Have you ever wondered how the best companies handle cap table management?
Managing your cap table is essential to building a successful startup. It’s also one of the functions many founders and investors overlook.
Misunderstandings among parties can lead to disputes surrounding ownership and equity. The key to safeguarding the sanctity of your company cap table is to ensure all parties understand the processes, policies, and checks before committing to them.
Consider best practices to simplify cap table management, whether you’re building the next social media giant or launching a new SaaS startup.
Understanding Cap Table Basics
A cap table (or capitalization table) is a tool that tracks your company’s financial information, including a list of all shareholders and the details of their ownership stakes. It also tracks changes to the shareholder list and other important company information when managed well. You’ll find them in nearly every financial document related to your startup or business.
The cap table serves several essential purposes, including:
- A historical (and current) overview of your company’s ownership at any given time.
- How many of which types of shares does each shareholder own, which helps resolve disputes and avoid misunderstandings.
- Who owns what percentage of your company so you can make decisions based on a majority vote or consensus among shareholders with equal rights (such as co-founders).
- Assistance with calculating liquidation preferences and other terms when investors sell shares in exchange for cash or other consideration.
Understanding the basics helps you maintain control over your company and avoid pitfalls.
There are many ways to value equity. You’ll use cap table management to determine how to issue shares to investors and employees through multiple funding rounds as the company grows.
Tips for Good Cap Table Management
When you’re starting, setting up your caps table might feel unnecessary. But it becomes increasingly critical as your company moves through different stages, from seeking outside funding and sharing equity with early employees to exiting or going through the IPO process.
Fortunately, there are some standards and best practices to follow to make cap table management as easy as possible.
Track Changes in Real-Time
Use cap table management software to easily track changes in real-time and ensure that all stakeholders have up-to-date information about who owns how many outstanding shares and their terms.
The software should allow you to add new shareholders and manage their terms and ownership percentages. It should also enable you to make changes to individual shares without going through every transaction individually, saving time and improving accuracy.
Automate Legal Documents
Managing legal documents such as stock certificates, option agreements, and convertible notes can be a pain.
Software tools and systems can ensure accuracy and speed up issuing equity. Many can also help you automate all the administrative tasks related to giving and tracking stock options, including payroll processing and payouts at vesting periods.
Monitor All Activity
Changes to the stock structure can impact who controls your company. Monitor all activity related to the cap table, such as vesting schedules, option grants, and dilution events (e.g., follow-on financings).
Avoid events that aren’t recorded in your cap table. For example, if you grant options without recording them in your cap table, they may not vest properly if their terms change after they’re granted.
Stay Organized
Keep all documents, records, and data related to the cap table organized and easily accessible. It’s essential to quickly find information about who owns what percentage of your business — especially if you’re going through an acquisition or sale process.
Maintain Security
Ensure all data and documents related to the cap table are secure and confidential. Your employees and contractors should not have access to this information unless it’s vital for them to do their jobs.
Consider Tax Implications
Changes to the cap table can impact your shareholders and the company’s tax liability.
Consider the tax implications of any changes you make to the cap table. If you or your company makes significant revenue from selling equity in your company, you’ll have to be aware of any tax implications.
For example, if you issue an option or grant stock at a discount, you might need to report that as income for yourself or your company at the time of exercise or vesting.
Keep Good Records
Keep records of all cap table activity for future reference. No matter how small your company is or how few people hold equity in it, this is essential.
If you want to raise money or sell equity, later on, investors will want to see your history — including any vesting schedules and dilution events. That will enable them to decide if they can or wish to invest in your company.
Need Help Getting Your Cap Table in Order?
Managing your cap table can affect your business’s ownership structure and long-term success.
Effective cap table management keeps a company organized and holds all the essential information about its capitalization and ownership. Raising capital or making significant decisions without a clear overview of the outstanding shares can become challenging.
Contact Founder’s today if you’re unsure about your company’s cap table management. We can help you follow the best practices and industry standards so that your cap table is always correct.
