Transfer Agent for Startups

In this article, we focus on the role of transfer agents for startups.

Incorporation of a startup inevitably requires care for equity distributions. While it is easy to manage limited shareholder activity, the process becomes complicated with the increase in number and size of the company. Gradually stockholder management becomes an exclusive and time-consuming activity. This is when startups require stock transfer agents.

In this article, we focus on the role of transfer agents for startups. We will also try to gather a better understanding of cap table management and explore possibilities of using cap table software.

Transfer Agents for Startups

Managing shareholders is a crucial aspect of every business. To regularly update records, ensure timely payments, and to stay committed to mutual connections help build long-lasting relationships between the company and the shareholders. When the numbers are few, communications are more personalized. But as the company grows, distributing shares becomes a requirement and this increases the number of stakeholders in the business. The extent of this process eventually becomes cumbersome for the company to handle in-house and needs to be outsourced to transfer agent companies. Let’s explore this more.

What is a transfer agent for Startups?

A transfer agent company is an SEC-registered entity that is responsible for liaison between companies and their shareholders. They take care of the whole end-to-end processes in shareholder management. Bookkeeping, timely payouts, voting, are some of the fundamental responsibilities of a transfer agent. They also offer the Direct Registration System (DRS) to investors by which shares can be purchased directly from the company without involving intermediaries. Some of the basic responsibilities of a transfer agent are:

  • Facilitate important corporate events such as mergers & acquisitions, IPO, stock splitting, and the likes.
  • Issue electronic stock certificates, stock payments, integrate with stockbrokers if required, and provide replacements for lost share certificates.
  • Escrow services
  • On authorization, process DWAC & DRS transactions
  • Regular emails carrying timely communications such as shareholder letters, news, proxy documents, etc.
  • Facilitate proxy meetings with clear timelines
  • Timely submission of regulatory reports online and offline

Along with a team of finance professionals, transfer agent services also include reliable legal counsel. The legal team closely monitors all SEC and government regulations and ensures timely filings of the required paperwork. This is a huge task especially for publicly trading companies with thousands of shareholders. Since transfer agents are the face of the company, investing in the right one is crucial as they are entrusted with fundamental aspects of a business. The slightest lapse can have massive consequences.

How transfer agents help startups?

Startups are always cash strapped and hiring stock transfer agents is invariably expensive. But the extent of responsibilities that transfer agents take care of is quite a lot and many times impractical for a growing startup to handle on their own. Shareholder communications and the regulatory accountability related to it is a massive responsibility. Any errors could cost a startup dearly as compared to hiring a transfer agent early in the business.

Here are some important reasons justifying the requirement of a transfer agent for startups:

  • Startups are not experienced in shareholder management. But shareholders are the backbone of a business and maintaining a long-term trustworthy relationship is important.
  • Protects the startup from regulatory lapses that can have massive legal and financial implications on the business
  • During equity crowdfunding, working with a transfer agent company exempts a startup from the regulatory requirement of going public in case of 2,000 or more registered shareholders.
  • Startups are high powered businesses and need all the time and resources to focus on strategies to grow the company. In such a situation, focusing on shareholder management proves cumbersome.

Costs of a traditional transfer agent

To hire a transfer agent for startups is a sensitive affair. Transfer agents are entrusted with sensitive shareholder contact information and communication. They practically become an extension of the business and in practice not changed frequently. One transfer agent could partner with a company for a lifetime. Thus, investment in a transfer agent must be done with utmost care.

Stock transfer agent services are generally bundled offers. So at the onset, their contracts may come across as an expensive affair. Hiring them for a one-off service might be expensive as well. Thus a company has to do a careful cost-benefit analysis before signing up. Besides, one must be wary of the termination clauses that can cost anywhere between $500 and $15,000 if the contracts are terminated before 7 to 10 years.

Also, like any other business, a transfer agent company may charge an annual increment on their existing contract rates. It is up to the business to decide if they are operating in an ever-changing regulatory environment or engaging with shareholders who require personalized attention that would eventually justify the cost of hiring a transfer agent. Finally, it boils down to the complications involved in the cap table management of a company. All other services offered by a transfer agent are in addition to this. In the next section, we discuss cap tables in detail.

Cap Table Management

Cap table management forms the core of transfer agent services. During fundraising, cap tables are the first go-to document for investors, and to update and maintain them with high accuracy is an important task. Let’s begin by understanding what cap tables are.

What is the cap table?

