Don’t Make These Three Common Cap Table Mistakes
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Today’s post is brought to you by Carta + Pilot. Carta has everything you need to manage equity. Pilot has everything you need to manage your books. And we are both helping startups run better, grow faster, and generally keep their ducks in a row.
So you’re running a startup. Things are moving a mile a minute, and you want to make sure you’re staying on top of your finances. So do we! Healthy finances are key to startup success.
It can be thrilling to raise your first round, get investors, and start to hire employees. But it also brings a lot of questions about shares, ownership, and fair market value to the forefront. This is where creating and maintaining an accurate cap table comes in.
Cap Table Defined
Before we dive into the ins and outs of great cap table management, a quick reminder on what a cap table is. A cap table (or capitalization table) is a record of who owns what at a company. It is important to have one in place as early as possible when founding a company, so you can always have an accurate picture of ownership and equity.
How to Create a Cap Table
Your cap table should be a clear and comprehensive record of who owns what at your company.
Typically that includes:
- Names of shareholders
- Number of shares (both common and preferred)
- Fully diluted shares
- Percent ownership
- Stock class
- Price per share
Why Should You Care About Having a “Clean” Cap Table?
There are three major reasons why you should care about keeping your cap table updated and accurate:
- When you raise a round of financing, your investors will need to see your cap table as part of due diligence.
- Every time you issue shares or option grants (to a new hire, for example), you need to know how many shares you have left in your option pool. This ensures you don’t issue options over and above your authorized option pool.
- Clean record-keeping is essential for legal compliance and in case of audit.
Three Common Cap Table Mistakes
Cap tables may sound pretty simple, but many founders make avoidable mistakes when managing their cap table. Here are a few of the most common pitfalls the team at Carta sees:
Not keeping your cap table updated
This is a cardinal sin of cap table management, and it can be very common. Things aren’t exactly moving slowly at most startups, and day-to-day financial management can sometimes get put off in favor of more pressing needs.
But when it comes to updating your cap table, putting things off can lead to huge headaches in the future. Not only is it time consuming to go back and try to update it later, but it can also be quite costly if you need the help of an attorney or other specialist.
It’s important to update your cap table when any of the following happen:
- Financing: Raised a round? Congrats! Add new investors to your cap table, and ensure any future shares issuances reflect your new fair market value.
- Liquidity events: Running a tender offer or secondary transaction? Be sure to update your cap table as soon as shares have been exchanged.
- New employee grants: Hiring? It’s important to record what you are granting and to whom.
- Option exercises: These should be recorded as they happen — backdating exercises is a red flag to auditors and possibly investors.
- Employee termination: Things didn’t work out? Make sure your cap table is updated in a timely fashion.
When it comes to cap table management, it is important to start early and update often. Get the right info, record it, and keep it up to date. It’s a simple way to save yourself from big issues down the road.
Missing or incorrect info
This may seem like a no-brainer, but it is extremely important to get the info on your cap table correct the first time. Any inaccurate or incomplete info can delay closing a new round of funding. Nobody wants to be chasing down the right info months (or years!) after the fact, when the stakes are high and time is crunched.
The first thing to make sure you get right when putting together your cap table is the full legal name of everybody on the table. This becomes particularly important as you grow and add people that may have similar or the same names. Nobody wants to be chasing down Charles E. Cheese and Chuck Cheese to figure out if they’re actually the same person.
The second thing to check is contact info for all of the shareholders. You may need to contact people in the future, and if their email isn’t correct (or isn’t their personal email or is for a shared inbox), you could be forced to spend a lot of time tracking down the right info.
Not using a software tool to manage it
Like most things in a startup, it is important to choose a cap table management tool that can scale effectively with your business. While it may be okay to use a simple spreadsheet in Excel right when you start out, you’ll quickly find that manually updating a spreadsheet is too time-consuming and error-prone to scale well. And there’s nothing worse than having to make a painful switch in tools as you grow. That’s where software tools like Carta come in.
When you use a tool like Carta, your cap table data and equity transactions are managed in one place. That means you can put less effort into maintaining your cap table, because it automatically updates when you issue securities, raise a round, or get a new 409A valuation. A cap table management tool also allows you to share your cap table with your legal team and investors, and set permissions to keep information secure.
Using a tool like Carta also means that you can issue securities electronically. That may sound like an obvious must-have to startup founders, but there are still a lot of companies that issue paper stock certificates. As with anything paper, there is always the possibility those could be destroyed or lost, which is why it is smart to have everything online.
Running a startup can be exhilarating, overwhelming, and very rewarding (all in the same moment most days). Luckily there are many things you can do to set yourself up for success as you scale your company. One of those is getting great tools and services in place, like Carta and Pilot, so you can get your time back to work on what is most meaningful to you.
Disclosure: This communication is not to be construed as legal, financial, or tax advice and is for informational purposes only. Pilot and Carta do not assume any liability for reliance on the information provided herein.