How to Standardize Cap Tables for Companies Operating in Multiple Jurisdictions?
The US has been a hub for technological innovation for almost a century. Hence, investors from all over the world want to invest in US startups. Consequently, even if a startup’s cap table starts off simple, its complexity increases with each funding round.
A startup may eventually introduce multi-entity ownership structures to deal with compliance challenges in each country. If a startup survives hostile takeover attempts or pursues inorganic growth, it may end up in a very complicated ownership structure with cross-holdings.
In this article, we will guide you in standardizing your cap table to deal with the challenges of operating in multiple jurisdictions.
Core standardization framework
The foundation of effective multi-jurisdictional cap table management lies in maintaining a single accurate data source. You can achieve this by implementing the following solutions.
Centralized data storage
Instead of creating multiple cap tables for each jurisdiction, you should maintain a single cap table centrally. Whenever a stakeholder requests to view the cap table, the centrally maintained data must be accessed and transformed as per the stakeholder’s jurisdiction.
For instance, suppose your US startup has investors from Switzerland, Saudi Arabia, and Norway. When these investors want to access your cap table, the centrally stored data about voting rights, economic rights, vesting schedules, description of equity interest, and stake value must be transformed to suit the investor’s jurisdiction.
To maintain data security, you must invest in encryption tools, conduct regular audits, and control access with austerity.
Unified share classification system
Different share classification systems may exist in different jurisdictions. In some jurisdictions, investors might be familiar with class ‘A’ and class ‘B’ shares, while investors in other jurisdictions would know about common stock and preferred stock.
To avoid misinterpretation, you must establish a unified share classification system and share the accurate and appropriate translations with investors.
Example
| Share class as per local jurisdiction | Foreign jurisdiction |
|---|---|
| Class A shares | Common shares with voting rights |
| Founder equity | Restricted shares without voting rights |
| Series B preferred shares | Preferred share without voting rights |
Jurisdictional compliance layer
When you operate in different jurisdictions, you may end up in a situation where you must comply with conflicting requirements.
In such situations, you can implement the following solutions to help your stakeholders face tax and legal compliance challenges without compromising accuracy.
Address currency standardization
Your cap table management algorithm must be capable of real-time foreign exchange conversions. Moreover, you must set up automated record-keeping in key equity events such as funding rounds, conversions of a large volume of convertible securities, and buybacks.
These records should carry currency conversion timestamps. Such record-keeping is crucial for meeting disclosure requirements and maintaining an audit trail.
Implement jurisdiction-specific modules
Every country may have different requirements for nominee structures, disclosure thresholds, foreign ownership restrictions, regulatory filings, and foreign investment restrictions. However, a single company cannot have different equity structures for each jurisdiction.
Instead, you must maintain a core structure to which jurisdiction-specific modules get attached depending on the investor’s geographical region.
Technical implementation
A technically robust cap table management software would pivot you from reacting to stakeholder requests and fixing errors to preventing discrepancies before they even reach stakeholders. Here are two things you can do to achieve this:
Implement automated reconciliation processes
You must leverage automation to compare data being supplied to different jurisdictions and the central data storage. This should allow you to flag discrepancies such as differences in shareholding percentages, mismatches in shareholder names or IDs, and missing or extra shares.
As a result, you can prevent reporting errors. To prevent stakeholders from viewing inaccurate cap tables, it is essential to establish a manual review and intervention process that is triggered when errors are found.
Build in validation rules
Your cap table system must be capable of automatically checking for global consistency rules and local compliance requirements. This means that, in all cap table reports shared with stakeholders, the total ownership should always equal 100%.
In certain jurisdictions, investors whose ownership crosses a certain threshold must be identified in reports to regulators and government agencies. In the UK, if a shareholder owns more than 25%, they must be disclosed as a Person with Significant Control (PSC).[1] Your cap table management system must be capable of verifying whether such disclosure requirements have been met.
Practical considerations
For compliance and tax reasons, a company may adopt a multi-entity ownership structure. A company that raised funds from investors across different countries may set up holding companies in each country to comply with local disclosure and other regulatory requirements.
In such a scenario, the investor would need clarity about their influence over the core business and the value of their stake. To facilitate this, a professionally made equity management platform, such as Eqvista, would undertake the following steps:
Separate entity dashboards equipped with consolidated views
You must develop a cap table management software that tracks ownership of each holding entity in the core business. This software must also track the ownership of each holding entity stakeholder in the core business. At the same time, you must also respect the privacy of the investors who do not wish to be identified by limiting access. You might need to limit a stakeholder’s viewing access only to the fellow investors of the same holding entity.
Each stakeholder must be able to understand their ownership of the holding entity, their stake value, and their indirect ownership percentage of the core business.
Track cross-holdings and inter-entity transfers
If your company has an extremely complex ownership structure, anticipating changes in stake values can be challenging. This can happen when your company engages in inorganic growth and is subjected to hostile takeover attempts. Such events can lead to different entities owning shares of each other due to inter-entity stock for cash and share swap transactions.
To help your stakeholders gain clarity into actual ownership and identify risk exposure, you must provide visual aids.
Enable automatic forex adjustment to valuations
The cap table management software must be able to convert holding entity stake values into different currencies used by different investors. Then, these figures must be reported to investors of the holding entities. Additionally, the stake value history or the valuation history as per the core business’s home currency should be shown. This would help investors understand the foreign exchange risk.
You could go a step further and periodically release a valuation report that includes a foreign exchange risk assessment. This would provide much more transparency and enable investors to make informed decisions.
Eqvista – Clarity in compliance!
Cap table management for companies operating in multiple jurisdictions and with a multi-entity ownership structure requires diligent record-keeping and well-designed automation that supports various kinds of analysis and data exploration. Since every company may have a unique ownership structure, very few universally applicable cap table management solutions exist.
Eqvista’s comprehensive equity management solution is a rare exception. Our software enables all kinds of equity management functions, from board approval to issuance and retirement of shares and visualization of funding scenarios and exits. Contact us for a demonstration!