A cap table is a simple spreadsheet that contains shareholder information of a company. Based on the security class, shareholders can be of various categories such as common shares, preferred shares, convertible notes, warrants, etc. especially in the case of startups, when there are fewer shareholders with simple vesting schedules, cap table management is handled in-house on a simple spreadsheet.

cap table

Cap tables typically list individual shareholders and their corresponding share prices. Accuracy is crucial for efficient maintenance of a cap table. The information must be up to date as cap tables also act as references for strategic business decisions. Who owns how much of the company has a direct impact on share prices and hence fundraising efforts.

Why is cap table management important?

Investors use cap tables as a reference point during funding rounds. If a company displays efficient cap table management, it builds investor’s faith in the business and improves the chances of winning a funding bid. On the contrary, lapses in cap tables indicate that the company is not ready to handle shareholders and this harms company valuation. Thus, it is in the best interest of growing startups hoping to raise external funds to ensure the best team is on their cap table management.

Meanwhile, internally the cap table is an important reference point to gauge financial projections of a business. Data such as the existing number of shareholders and the current share price helps management decide on the extent of dilution the business can afford in further funding rounds without losing too much of their ownership. Cap table management has a direct impact on founder decisions about maximizing equity shares with minimal losses.

How to manage a startup cap table?

As we see, cap table management forms the foundation for equity distribution and fundraising efforts of a business. More so in the case of growing startups, it is important to know exactly how to approach cap tables as any errors in the early stages can derail the financial planning of the company.

Here are some tips to approach cap table management of your startup:

  • Understand your company equity structure – In a typical startup scenario, most shareholders are founders, employees, investors, or consultants. Though it is a close circle, it is even more important to be sensitive towards such data so that no one feels deprived in the long run. Developing a detailed understanding of who is assigned how much of the company equity and under which asset class is the first thing to master in cap table management.
  • Record all the share details – Now that you know who owns what and how much, the next thing to do is record all shareholder details in as much detail as possible. This includes information such as the name of shareholders, type of shares, price of each share, number of diluted shares, etc. This is simple to maintain on a spreadsheet. But with a large number of shareholders, to maintain, edit, and update these many details regularly becomes cumbersome. Besides, the privacy and security of such data also become a concern. This is where equity management software comes in. With sophisticated ones such as Eqvista, it is quite simple to record all equity details such as common shares, preferred shares, options, warrants, and convertible notes in a secured cloud server. This data can be easily accessed by authorized personnel only.
  • Get these data centralized and share access to those who need – Cap table management on an excel sheet creates the issue of sharing relevant information with stakeholders. But with cap table software such as Eqvista, this process is centralized and as simple as granting individual logins to shareholders. Also, in addition to equity information, it is easy to share access to relevant legal documents such as the Articles of Incorporation, stock purchase agreements, etc.
  • Keep compliances with all rules and regulations – Every startup owner would at some point agree that regulatory requirements are a cause of concern. Startups must be on top of all developments and changes in reporting requirements to ensure their compliance with rules and regulations. It is extremely difficult to update and follow these on an excel sheet. Thus, cap table software such as Eqvista come in handy to automate prompts for this process.
  • Review data regularly – Startups are a growing business. Thus, the business environment will be dynamic. With incoming funds, new members on the management team, and new employees, the equity structure will change as well. The most efficient way to approach cap table management is to regularly update it. Cap table software such as Eqvista eases this process in comparison to updating numerous excel sheets.

Why Choose Cap Table Management Software for Your Startup?

As we see, cap table management is an undeniable part of any business. No matter how many shareholders a company has, maintaining all details about these investors is unavoidable. Besides, it is not only this data but all documents accompanying every equity transaction that also needs to be maintained. In the initial stages, with a couple of founders, cap tables can be maintained on an excel sheet. But as the business grows and the startup begins to grant stock options and rewards following different vesting schedules to various stakeholders, operating on a simple excel sheet or maintaining multiple excel sheets becomes next to impossible.

Waterfall analysis

At this stage, if the startup does not want to or cannot afford to outsource this process to a transfer agent company, the next best and economical option is to subscribe to cap table software such as Eqvista. Opting for cap table software instead of transfer agents is now a growing trend among startups because:

  • It is much cheaper and the functionalities extend beyond just cap tables.
  • With the extent of services provided by this software, they can be very well listed as equity management software.
  • Most common events such as vesting schedules are automated.
  • Owing to cloud computing, they provide personalized account access to shareholders
  • They provide training and support to clients to ease their learning and user experience.
  • Some include financial modeling such as Waterfall Analysis and Round Modeling for future investments.

How Eqvista Helps You?

Eqvista is one of the most advanced cap table management software in the market today. We are an efficient and economic alternative to transfer agents for startups. We provide extensive learning support to our client companies that make the user experience easy and smooth. Especially for startups with under 20 shareholders, using our platform is FREE.

Interested in issuing & managing shares?

If you want to start issuing and managing shares, Try out our Eqvista App, it is free and all online!