Cap Table Secrets: Organize Like a Pro

Picture this: You're a newbie in the private equity jungle on a mission to unravel the mysteries of a cap table - ensuring it sparkles with clarity and precision but aren't really sure where to start. Trust me, we’ve all been there. 

“But what could possibly go wrong?”, you might ask. Well, my friend, a lot actually and in this article we will be focusing on the most common issues we see new clients make at equity admin co.

What lies ahead

Managing a cap table requires keeping up with shareholder agreements, option grant documents, late terminations and even historical transaction records that are very easily missed, such as undisclosed transfers, and unrecorded share issuances… It gets very easy to mess up very quickly and it can make even the simplest tasks rather difficult, such as determining accurate ownership percentages.

If a cap table does not reflect the correct structure, it can lead to misunderstandings, loss of trust, and potential conflicts during fundraising or exit events. Keep in mind that shareholders play a part in company decision-making, and this can get very difficult if they don’t have a clear view of ownership and voting power records.

Furthermore, privately held companies are required to go through periodic 409a valuations to determine their Fair Market Value (FMV). Well, those are also based on your cap table and will impact employee compensation plans, taxes and the market perception of your company’s value. 

A messy cap table can also prolong the due diligence process during mergers and acquisitions… All of this, not to mention that failing to accurately reflect equity transactions can result in legal and regulatory issues, should be reason enough to take managing your cap table that much more seriously. 

Now, breathe

Ok, ok.. I think you get what I mean by now. But, when you start off on the right foot, managing the company's growth becomes a whole lot smoother.

Now that we have a glimpse of what can happen, let's take a deep breath, hold each other's hands and explore the shiny Realm of Equity with some baby steps.

1. Make the tough decision whether to use an escrow account for the collection of the funds raised, or whether those should be directly sent to the company bank account.
   
   

• This defines who has the responsibility of keeping track of the funds received. If you lean towards the latter, your Finance/Accounting Teams should be tracking the details of each wire transfer, including the amount, date, and sender's information. This helps in cross-referencing with the cap table and identifying any discrepancies or missing transfers.
  

2. Some people say that rules make the fun possible and I agree. It's crucial to review and organize documents, those include SPAs (Stock Purchase Agreements), STAs (Stock Transfer Agreements), Exercise Notices among others. Carefully read them and make sure the cap table aligns with what they have stated.
   
   

• Create standardized labeling so it makes it easy to find the documents you’ll need a few years from now. For example:

1. YYYY.MM.DD Stock Transfer Agreement - Seller - Purchaser

2. YYYY.MM.DD Stock Option Exercise Notice - Employee name
   

• Store the documents in a Drive shared with the internal related parties, having a folder for each transaction (preferably with standard naming as well).
  
  

• Check all the signed documents and their details

• For example: if a Venture Capital Firm is investing through more than one fund, check the cash to be paid by each and the number of shares to be issued to each. That will set you up for success when confirming the receipt of funds related to each share certificate and the issuance itself, in case there are different rights or preferences associated with the shares and even the price per share.
  

3. Take advantage of modernity: use online platforms to make sure all involved parties have access to the same version. Even if your company cap table is managed in a spreadsheet, use an online interface.

   But, In case you really like your spreadsheets and want to stand by them, here is a golden rule: attribute Labels. Following the database logic, primary keys are record identifiers, distinctive for each record. This is a must have, otherwise it can get very easy to confuse the transactions and end up exercising the wrong stock option or transferring the wrong share certificate. Can you imagine violating Rule 144 or disqualifying an ISO exercise simply because you missed identifying each transaction?

• Rule 144 sets forth certain conditions for the resale of restricted and control securities, including holding periods. It's always a good idea to consult with a legal professional or securities expert for specific guidance related to your situation.
  
  
• If the ISO exercised shares are sold or transferred in a disqualifying disposition, the employee is subject to ordinary income tax rates on the spread between the exercise price and the FMV of the shares at the time of exercise.

4. Like the song said “Repeat steps one through three”. Never stop following the steps above. Whenever you have a new financing round or even new stock option exercises, make sure you have the signed document and the payment receipt, but wait for your finance team to confirm the receipt of funds before you issue the share certificate. (It’s not uncommon for payments to fail, especially those that are international.) 

The key rule is simple: don't give out shares until you've got the cash in hand. It might seem like stating the obvious, but even the clearest paths benefit from signposts. This is the reason why steps 1 and 2 are so fundamental.

As soon as you confirm the receipt of funds, work on the issuances and make them as organized as possible and with a dash of color-coded spreadsheets, a sprinkle of well-labeled securities, and a dose of designed processes, you'll be the hero of your equity programs. 

To make things easier, try the Transaction Control List, available for free download on the Equity Admin co. web page. While far from being a cap table replacement, this free download is meant to be the first push towards organizing documents and transactions, but you can always count on our team of experts to help you go the extra mile towards proper cap table management.

Admin's Ninja Trick

If needed, draw it. Yes, you read it right, DRAW IT. Think about it, some transactions might get so complex that even the most advanced platform makes it tricky to follow. Why not create a flowchart to help you visualize the historical data? Works for me everytime.

Remember: with great organization comes great success! 

Now, go for it and conquer the Equity World!

NASPP Resources

Selecting the right cap table solution is a strategic decision that can significantly impact your company and it’s not an easy thing to do, especially when the market has gotten considerably more competitive.

Newer providers and existing ones have all been working to create more robust solutions for their clientele to help ensure that they can manage their equity structures effectively. To see what innovations have been made and what options are currently available, please check out the webinar below to take advantage of the unique opportunity to experience the 12 best-in-class cap table providers demo their platforms.

• NASPP | Solution Showcase Part I
• JP Morgan
• Carta
• Pulley
• Eqvista
• Cake Equity
• Qapita
  
• NASPP | Solution Showcase Part II
• Mantle
• AngelList
• Morgan Stanley at Work
• Insightsoftware
• OptionTrax
• Fidelity Private Shares