The Crucial Role of Cap Tables

Capitalization Tables - “Cap Tables” for short - are one of the most vital, but underrated pieces of a business. I might even argue they are the most important part of a business, aside from the actual product and finding product market fit.

WHAT IS A CAP TABLE?

Cap Tables track ownership in a company, or who owns how much of a company. They can be incredibly simple in the beginning stages of a company - eg. Bob owns 50% and Jill owns the other 50% - or extremely complex in later stage companies - eg. 5000 different partial-owners who own different award types, from founders and investors to advisors, consultants, board members, employees, etc.

WHY IS IT IMPORTANT TO TRACK CAP TABLES?

Think about a major goal of a lot of businesses - to either:

1. Go public, or

2. Get acquired.

Most founders risk it all to build a company that will be able to both support them in the short-term, and pay dividends in the long term. If the goal is to IPO or get acquired, I guarantee you that the Cap Table needs to be up to date and accurate. Even when the goal isn’t to get acquired or IPO, the Cap Table needs to be correct whether the business is going through a fundraising round or an audit. The problem is that most founders and executive teams push the Cap Table updates to the back-burner. They think, “Oh, I’ll get to that later this year,” or “There’s no urgency on these updates for the foreseeable future….” Oftentimes that lack of urgency comes back to haunt them when a fundraising round is right around the corner and they’ve pushed back a year’s worth of Cap Table updates. They have to spend days or weeks trying to organize and update their equity documents and data, when it would have been so much quicker and easier to do the updates in real-time, as they happened.

WHO IS SUPPOSED TO MANAGE THE CAP TABLE?

This is a fun question, and if you ask three different companies, you’ll get three different answers. Equity sits as the crossroads of Legal, HR, and Finance, so naturally you’ll find some companies who designate an employee on the Legal team to own the Cap Table, and other companies who designate as HR or Finance employee to manage it. So who is right? Well, all of them, and none of them. When it comes to the Cap Table, you need someone with the following traits:

1. Knowledge of equity rules and regulations - how to ensure that equity is being issued legally and compliantly.

2. Knowledge of how issuing equity and different type of awards can affect the company’s accounting.

3. Knowledge of how to use a Cap Table management software (this can help things go much smoother when it comes to making updates in real-time).

WHAT ARE SOME COMMON PROBLEMS WITH CAP TABLES?

There are a handful of issues that we consistently see when working with clients’ Cap Tables and equity data:

1. The data hasn’t been updated in awhile - This is an easy one to solve, but it must become a priority. The person(s) who are responsible for equity in a company must commit to making the updates in real-time. This means stopping vesting as soon as an employee is terminated, taking the time to get new investors on your Cap Table as soon as a financing round closes, issuing option grants as soon as the Board has signed the consent to issue them, etc. Whether a company uses their law firm, an external equity administration firm, or someone in-house, making updates in real-time is crucial to ensuring accuracy on the Cap Table.
   

2. Legal documents that provide Cap Table updates are missing or non-existent - This issue is a little tougher and probably requires help from a qualified legal counsel. Equity typically requires legal documentation that is meant to back up what’s on the Cap Table. If a company is missing this information and cannot identify documentation to support someone’s ownership on the Cap Table, this could be a big issue.
   

3. The company is using an outdated method of tracking their Cap Table when it’s getting complex - The beauty of an Equity Management software. It’s easy to stick to a spreadsheet in the early days of a company, but as more investors start putting money in, and an Equity Incentive Plan is created to attract and retain employees (and help them share in the company’s growth) - it can really help to find an Equity Management software that fits the company and Cap Table well.
   

4. The data is just plain wrong - This may require some extensive work or some outside help to understand what data are wrong. You don’t know what you don’t know, so without some equity expertise, you may think everything is fully up to date and accurate. Some help reviewing legal documents and identifying any missing information will save a company loads of time when an audit comes along.

CONCLUSION

Cap Tables are critical to a company’s success - they really can make or break a company. Private companies have the blessing of being able to modify and make adjustments to the Cap Table weeks or even months after an event takes place, or an error is made, but that also means updates can be pushed off until absolutely necessary. AVOID THIS AT ALL COST. If you’re a founder or a person responsible for making updates to the Cap Table, please commit to making these updates as they come, in real-time. I promise you life will be much more pleasant if your company needs to raise funding or go through an audit. Find someone who understands equity inside and out to make sure your Cap Table is 100% accurate. This could save you hundreds of hours and thousands of dollars in the future (not to mention your sanity and peace of mind, which you can’t put a price on).