Cap Table Management: Which Provider is Best for Your Startup?
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Cap table management, also known as equity management or stock administration, is a vital component of your company’s equity compensation. As your business continues to grow and scale, ensuring that you have a team to meet market demands and improve your business isn’t just about hiring more people. It’s about hiring the right people. And what better way to attract and retain top talent than by providing employees with an ownership stake in the company?
Yet, as you may already know, establishing equity compensation plans and benefits requires tedious attention to stock law regulations and compliance. Failure to do so can result in severe penalties for you, your company, and your employees–including subjection to the Security Exchange Commission (SEC), hefty fines, or state regulatory actions. For these reasons, you should approach stock plan management with a high degree of care.
But where do you get started?
For many founders, cap table management is not their area of expertise; startups often handle stock administration instead. In this article, we will explore what cap table management entails, weigh the pros and cons of various provider options, and provide guidance on selecting the best option for your business.
What is cap table management?
A capitalization table (or cap table) is a document that lists everyone who has ownership in a company. This includes stock, warrants, equity grants, or convertible notes. Managing a cap table is a significant part of business operations as it informs founders about who owns how much of their company. This can affect significant company decisions, from deciding how to price future fundraising rounds to determining which executive approval is needed to sign off on business plans.
Why is equity management important?
Granting employees equity is more than just a workplace perk–it’s an investment in your company’s success. Employees who share ownership of the business feel more connected to its mission, vision, and values; they’re also incentivized to perform their best work to contribute to the company’s overall growth and health.
How to Manage Your Cap Table
There are two main ways startups manage equity:
- Law firms
One of the most common ways startups manage their cap tables is in-house. This means having a person–or team–within the company handle all the tasks associated with equity management.
- More oversight
- More control
- Person(s) assigned to this role usually aren’t 100% focused on stock administration
- Person(s) assigned to this role rarely are stock admin experts
- Work can take longer to complete
- Company may not have the latest and greatest technology to handle cap table management
In-house equity management may seem like the best option initially for startups–mainly because the company is still small and equity ownership is simple to track early on. As a result, these tasks are typically assigned to someone already hired within the company who isn’t a stock administration expert, such as an HR director, to focus on part-time.
However, equity management becomes increasingly more complicated as the company continues to grow and scale (i.e., new hires, revenue, and funding begin to surge). Consequently, many things can go awry since the person(s) assigned to this task are 1) not stock administration experts to begin with; 2) do not consider these tasks as their primary responsibility; and 3) most likely do not have the best technology or software for cap table management.
As a result, equity management can fall by the wayside and take significantly longer to complete. In addition, it can be more prone to error, causing costly mistakes. Examples include creating obstacles for future fundraising or costing a material amount of equity if termination or repurchase is improperly handled.
While in-house equity management can seem ideal initially, there is a heightened risk for financial and legal errors–which is why this option is short-lived and unsustainable in the long run.
Another common way startups handle equity management is through law firms. Since law firms are the entities that initially set up stock paperwork for companies, founders can utilize them for stock administration by default.
- More seamless transition
- Already established relationship(s) with lawyer(s) and law firm
- Law firms understand compliance rules and regulations
- Highest costs are incurred with this arrangement–up to $625+/hour
- Law firms are not set up to deliver a delightful experience for this type of work
- Stock management is not their primary area of focus
- Work can be delayed with “back burner” treatment
- Routine equity grant operations are typically not met
Because equity grants typically begin by working with a law firm to set up proper documentation, many founders delegate their cap table management to the firm they’re already working with by default. This, of course, can logical – especially since a working relationship has already been established, and law firms are viewed as legitimate, trusted advisors.
However, law firms are fundamentally in the business of providing linguistic and strategic advice on novel documents and transactions. Equity management is usually not their primary area of focus. Therefore, junior lawyers are usually assigned to this task and do the work during their downtime–treating it as more of an afterthought than a top priority.
As a result, law firms don’t usually meet the routine operational needs that cap table management demands, such as ensuring that every new hire receives a timely equity grant e-signed by all relevant parties and loaded into stock administration software.
In addition, law firms can sometimes give companies back burner treatment as their cap table management is ignored or deferred for many months and then ultimately billed at exorbitant costs as part of a “clean up” process before the next financing event–a strategic move to increase the billable hours of their junior lawyers.
All of these factors can lead to gaping holes in the company’s stock plan management, causing harm to both company and employee finances since certain stock transactions have different economics and taxation, depending on how early or late they occur.
While law firms seem like a convenient way to delegate stock administration, legal advice is their main focus, not equity management. In addition, the lack of quality service they provide for this work does not justify the cost.
Why Choose Pilot for Cap Table Management
Choosing the right cap table management for your startup is important. Finding a provider with the right balance of expertise, technology, and dedicated service is critical for short- and long-term success.
Here’s why our stock administration service provides startups with an even more comprehensive and delightful back-office experience.
Our team of stock administrators are experts with more than 15 years of experience in the field. They have successfully performed cap table management for Zynga, Flurry, Lyft, Expensify, TicketFly, Carta, HighBrewCoffee, Stoke Space Technologies, Carvana, TrySparrow, and hundreds of more startups. They know the minor and significant pitfalls of issuing equity and have standardized processes to mitigate errors for concerns.
With Pilot, you have a designated account manager readily available at your disposal. So whether it’s granting new hires equity awards, recording a financing event, having questions about stock transfers, or wanting to learn more about optimizing your stock plan management, you’ll get the deep expertise you need to stay focused on building your business.
Leveraging best-in-class third-party service provider API integrations, we ensure you have the most seamless, cost-effective cap table management service possible.
Our stock administration team is 100% dedicated to cap table management for your business–and nothing less. We have multiple stock administrators check every transaction, ensure that best stock administration practices are utilized, and deliver work on time. As a result, you can rest assured that your equity management is handled efficiently and effectively, especially as your business grows.
We’re not just dedicated to superior service but to making equity management a delightful experience for you and your business overall.
Significant Cost Savings
Get the highest-quality stock administration service in the industry–at a reasonable cost. We leverage significant expertise and technology to manage our time efficiently so you’re never over-billed.
Ready to Take Your Cap Table Management to the Next Level?
Partner with a stock administration provider that cares as much about your startup as you do. Connect with us today to learn more about how we can take equity management off your plate so you can focus on what matters most.
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