Should Startup Employees Have Access to the Cap table?
Employee equity management is an important part of business strategy.
A cap table for startups is one of the most highly guarded documents. It is practically a blueprint of all stakeholder activity in a startup. Stakeholders include founders, employees, advisors, consultants, and investors. All this information is business secrets and must be handled with utmost care. This is why the issue of cap table access to employees is a highly debatable one in the startup world. Let’s see why.
Before we delve deeper into the issue of cap table access, let’s try to demystify the concept of cap tables. This is a widely used term in startup circuits and is the first thing investors question during a funding round. Then what exactly is a cap table for startups and why are they crucial for a business?
What is a cap table?
A cap table is a comprehensive document that details equity ownership in a company. The moment a startup sets aside an option pool and is ready to issue equity to employees, cap tables come into play. Gradually as external funding rounds happen, investor’s shareholding details are also populated into the cap table. At any point in time, a quick reference to a cap table provides a snapshot of the market value of a company.
In the initial stages of a business with a few shareholders, cap tables are maintained manually on a simple excel sheet. The Y-axis carries the names of stakeholders and the X-axis lists the corresponding details of their shareholdings. A cap table must contain details of all types of shareholders – common shares, preferred shares, warrants, convertible notes, and their respective share prices as well. Cap tables are the cornerstone for fundraising activities and employee equity management.
Why are cap tables important for a startup?
Cap tables are the go-to document for any equity-related decision. It is the only comprehensive document that provides all details of a startup’s shareholdings in one place. Here are the most important reasons for having a cap table for a startup:
- Cap tables help maintain the calculation of market value. Every shareholder reporting and new capital issuance is done by referring to the cap table.
- Existing shareholders have a clear idea about how much dilution can be afforded for new investors
- Potential investors can estimate the existing level of shareholdings and the leverage they might have if they decide to come on board.
- Employee equity management becomes a transparent process. Employees holding shares can see their value in real-time
- A historical insight into cap tables provide a sense of the business health and could provide the much needed competitive advantage at attracting investors.
- A well-organized cap table enables the audit and legal teams of the startup to establish the value of the business by reporting best practices.
Employee Equity or Equity Compensation in Startups
Equity compensation in startups is a trend these days. Especially in the US market that enables and nurtures startups, hiring top professionals using lucrative equity compensation has become a norm. Salary packages are no longer about how much, rather what matters is the cash to equity ratio.
What is employee equity compensation?
When a company offers equity to employees as part of their compensation package, it is known as employee equity compensation. It is seldom a stand-alone component. Equity is mostly granted in addition to a basic salary in cash. It is a good recruitment and retention tool, especially for startups that invariably struggle with cash flows in the early stages of operation.
Equity compensation in startups can be in the form of common shares, preferred shares, warrants, or bonds. But the one used exclusively for employees is common shares. Equity grants are always accompanied by vesting schedules that ensure that employees receiving company stock have served time contributing to the business. Based on the position offered, the percentage of employee equity varies with every case.
Types of equity compensation
Equity compensation in startups is regulated by IRS and SEC guidelines. Thus companies must hire a professional team of HR and legal personnel who are well equipped to handle employee equity. Certain processes need to be followed while issuing equity to employees. Each one has its own tax implications. The two main categories of equity compensation are:
- Stock options – This is the commonly granted equity to employees. At the time of grant, an employee is granted the right to purchase a certain percentage of company stock at a predetermined price known as the exercise price or strike price. The idea is that over the years, the company’s share value will increase and later when the employee chooses to exercise their options, they will profit from the price differential created by the actual share value. Thus with stock options, employees are granted the right to purchase stocks at a special price and not the stock itself. Stock options are subject to vesting schedules and cliff periods.
- Restricted stock units – This category of equity compensation in startups is reserved for top executives. In this case, the grantee receives the entire stock in one go. They are not required to buy any stocks. These are well suited as incentives and starting bonuses for high flying professionals. However, vesting schedules apply here as well, no matter how short they are.
Startup Employee Equity Management
Employee equity management involves the utmost precision and meticulous work. Manually managing employee entry, premature exits, and multiple investor exchanges all on a single excel sheet is a highly risky prospect. Even the minutest of error or miscalculation in the cap table can send the entire equity structure of a startup into a spiral. This may have legal implications as well. Thus the trend in equity management today is the replacement of excel sheet cap tables with automated software. Here is why:
Why use equity management software instead of excel sheets?
The idea behind a cap table for startups is to consolidate all equity-related information in one place. This data is highly sensitive and informs the financial strategies of a startup. Now imagine how risky it is to maintain this massive chunk of data on a spreadsheet that anyone can access and manipulate if needed! Hence the shift towards automated cap table software.
The best cap table software in the market is highly sophisticated and offers a spectrum of services that go beyond simple cap table management. Pioneers such as Eqvista are thus rightly referred to as equity management software. The top advantages of relying on cap table software are:
- User-friendly interface allowing customized access to equity holders – employees and investors alike. This is not possible with just excel sheets.
- The risk of entering improper data is minimized by built-in checks.
- Issuing equity is just a matter of a few clicks. This software also allows the issuance of electronic share certificates.
- All equity-related data and documents are available for quick access.
- Complex calculations such as estimating the fair value of shares based on multiple factors such as discount rates, equity value and much more can be done easily using this software.
- Master controls are provided only to pre-authorized personnel. Thus equity data is well guarded.
Should Employees Get Access to the Company Cap Table?
This is one of the most heavily debated topics in the startup world. How transparent can a startup be with the employee equity information? Employee equity management is an important part of business strategy as well. Does it make sense to make such data a free source? Here are some pointers in this direction:
- Employee equity is salary. Though cash-less, it is still part of the salary structure in the form of equity compensation in startups. Thus revealing this information is as good as publishing salary details of all employees, which for sure does not make sense.
- Employees need to know how much equity they own, its real-time value, and the extent of preference preceding them. As long as this information is provided, not much is required to be shared. It is difficult to provide customized access using excel sheets. But cap table software provides this personalized feature to every employee.
- A select category of staff such as the board members, CFO, key members of the finance team, legal team, and investors with significant information rights can be allowed to access startup cap tables. These people are key to drive business and need to know cap table status to plan a secure financial future for the startup.
- Though it is debated that granting all employees access to the cap table creates an open and fluid environment in sync with the startup culture, considering not all employees are granted the same percentage, revealing the cap table will be counterproductive. Only the hiring team understands the discretion behind granting variable equity structures for employees. Such sensitive data thrown out of context will only harm the company.
Create and Easily Share Access to Startup Cap Table on Eqvista
Eqvista is one of the market leaders in cap table software. It is one of the most powerful share management platforms in the market today. Our top features include:
- Possibility of managing unlimited companies using a single account
- Easy, customized access to the cap table
- The issue, record, and manage convertible notes, KISS, SAFE, all in one place
- Sophisticated equity plan management
- Easy management of employee stock options
- Waterfall analysis
- Financing rounds modeling
Eqvista is much more than simple cap table management software. Contact us today to know more about how to manage your cap table!