Let’s say if your startup is a Netflix series, then your capitalization table would be the rolling credits. It would outline everyone that makes up the ownership and the roles they have in the company.
For every company founder, it is important that you have a detailed understanding of all that you own in the company and who owns the other parts of the business at each stage. This is true regardless of if you are creating a new business or raising funds for an existing one. You should focus on cap table management and understand how to handle the equity ownership of the business.
Before we can get into the details of cap table management, let us talk a little about what the cap table is and what makes it beneficial for a founder. To begin with, a cap table, also known as capitalization table, offers information that every entrepreneur, investor, employee, officer and contractor would need to understand the ownership of your company. In short, the cap table is a chart that displays the ownership stakes in a business. It has a list of all the securities in the company (including warrants, options, stocks, and others) how much was paid for the equity, and the percentage of ownership of each investor.
Here are some reasons why a cap table is beneficial for your company:
- The investors in your company would want to see the overall control of your company and forecast potential payouts and dilution under particular scenarios.
- Potential investors can easily evaluate the amount of control and leverage sustainable to negotiate the terms while raising capital.
- The shareholders, officers, contractors, and employees who have equity stakes or options would be able to see their real-time value with the cap table.
- The historical insights of the company on the cap table can help in negotiating the terms while you work towards raising new funds for the company.
- During an audit, you would be able to present the holdings and history of your company. This would leave a good impression of your company as well.
- You can easily stay compliant with all the rules related to equity with a cap table in front of you. You would also be able to see where you need to pay tax with the help of a cap table, which would be difficult otherwise.
- With an accurate cap table, existing shareholders would be able to figure out the percentage of the company to give an investor in place of the capital, with little effect on ownership dilution.
Why is a cap table management needed?
By managing your cap table, you would be able to avoid more complexities in the future, and keep all the details in place. And by cap table management, we mean communicating with shareholders, complying with regulations, drafting and signing legal documents, recording transactions, and other important documentation.
There are chances in the future as your company grows, your cap table will become more complicated and disorganized if not maintained well. As the number of investors and employees increases, the number of shareholders would increase in the company as well.
While in the end, this would be great for the business, as your company grows and things become complicated, the administrative burden increases as well.
And you manage your cap table, you may encounter problems along the way.
Here are the problems that you should avoid as you manage your cap table:
1. Not keeping your cap table updated
This is one of the most common mistakes made in cap table management. Everyday financial management can at times be put off to take care of more pressing needs. But when it comes to cap table management and updating the cap table, there is nothing more important.
In fact, if you try to come back later to update it, it would be more time consuming in the end tracing all the share movements and details of the company. However, if you use a cap table application like Eqvista, you would not have to stress about spending much time in updating the details. You can do it instantly, which is important for cap table management and not getting things more complicated for you and your company.
You would have to update the cap table during any of the following instances:
- New employee grants: Getting new employees on equity compensation? Well, remember to update your cap table about the share issuance.
- Employee termination: If an employee is leaving before time & the options would be taken back, ensure that you have your cap table updated about this.
- Option exercises: As soon as an option is exercised, it should be recorded. If you backdate the exercises, it would show a red flag to investors and auditors that check your cap table. In short, it would be bad for your company.
- Financing: Planning to raise capital? Then ensure that your investors are added in your cap table along with other important details. You can use Eqvista to fill in the information to create your cap table. This means you would not have to guess what information is needed and what is not.
- Liquidity events: If there is an offer on a secondary transaction, do not forget to update about the exchanged shares in your cap table.
In cap table management, it is always better to begin working on things early and update everything as it happens. In short, take the proper information, record it and keep everything always up to date. This would help you avoid any trouble down the road.
2. Manual Entry Mistakes or Incorrect Info
Another issue that many face is manual entry errors. Even though it might seem like something you can easily pull off, it is important that you cross-check each time you add information to a cap table. For any incomplete or inaccurate information, you would not be able to close a new funding round and make decisions using your inaccurate cap table.
In fact, you would find it highly stressful to find the right information long after you had entered it incorrectly. You may be wasting time and energy, and even after doing this, you might lose the funding deal as you went searching for the right information to update your cap table with.
To avoid this, ensure that you have the right information put together for your cap table. Cross check every detail and ensure that you are using the complete name of every person as you create the cap table. As your company grows, new people would be added and there can be some people who have the same first names.
Furthermore, make sure that you take the permanent address of each person so that you do not waste time searching for them in the wrong places, in case you need to connect with them.
3. Not having access to all or not having a centralized system
A lot of people would need access to your cap table, including investors, central leadership, the accounting department and even your lawyers. Failing to have a system where you can share all the updates and details on a centralized system can be a huge issue for you. It would act like an obstacle when a deal has to be made and communication can become an issue. Moreover, if you have some tax issues to deal with your accountant or lawyer, things would become overly complicated.
That is why a new system of cap table softwares have come into the market to overcome this issue. Use software that allows you to update everything in real time while others can view the update. It would save you time and help you make smart decisions.
Eqvista offers the feature of real time updated cap table software. You can also choose the access level with whomever you share the cap table details with, so that you do not have to deal with people changing the details by mistake. All in all, relying on an old-fashioned spreadsheet is not going to do the job you want. Eqvista can help you!
4. Not using a software tool to manage it
Just like other things mentioned above, you would also have to choose a proper cap table management tool if you want to scale your business and avoid any troubles along the way. And even though using a spreadsheet is a simple way, you may find it a headache after somewhile. With this, you would find trouble changing the tools for recording this every time.
That is where Eqvista comes into the picture. Not only would Eqvista allow you to easily update everything in real time, it would also help you in staying compliant with the various equity related laws. It also allows you to easily set permissions that would keep all your information secure.
How can Eqvista help you?
Operating a startup can be very overwhelming, especially if you are a new founder of a business. And one of these tasks is cap table management. Using a tool like Eqvista can help you do everything properly and still have enough time on your hands to work on other meaningful tasks for your business.
Eqvista has a lot of great features that include real time updates, shared access with other members, compliance, incorporation and management of the shares of your company in one platform. In fact, Eqvista is FREE and it gives you all that you need to manage your cap table. Find out more about Eqvista and begin using it today!