’s not hard to recreate it whenever you need data to make a decision.
But as your business matures and grows, it becomes even more complicated to recreate the financial statement on an ad hoc basis and nearly impossible to stock the information accurately in your head. The same goes with your cap table:
At first, you might be able to rattle it off the top of your head or have it documented simply in Excel, but with time, the information becomes more complex, and you need faster and more reliable automated systems in place. As with financial statements, having well-thought habits in place will serve you well as the business grows.
Luckily, in today’s all tech-environment, cap table management for startups has never been easier. You can use reliable cap management software to gain better capabilities and version control than spreadsheets to manage this process. Such tools are great starting points for early-stage businesses seeking advanced features to manage complex cap tables.
2. Delegate Ownership of the Cap Table
As you create new rounds of financing and analyze the impact on investors, cap table management becomes a considerably valuable activity. This is where your outside counsel or legal team becomes even more advantageous to you as a founder.
Delegating cap table management to your attorney can further help you stay on top of key changes and reduce errors while allowing you to focus more on building and growing the business.
Building and maintaining an accurate cap table requires analyzing, understanding, and translating legal documents into figures and formulas. That is why you will need to rely on the expertise of your legal team to ensure the most on-point business decisions are made.
More often than not, we startupers make seemingly small mistakes, such as adding a person’s name to the cap table before an equity funding has been legally made. This can lead to major errors that can have painful tax consequences for the business. Order of operations should be a top-of-mind priority, and it’s best to leave the cap table maintenance to your legal team.
3. Decide How Much Information to Disclose to Your Investors
There is no right or wrong answer when it comes to how much information to share with your investors. Normally, providing investors with a summary cap table is a fairly normal practice. By doing so, you allow your investors to calculate their ownership position for audit purposes and internal tracking.
Sometimes, investors do not receive an itemized list of every investor or shareholder in the company. While differences may vary from one company to another, some prefer that any company-related discussions are directed to the executive team so they can address and control messaging. Obviously, investors will find out which of their peers have also invested in many cases, but sharing contact information, valuable equity positions, and individual employee’s equity stakes are less common.
However, it pays to know that major stakeholders may have specific, private contractual rights to get consistent statements and cap table updates. They might even have a representative who is a board member, in which case, as determined in the equity financing paperwork.