Tips to Manage Your Startup Cap Table

The financial responsibilities of starting a company properly can be tricky, especially if this is your first time. Thinking about how to compensate advisors, employees, and the founding team is critical because they are your business’ core talent. Their commitment is key to ensuring the success of your venture.

A capitalization, or cap, table is just one key to any startup. It is a record of the pro-rata stock ownership of the company’s founders and shareholders. The basic data included in a cap table are:

  1. Company stockholders

  2. Classes of stock and how much was paid

  3. How many shares of each class are owned and by whom

  4. Total ownership on a fully diluted basis (issued and non issued)

As a startup business owner, your cap table should be well understood and managed carefully as it is often the most important ‘asset’ you own and the value listed in it belongs to the people who have contributed to the company’s success. When everyone has their stock, it can be a real problem to fix it later so it’s critical that a cap table be managed properly from the start.

Unfortunately, many startups are careless with their cap tables and hand out stock options like they are candy. The stock in your company is the lifeblood, not to be used in a carefree manner. Careful management of your cap table means sharing ownership with those investors and key employees who are delivering the necessary talent and ideas to guarantee your success.

What Goes Wrong with Cap Table Management

Cap tables are essential reporting tools for investors, board members, acquirers, attorneys and auditors, to name a few, and there are many ways to manage a cap table – there are also many ways to mismanage a cap table.

What typically goes wrong with cap table management includes the following:

  • Failing to centralize the data – different spreadsheets, different groups, and different data is a recipe for disaster.

  • Failing to connect to ‘live’ data – if your cap table isn’t integrated with real data, it’s never really updated.

  • Failing to automate calculations – the potential for human error is incredible and any calculation or column that is ‘off’ can be a big problem.

  • Failing to integrate reports – using static reports is an inefficient waste of time that leaves a lot of room for errors to happen.

Tips to Proper Cap Table Management

Investors like to see entrepreneurs thinking long-term, being realistic about their hiring and growth needs, and playing fair with those who have contributed to the success of the company. The following are some important tips to getting the cap table management right:

  1. Get down to basics early. Know who your founders and advisors are, who the key employees are, and then set aside an option pool between 10 and 20% of the total equity to award those individuals. With that pool, determine a formula that defines the compensation for your key players to make it worthwhile. If your hiring plan indicates that the employee base will grow, you may want to identify a separate pool for employee incentives as well. Here is an example of an option grant strategy for a Silicon Valley startup:

option-pool-example.jpg

  1. Centralize and share the data with your accountant and lawyer. Rather than keeping multiple spreadsheets and managing the data across them, centralize the data and share it with your accountant and lawyer. Even if you started with Excel spreadsheets – there are dozens of templates available on the Internet, there comes a time when you have to turn that data over to the pros. After all, it’s their job to ensure consistency and accuracy across the enterprise. This can be done with various software solutions.

  2. Review quarterly or anytime an event occurs. Anytime you make a change: hire a new employe, issue a round of funding, etc. you will need to review the equity plan and update the capitalization table. Just as you would check in with your accountant quarterly, you’ll also want to review your cap table on the same schedule at a minimum. As a business owner, it’s important to understand how much of the company everyone who’s invested in it owns.

About the author

Matt Faustman

Matt Faustman

Matt is the co-founder and CEO at UpCounsel. Matt believes in the power of online platforms to change antiquated ways of life and founded UpCounsel to make legal services efficiently accessible. He is responsible for our overall vision and growth of the UpCounsel platform. Before founding UpCounsel, Matt practiced as a startup and business attorney.

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