A capitalization table, or cap table, is essential for businesses, showing equity ownership capitalization and information that is necessary for financial decision-making. Given the information included, cap tables require excellent management to ensure it’s all an accurate portrayal of your company’s overall capital structure for growth and potential future investors. At Astrella, we’ve made it our job to make cap table management less complicated. In this blog, we will explore the top cap table management tips for business owners that will help make this job easier to handle.
1) Keep the Cap Table Up-To-Date and Compliant
First and foremost, your cap table should always be kept up-to-date and compliant. As your business grows, your cap table becomes more intricate, increasing the number of investors and different classes of shares, adding more rows and columns to your cap table. With more employees, a larger number of formulas and sheets are added for testing schedules and tracking option grants. Not to mention resigning employees will have options returned or purchased. All of these updates require careful attention because even the most minor of errors can result in losses or faulty decisions.
There’s also the issue of maintaining compliance with legal requirements, such as the tax treatment of restricted stock awards, proper expense records with issuing equity-based compensation, exemptions, and more.
Using an outdated or incorrect cap table can end up making these mistakes too easily. Unfortunately, these mishaps can lead to legal ramifications, non-compliance, and difficulty attracting future investors. Many businesses attempting to perform their own cap table management on an Excel sheet end up being more at risk than those who use a comprehensive software.
2) Understand the Equity Details of Your Company
There are various types of equity that may be included in your company’s cap table, including common stock, preferred stock, and options.
- Common Stock: Common stock is a security representing ownership in a corporation and is reported in the stockholder’s equity section of the balance sheet. The holders of this stock have the ability to elect the board of directors and vote on corporate policies, typically yielding higher rates of return over the long term. If a company is liquidated, these shareholders will only have rights to a company’s assets after bondholders, preferred shareholders, and other debtholders are paid in full.
- Preferred Stock: Holding preferred stock means that the entity has a higher claim to dividends or asset distribution than those with common stock. This equity represents ownership of a company and the right to claim income from operations and has characteristics of both bonds and common stock, often making it more appealing to some investors. In the event of liquidation, the preferred stockholders’ claim on assets is higher than that of common stockholders but less than that of bondholders.
- Stock Options: Stock options, also known as equity options, give an investor the right to buy or sell a stock at an agreed-upon price and date, but without the obligation to do so. Some companies offer employee stock options (ESOs), which are equity compensation given by the company to some employees or executives. These are different than listed equity options on market-traded stocks as they are restricted to the particular corporation that is issuing them to their own employees.
By understanding each, you’ll be able to better choose the right type of equity for your business and needs.
3) Determine Responsibility of the Cap Table
When you’ve got a cap table that needs to be managed, who should manage the cap table within your organization? Ideally, the legal team for your company should be tasked with your cap table management, as they will be better able to help you stay on top of any critical changes and minimize errors. Delegating that responsibility will also enable you to focus more on the direct building and scaling of the business. Creating an accurate cap table and maintaining it requires the ability to read, understand, and translate legal documents into formulas and numbers. Your legal team can use this information and their expertise to make the most accurate business decisions.
4) Decide How Much to Communicate with Shareholders and Stakeholders
Cap tables are more than some random internal tracking document. A cap table should be utilized in a way that builds trust and maintains a good relationship with your shareholders and stakeholders. However, it is up to you to determine how much of this information is disclosed, and there really is no right or wrong answer. What you will need to understand is: what do investors look for in a cap table? Most commonly, investors won’t receive a fully itemized list of every shareholder or investor in the company. Instead, they’d receive a fairly standard summary cap table as these allow the investor to calculate their ownership position for their own internal tracking and auditing purposes. Of course, depending on the investor, how much information and what information is shared would ultimately be up to the company on a case-by-case basis.
For companies that have a major investor, they may require regular financial statements and cap table updates based on their contractual rights. Suppose there is a representative of theirs that is a board observer or member. In that case, they’ll have access to the information they want, which is agreed upon in the equity financing paperwork.
5) Consider What to Share with Employees
Just like with your shareholders and stakeholders, it’s essential to consider what information you want to share with employees. Mainly, as a founder, you should consider what you’re comfortable with in terms of employer transparency. You can choose to be completely transparent or only provide equity information on a need-to-know basis. If you’re going to share information from the cap table, you need to do be able to help your employees understand what exactly they need to know.
If you have employees with equity, they’ll need to understand what their payout is should the company sell. Allowing them to have access to their holdings as well as regular communication and resources will help motivate employees and improve retention. However, if stocks are not appreciating as they’re expecting, sharing the information may end up having the opposite effect. This may be reason enough to decide not to disclose any cap table information to the team as a whole.
How do you Structure a Cap Table?
For new companies, creating a startup cap table is essential for managing financial assets. Of course, if you have not had much experience with a cap table, the above tips could make the process of structuring a cap table feel overwhelming. Not only does it need to have the necessary information, but it also needs to offer quick setup, security, and automation for efficiently managed information. Luckily, we’ve created an overview to get you started on structuring a cap table for your business.
Make Cap Table Management Easy with the Right Cap Table Software
By understanding these tips and how they can be applied to your business, cap table management will be a much easier task. In order to maintain better accuracy, take the manual processes away and invest in a comprehensive cap table management software like the one from Astrella. Taking all of the necessary steps to manage your cap table effectively will help ensure the long-term success of your company. To schedule a demo of our cap table management platform, contact Astrella today.