Fractional CFOs have become increasingly popular with early-stage startups. While larger companies may have an in-house CFO, smaller businesses may not have the resources or workload to justify such an expensive employee. This is where fractional CFO services can provide value. In this article, we will explore what fractional CFO services are, how they manage a cap table, six cap table management best practices, and how to get started with fractional CFO services.
What are Fractional CFO Services?
A fractional CFO is an experienced financial professional who works with your business on a part-time basis. These professionals bring significant value through their financial expertise and strategic planning skills without the cost of hiring a full-time CFO.
For small and medium-sized businesses, a fractional CFO can bring fresh perspective on issues to owners who may not have prior experience managing complex financial issues or planning for growth. Fractional CFOs can assist with budgeting, forecasting, and other financial planning needs that are important to the success of the business. They can also assist with financial reporting, cash flow management, risk management, and investor relations, and can plug into an existing finance team (if one exists).
For venture-backed businesses, or businesses that plan to raise venture capital, a fractional CFO can help businesses prepare for the fundraising process. One critical component of this is making sure the company’s capitalization table (or ‘cap table’) is adequately maintained.
Why Does Cap Table Maintenance Matter?
First, let’s discuss why cap tables matter. A cap table is a document, updated frequently, that shows who owns how much of your company. At any given time, a company’s CEO should be able to reference the cap table to understand their company’s ownership structure.
For that reason, cap tables are often a high-priority item when venture capital firms perform due diligence on a potential investment. Potential investors want to understand how current investors will be impacted by a potential fundraise, and how potential additional future fundraises may impact their ownership stake, should they decide to invest. Ultimately, if a cap table is kept reliably up-to-date and accurate, this will result in fewer questions from a potential investor – which is always a good thing.
Investors will also want to understand how the current company’s management team and employees are incentivized to perform. If a company’s CEO owns only a tiny fraction of the company, it may indicate that they aren’t appropriately incentivized to grow the company for a long period of time if more funds are raised and their ownership stake is diminished.
All of this is to say that maintaining an accurate cap table enables a company’s management team to understand the implications of the decisions they make. But maintaining a cap table is a highly detailed and complex process, and without prior experience doing so, often leads to inaccurate results and confusion.
A Fractional CFO’s Approach to Cap Tables
First and foremost, a fractional CFO will review your cap table to make sure it has been well maintained. This means reviewing documentation (with input from your company’s attorneys) related to the formation of your company and any subsequent changes in ownership or fundraises to make sure you understand how much of your company each stakeholder owns. Sometimes, especially in cases of complex cap tables, this may entail using cap table management platforms such as Carta to house all relevant information.
Then, a fractional CFO will take steps to make sure that there is a regular process for keeping the cap table up-to-date as new equity issuances occur. This includes keeping track of securities whose terms are associated with time horizons (for example, convertible notes that accrue interest or stock options that vest according to a schedule), notifications when certain deadlines occur, and appropriately accounting for the impact of these changes in your financial statements.
Once your cap table is updated, its accuracy verified, and processes are put in place to ensure it is kept up-to-date, a fractional CFO can provide valuable insights and analysis based on the information within. They can help you understand the impact of equity issuances on the ownership structure of the company and provide guidance on how to structure future equity offerings. As a CEO, you know have the ability to accurately understand the implications of the decisions you make around fundraising for each of your investors (including you!).
6 Cap Table Management Best Practices
Even if you’re not ready to use an outsourced CFO, it is essential for any company a few best practices to ensure they are staying on top of how the company’s equity is split between its shareholders. Here are six best practices to help you manage your cap table more effectively:
- Maintain accurate records: It is crucial to ensure that all equity issuances and transfers are accurately recorded. Accurate record keeping helps to prevent disputes down the line. Maintaining accurate records also helps to ensure that the company’s ownership structure is clear and transparent.
- Use a reputable software: Utilize a reputable cap table management software to enhance transparency, accurate tracking, and detailed record keeping. A good software can help you keep track of all the equity issuances and transfers, and provide you with up-to-date information about your company’s ownership structure. This will help you make informed decisions about your business. Here’s an article we wrote on 8 common tools companies use to manage their cap table.
- Provide regular updates: Shareholders want regular access to the most current information about their investments. In some cases, these updates may be mandated by the terms of their investment. Regular shareholder updates help build trust with your investors and keep them informed about the company’s progress. This also helps ensure that the company’s ownership structure is clear and transparent.
- Document all transactions: Keep all documents associated with equity issuances, transfers, or other related transactions. Better yet – keep them highly organized and easily accessible. Documenting all transactions helps to avoid misunderstandings and disputes. It also helps to ensure that the company’s ownership structure is clear and transparent.
- Review and update your cap table: Review and update the cap table regularly (at least quarterly) to ensure accuracy. Accurate information helps to make informed decisions about your business. Regularly reviewing and updating your cap table also helps ensure that you are aware of any dates that are important for securities that have terms associated with a time horizon, such as SAFE notes, convertible debt, and stock options.
- Engage a professional: Engaging a fractional CFO can provide expertise during your cap table management process. A fractional CFO can also help glean useful insights from your cap table as you approach a fundraise or significant event in your company’s growth.
How Can I Get Started With Fractional CFO Services?
If you are interested in utilizing fractional CFO services, it is essential to choose a qualified and experienced professional. Conduct extensive research and gather information on potential candidates before selecting one. We’ve created a guide on selecting the right fractional CFO to help you through the process of doing so.
That said, we may be biased, but we think our CFO Services team is pretty great. So, if your business is planning its next phase of growth, you’ll want to get ahead of the due diligence process. Schedule a call with one of our team members today to learn more about how our CFO Services team is ready to get your cap table up-to-date and prepare for your upcoming fundraise!
