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Is Your Company Ready to Implement Cap Table Software?

Written by: Derek Thomas, CPA and Sylvi LaFrazia, CPA

Why Cap Table Software?
Many of our clients ranging from startup to later-stage and pre/post-IPO companies, use Excel as an equity instrument management tool for tracking and recording of their stock option activity. While Excel is a powerful and affordable tool, there are some significant downsides to using it for this purpose. For instance, our clients become frustrated by the amount of time they spend throughout the year maintaining a complete and accurate cap table. We have also seen instances in which inaccurate cap table information and data was presented to investors, owners, employees and members of the board of directors. Making this mistake could have a negative impact on your next financing round, result in mispriced option grants and even cost you potentially thousands of dollars in legal fees as you “re-construct” your cap table. 

Fortunately, there is another option. Using an equity management software through an experienced vendor can significantly reduce the risk of recording an improper transaction, and the resulting headache from consistent spreadsheet maintenance. Additionally, several cap table management software products offer services that handle the complex calculations for you, such as calculating the fair value of the share-based compensation based on various assumptions such as volatility, discount rates, equity value, etc. Several software providers even offer stock compensation recognition schedules that automatically calculate and post necessary compensation costs to your general ledger.

Read on to find out if it’s time for your organization to ditch the Excel spreadsheet and select a reliable equity management software, along with what to look for in choosing the right solution for you. 

How Do You Know When You’re Ready?
Before determining the type of cap table software to select, ask yourself these three questions to ensure that your company is actually ready to make the switch from Excel:

  • Are we hiring a lot more people compared to historic trends?
    • If so, you may have a larger than normal number of option grants with unique vesting terms as well as increasing levels of option exercises that will need to be accurately tracked.
  • Are we incorporating stock options as part of our hiring package more regularly?
    • Issuing stock options to employees is an attractive way to hire and retain good talent. If you choose to issue shares in conjunction with expanding your employee base, additional cap table data will need to be accumulated and monitored.
  • Are we in the process of seeking financing?
    • Any type of financing, such as a Series A round or beyond, creates a whole new series of stock to record and monitor. This can significantly complicate the cap table and overall equity structure in terms of factors like fully diluted ownership and liquidation preferences. 

What Should You Look for in a Cap Table Software Provider?
Once you’ve determined that you need a cap table management solution, you should select the tool that works best for your business and its unique equity structure. Several cap table software providers offer features and functionality that range from more generic for startup companies to significantly more advanced (and complicated) for publicly traded companies. So regardless of the stage you’re in, there is certainly software out there that can meet your cap table management needs while remaining within your budget constraints.

Consider questions like these during your due diligence:

  • How many series of equity securities does my company have?
  • Will I need to have the software complete 409A valuations for us, or are we better off using an external specialist?
  • Can the software – and do we want it to - become integrated into our internal accounting and human resource systems?
  • Who will need access to our cap table software – accounting team, legal counsel, investors, external auditors?
  • How will the provider facilitate moving our equity data from our existing spreadsheet to the provider’s software platform?
  • What steps will be taken by the provider to ensure the data we provide from our existing records is accurate?

Depending on your complexity and needs, you may benefit from a cap table provider that can give you multiple unique logins with different rights, capabilities and viewing credentials for your users. Additionally, a provider can act as a document manager for all pertinent cap table data. Instead of sifting through piles of equity documents or sharing potentially outdated and inaccurate Excel files, your equity documentation could be properly maintained in the cloud, allowing your users access to the same information from any location. Unique software platforms allow you to customize your accessibility, viewing credentials and transaction authority based on your role and/or affiliation with the company. 

How Should You Select Your Cap Table Software Provider?
Once you’ve decided to implement cap table software, you’ll have your choice from various options on the market. Some of the more well-known providers include eShares and Capshare. There are also other options that are gaining popularity, such as Shoobx, OPTRACK and Optiontrax.

Typically, these providers will offer to provide demos to show you how their service will simplify and improve your equity monitoring, and they will provide in-depth explanations of how their service can be customized to fit your company’s needs.

Pricing for the software will vary based on the platform you choose and if you decide to add on any supplementary tools to go along with your software. Basic platforms for startups, which assist in tracking founder’s shares and a single series of stock, can be free of cost. Many providers offer these cost-free services in hopes that your business will grow along with them. As your business evolves, your software needs will as well, which will lead you to then move into a more complex software structure that is either based on an annual fee or a ‘per shareholder’ fee.

Implementing a cap table software solution is well worth the investment. In many cases, by delegating these duties to an external provider, you will free up significant time, leaving you to focus more on building your business. You’ll also have greater peace of mind knowing that your equity is properly tracked, monitored and recorded. As a result, your employees, attorneys, accountants and, most importantly, investors are happy and assured that you have everything under control.

To learn more about this topic, contact Derek Thomas, CPA, Audit Supervisor, at 617-428-5487 or dthomas@wolfandco.com, or Sylvi LaFrazia, CPA, Senior Auditor, at 617-261-8167 or slafrazia@wolfandco.com