Every startup knows the unique challenges it takes to get your business up and running. An integral part of that initial setup is investors. With initial seed rounds, founders’ contributions, and other debt and equity financing, you may find yourself issuing a large amount of initial equity instruments.
As you continue to grow and attract additional investors, employees, and business consultants, you may find yourself issuing several different instruments, including common or preferred shares, stock options, warrants, Simple Agreements for Future Equity (SAFEs), incentive units, etc. Many companies, ranging in status from startup to later-stage and pre/post-IPO, use Excel as an equity instrument management tool for tracking and recording their equity activity. While Excel is a powerful and affordable tool, there are some significant downsides to using it for this purpose. Internal accounting departments, HR, and legal counsel can become frustrated by the amount of time spent throughout the year manually maintaining a complete and accurate cap table.
It is very common for inaccurate cap table information and data to be 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 “reconstruct” your cap table. Fortunately, there is another option.
Why cap table software?
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. This could include calculating periodic share-based compensation based on various assumptions such as volatility, discount rates, equity value, etc. Most cap table software providers even offer stock compensation recognition schedules that automatically calculate and post necessary compensation costs to your general ledger and can generate Generally Accepted Accounting Principles (GAAP) compliant footnote disclosure for interim and year-end reporting.
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 four questions to ensure that your company is ready to make the switch from Excel:
- Are we hiring many 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.
- Do we have a current or future audit requirement?
- An audit will further emphasize your Company’s need for precise, accurate, and GAAP-compliant reporting. With cap table software, you can generate detailed cap table and compensation schedules at the click of a button to ensure your business is always “audit-ready.”
Choosing the best cap table software provider
Once you’ve determined that you need a management solution, you should ensure that you are choosing the best cap table management software tool that works for your business and its unique equity structure. Several cap table software providers offer features and functionality that range from basic reporting for startup companies to significantly more advanced (and complicated) modules 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 become integrated into our internal accounting and human resource systems, and do we want it to be integrated?
- 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?
- Have there been any unique events during the year, such as option repricing, that we would need assistance with?
Depending on your complexity and needs, you may benefit from a cap table software 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 Carta, Shareworks, and Shoobx, to name a few.
Typically, these providers will offer to provide demos to show companies like yours how their service will simplify and improve your equity monitoring. They will usually 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. Additionally, these platforms also have the capability to monitor critical tax matters such as IRS compliance. Many platforms are able to offer on-demand Form 3921 and 83(b) documents, and Rule 701 disclosures.
Implementing a cap table software solution is well worth the investment. 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.
