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Startup Cap Table Management - Guide

IncParadise
23 July, 2021

It is very likely for every private company owner to know the importance of a cap table. And the reason is simple - it is vital for recording and tracking all the equity ownership of the company. It helps the founder work on their business growth. But it is not easy for everyone to understand or give their complete time to how cap tables work. So, they tend to need some help with managing it. If you are someone who needs a simpler way to handle all the equity data and tracking things better for your business, then this article is for you.

Here, you will understand what cap table management is all about and why it is important. We would also help you in choosing the best way to manage your company's equity.

Startup Cap Table Management - Guide

What is a Cap Table?

Also known as a capitalization table, this is a ledger that notes down all the equity capitalization in the company. It usually includes the following details:

  • The Shareholders in the Company and their ownership percentage in the company
  • The kind of securities (stock, warrants, convertible securities, options, and equity grants) issued to each shareholder and their value
  • The value of the equity in each round of investment by the shareholders
  • Equity dilution

In short, the cap table shares the data in a practical manner where you can now see all the debt and equity ownership in the company. And since various forms of equity have an impact on the current and future investors, they too are noted down.

So, a cap table is made up of many transactions and legal documents. Some of the additional things you will find here include:

  • Stock issuances
  • Sales
  • Transfers
  • Exercises of options
  • Conversions of debt to equity
  • Cancellations

Why is a Cap Table Important?

Being a business owner, having a cap table is very important since it helps you in making a lot of important decisions that would affect the capitalization of the company. For instance, the cap table will help you see how much investment you can take up in the next round and how many shares you can afford to give. It would also help you in making decisions with available options and pre-money valuations faster.

Or let us say that you are hoping to get a new CEO in the company and the candidate asks you to get a part of ownership in the company. To see if the option of giving this person some shares is there, you will need your well-set cap table. It will also help you determine how much you can give this person without hurting the other shareholders much.

What is Cap Table Management?

Cap table management is the process of effectively and accurately managing every difficulty and complexity in the cap table. As a matter of fact, cap table management doesn't only include the recording of transactions. It also has a lot to do with drafting and signing legal documents, complying with equity regulations, communicating with shareholders, and many other things.

Because of all the things shared above as well, cap table management is very important. In fact, it has become clear that the cap table can easily end up getting complicated really fast. When you reach Series A or B funding, things can end up looking so different in your cap table and if not maintained well, it can end up being a disaster. Disaster means you will end up making some really bad decisions. This is why it is very important to learn how to manage your cap table properly.

How does Cap Table Management Help Your Company?

With a well-organized cap table, you will be able to get good investments for your startup and even reduce your chance of giving up control on the company and diluting a lot of the shares. It can be a tough task to manage the cap table if you do not do it in the right way. But it is important for you to do it due to the following reasons:

  • It helps the current investors to determine the future possible dilution in particular situations and also helps them in getting the future payout in certain situations.
  • Using the cap table, the founder can determine how much ownership percentage to give the investor who is investing a certain amount in the company.
  • The legal team in your company will be able to present all the company holdings and history accurately with the cap table in case there is an audit.
  • Real-time value can be seen by employees who have options or equity stakes in the company.
  • Both the founders and the potential investors are able to find out the amount of leverage and control to negotiate when making a deal.
  • For raising new rounds of capital, it is important to have the history of the company in front of you and what the company still has to use for the negotiations and for the valuation as well.

Hence, it is quite important for the founders to spend time managing the cap table always.

Tips for Cap Table Management

There are cap tables of different sizes, but at a minimum, they need to show the information of every existing and old (retired) shareholder in the company. And if you talk to some old entrepreneurs, you will learn that they usually relied on Excel sheets for creating their cap table. However, it is not the best option and the reasons have all been explained above already - where a cap table is more than just the information about the equity.

Due to this, there are many software applications in the market that now lets you take care of everything right from one place. But before we talk about this, let us see how to perfectly take care of the cap table management of your company:

  • Record transactions - This is the obvious one, where you need to ensure that the cap table has all the information of the shareholders and what they own in the company. It is also very important to separate what they own (equity classes, securities, and share type) and how much capital was committed for this.
  • Keep everyone updated - Even though it is one person who needs to handle the cap table, you will need to notify all the shareholders when there is a change in it. This is important since you do not want angry shareholders.
  • Have a central repository (like a data container - eg., cloud storage) - You will need to track all the legal documents that are related to the equity and shareholders in the company. It would eventually become important to note every transaction down and notify the shareholders about it. Having a central archive with all the details is important to avoid any conflict in the information and a place from where everyone can get the information easily.
  • Keep up compliance - You do not want trouble with the IRS, do you? This means that you need to take care of handling all the regulations that come along with every step your company takes. In short, you need to ensure that everything you have on your capitalization table is verifiable and legally accurate. To help you, here are some very common laws you need to take care of:
    • 83(b) election concerns the tax treatment of the employee who received restricted stock awards from the company. It has to be filled by the employee within 30 days of grant if they want to elect for this treatment.
    • Rule 701 is the exemption for the company to register with the SEC before it can issue equity compensation.
    • ASC 718 is for measuring and recording the expenses that come with issuing equity compensation, under the accounting department. IRC 409A is a rule where the company has to perform a 409a valuation once a year to get the exact strike price of the options.
    • ISO 100K is a rule that limits the number of options that can be vested in a year for the person to qualify for specific tax treatment.
  • Use a Cap Table Software - It is clear now that using Excel to manage the cap table is not possible. Excel won't help you handle compliance, handle vesting, and a lot of other things. It would be prone to mistakes. With an advanced cap table software like Eqvista, you will be able to handle a lot more than just recording the transactions, including: Get your 409A valuation
    • Communicate with your shareholders in real-time
    • Ensure compliance with securities regulations
    • Track liquidation preferences
    • Perform a waterfall analysis at the click of a button
    • Get all the calculations for vesting schedules handled - you just need to create the schedule and the application takes care of the rest

Conclusion

In short, your cap table is crucial if you want your private company to grow and go smoothly legally too. Although there is no one-right-way to handle the cap table; using the best cap table application can help you stay at bay from all complications and legal issues that can arise otherwise.



About the Author


IncParadise

IncParadise offers incorporation services in all 50 states in the USA since 1999. Because of our great experience in incorporation business we are able to offer high-quality services at an affordable price. We do formation of Corporations, LLC, Registered Agent Service, Mail forwarding, Virtual Office and the other kind of filing services in all 50 states. Visit our website: www.incparadise.net

 

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