Should you share your cap table with investors?

A capitalization table (cap table) is a summary of all equity interests in a company. It includes key details about common and preferred shareholders, founders’ shares, stock-based compensation issued to employees, and the rights afforded by each entity holding an equity interest in your company.

By now, you must realize that such information is sensitive and must be protected. However, sharing your cap table with investors can help you avoid conflicts and disputes among and with investors. To help you decide whether you should share your cap table, we will explore this idea in this article.

What are the benefits of sharing and not sharing your cap table with investors?

Benefits of sharing cap table with investors

Some benefits of sharing your cap table with your investors are as follows:

Fosters trust

If you hide your cap table from your investors, it can make them anxious. They will not have clarity about their voting rights, the company’s governance structure, other key players and their influence, and the true value of anti-dilution rights and payout preferences granted to them. In such a scenario, you will find your investors restless and periodically looking for exits.

Conversely, when you share your cap table it demonstrates transparency. Your investors can utilize this transparency to build trust with your company on their own.

Informed decision making

When compared to other asset classes, startup investments tend to be on the riskier side. Hence, investors are granted rights against dilution as well as payout preferences.

However, one investor’s anti-dilution right can affect another investor’s returns. If you grant anti-dilution rights disproportionately, this is likely to happen. Disproportionate distribution of anti-dilution rights occurs when investors join at different stages or when their investment amount differs.

Similarly, one investor’s right to priority in payouts can affect other investors.

If you share your cap table with investors, they will have clarity about the rights they have and it will help them plan their journey with your company.

Risk assessment

When you share your cap table with your investors, they can assess the value of their investment after considering risks like conflicts of interest and dilution risks. Dilution risks can arise from excessive stock-based compensations issued to employees or excess anti-dilution rights granted to other investors. Such facts can be verified with cap tables.

Through cap tables, investors can also verify if other investors hold a stake in your competitors or if there are any other conflicts of interest among shareholders.

Clarity in governance structure

A cap table’s main function is to clarify the ownership structure. In turn, this helps investors understand who holds how much voting power. This will reveal which shareholders or groups of shareholders have the right to elect board members.

Cap tables also reveal investor rights and protections. By sharing your cap tables, all this information will be freely available for investors to assess, helping them gain clarity about your company’s governance structure.

Simplifies fundraising

When you raise funds in the future, the incoming investors will want to know who they will be joining on the cap table. They would want to assess which investors will remain on the cap table, how these investors want the company to be run, and how much voting power they hold. If you already maintain a cap table, you can share a copy of it with such prospective investors.

On the other hand, in fundraising rounds, some investors may want to exit. If they have access to your cap table, they can easily weigh their options based on their payout preference and anti-dilution rights.

Helps identify key players

Early-stage startups tend to raise funds based on their growth potential and their team. Hence, investors may want to verify that you are doing your best but not too much to retain key personnel. If you are unable to retain talent, you might face crises in various functions of your business. At the same time, if you overcompensate, it will drive the return on investment (ROI) down for your investors.

So, since employee stock ownership plans (ESOPs) and other stock-based compensations are commonly used to attract key personnel, sharing your cap table with investors will help them make this kind of assessment.

Benefits of not sharing cap table with investors

Not sharing your cap table with your investors is a step in the opposite direction from transparency. However, it does provide some tactical benefits to founders. These benefits are as follows:

Prevent internal discords

When you share a detailed cap table with your investors, they will come to know about other key shareholders. If they find that the same stock was offered to a different investor for a lower price, it can give rise to dissatisfaction. This can easily snowball into conflicts between investors.

Mitigating investor pressure

Through the cap table, investors can identify other significant investors and band together to push the company to prioritize short-term profits over long-term strategy.

Avoid misinterpretations

Equity interests can be of various forms, such as founders’ shares, employee stock ownership plans (ESOPs), convertible securities, common stock, preferred stock, and restricted stock units (RSUs). As a result, cap tables can be quite complex and easy to misinterpret. This, too, can lead to conflicts among and with investors.

In our opinion, a company whose goals and interests align with its investors and acts transparently, need not worry unnecessarily about investor pressure and internal discords. Additionally, with Eqvista’s easy-to-understand interface for cap table management, you can avoid misinterpretations as well.

Real-life use case of cap tables

Snap, the company behind Snapchat, went for an IPO in 2017, offering shares with no voting rights. At Facebook, there is a multiclass share structure consisting of class A shares and class B shares. Each class B share has 10 times the voting power than that of a class A share.

Such complicated equity structures may have been necessary for these companies but they do confuse investors. Conflicts, disputes, and lawsuits can stem from such confusion.

While Facebook and Snap’s equity structures are complicated, they pale in comparison to how complicated the equity structures of private companies are. As equity structures get more complicated, they cause more confusion.

A convenient way to sidestep such confusion is to simply share your cap table with investors.

How can Eqvista help with sharing cap tables with shareholders?

The main roadblock to sharing cap tables with investors is the difficulty in maintaining an easy-to-understand cap table. As your company goes through multiple rounds of funding, the equity structure will keep getting more complex. You will need to regularly update the data and document the changes so investors can easily understand them. Since data is easier to interpret through visualization, you might need to invest time in building interactive graphs as well.

Eqvista’s cap table management software can take this load off your hands, even with our Freemium version! Our core software offers tools for analysis as well as regulatory compliance. We also offer premium features like unlimited companies and users, electronic certificates, and compliance and onboarding services.

The report gets downloaded as an Excel sheet in your Downloads. Double-click the Excel sheet to open the downloaded report from the download folder in your system.

The report includes two sheets, the first sheet is just like a cover that tells what the report is about with the company name. The second sheet “Captable”, looks like this.

It holds updated information on the company’s cap table. Listing all kinds of securities in the company, share authorized, shares issued, fully diluted shares, capital committed, and ownership percentage.

Some key benefits of Eqvista’s cap table management software are

• Flexible access control – A major concern when dealing with cap tables is keeping the data confidential. With startups, this concern is amplified since investors and employees will join and leave at a high frequency. To address this pain point, Eqvista offers you the ability to control access to your cap table from its dashboard.

• Real-time updates – Through Eqvista, tasks like adding shareholders, creating equity and option classes, and issuing common and preferred shares are simplified. You just need to fill in the relevant details and the cap table will be updated automatically. In our premium version, Eqvista also enables you to upload data through spreadsheets.

• Download reports – When you are preparing for fundraising rounds, you might need to share valuation data and a summary of the current cap table to establish your pre-money valuation. However, giving direct access to your cap table to an outsider is risky. Instead, you can download the reports you need from Eqvista’s dashboard and share them.

• Direct shareholder access – Since Eqvista’s cap table management software provides direct shareholder access, you need not worry about notifying investors about any changes to the cap table.

• Centralized cap table data – Eqvista’s cap table management software maintains the cap table data at a centralized location instead of downloading it on every user’s device. This ensures a high level of data security.

Simplify your cap table management with Eqvista!

Sharing your cap table with your investors is crucial to avoid any misinterpretations. This is especially important with startups where equity structures tend to shift frequently. At the same time, you must maintain a high degree of confidentiality to prevent misuse of private information.

So, you will need a cap table management software like Eqvista that offers flexible access control, centralized cap table data, and real-time updates. We also offer solutions for issuing shares and adding shareholders. To know more, get in touch with our team.