Cap table management is the collective term for determining company valuations, ownership stakes, equity dilution, and other similar considerations. It's a complicated process, and most business owners struggle with it when launching a startup.
In its simplest form, a capitalization table is just a ledger that keeps track of who owns what portion of your company, but thanks to complications in tracking and presenting things like debt, convertible debt, option, warrant, and derivatives holders, that ledger can get out of hand after just one round of financing.
So what are the biggest issues with cap table management, and how can you address them?
Cap Table Management Issues
These are some of the biggest problems to watch for:
1. Failing to use a centralized system.
There are many people who will need access to your cap table, including your accounting department, your central leadership, any invested parties with partial ownership (who may not be within your business), and even your lawyers. Failing to have your system centralized, so that any vested party can access it at any time, can lead to problems with both updating and ongoing communication between party members. That's why using an online platform like eShares is such a benefit--your cap table will be cloud-hosted, so it's securely available to anyone authorized to view it, and updated in real-time. Relying on an old-fashioned spreadsheet isn't going to do the job.
2. Inconsistent tracking.
If you want a reliable system for detailing ownership stakes and valuations, you'll need to keep it updated in an organized way. If you keep adding new lines and new columns, or rearranging the information that's already there, your team members are going to get confused, and you'll increase the chances of making an incorrect calculation. This is where frequent problems like vesting schedule errors can creep in; remember, the "true" distribution of your company is what's stated and formalized in your legal documents, so any inconsistency between those documents and the information as it's presented in your ledger could lead to confusion down the road.
3. Not documenting new changes.
It's easy to remember to update the cap table when you receive a new round of funding, but what about smaller changes? You might forget about specific note holders, or fail to update the total share counts as you introduce new employees or partners. Having a system in place to review the information in your cap table regularly can prevent this, as can having a formal system in place to update the cap table after each significant event.
4. Liquidity and waterfall calculations.
While cap tables will start by calculating the percentage of ownership each of your shareholders has in your company, those percentages may end up being converted (partially or in full) to actual proceeds in what's known as a liquidity event. This can be complicated, since different shareholders may see different payouts, and all of your numbers will have to adjust simultaneously to reflect the new change. Some companies conduct what's called a "waterfall" analysis to determine how much of those proceeds should be distributed, and how it will affect percentage ownership.
5. Manual entry.
Manual entry can be a problem, as well. At first, you may be able to rely on a single person creating and updating the ledger, but as your company's financial information becomes more complex, the time it takes to update that data will multiply--and the risk of human error increases. You'll want to rely on automated calculations and formulas whenever possible, and keep the manual entry to a minimum.
If you don't want your cap table management to become nightmarishly complex, you'll need to keep things as simple as possible for as long as possible. An initial model might have you listing the main roles within your company, such as CEO, CFO, and CTO, and how much ownership each maintains. Only make increases in complexity when necessary, and start relying on automation and software with intuitive UI when things start escalating beyond the basic breakdown. The fewer extra variables you add, like manual entry or unnecessary tweaks, the better.