Cap Table Management Best Practices You Need to Keep In Mind

When someone becomes a founder, they are well-versed in all facets of a firm, including necessary business documentation and effective management techniques. A cap table and effective cap table management are two of the most crucial documents a founder must be aware of. This seemingly simple document, which for some is just a typical spreadsheet, specifies who receives how much ownership of the business.

Cap table management is a crucial component of a startup’s strategy, and since accuracy is essential, automating the procedure is the best option.

This article will cover practices that can help founders improve and maintain an efficient cap table management process.

What is a Cap Table?

A cap table, often referred to as a capitalization table, is a table that displays the company’s equity capitalization. In essence, it is a breakdown of the company equity held by the shareholders.

The company’s equity ownership capital, including its common equity shares, options, warrants, preferred equity shares, and convertible equity, is typically listed on a cap table.

Best Practices for Managing the Cap Table

Even though a cap table may not be necessary for an early-stage business, it is usually preferable to have one to keep proper records from the start. It would assure that the financial statements are factual. Startups can also save time using cap table software because the information automatically syncs through the app.

Many startups turn to legal firms for cap table management and even pay them a lot. However, instead of doing this, founders can easily manage it on their own using good cap table software, saving time and money.

Here are some best practices to keep in mind as startups work to maintain and enhance their cap table management process.

1. Do not overcomplicate the cap table

The cap table must be clear, relevant, and properly managed. If a startup has the appropriate resources, consideration, communication, and ownership, it can use the correct information and process to manage its cap table effectively and efficiently.

In other words, the cap table should be simple to read and understand, with supporting documents and commentary where appropriate to make the information self-explanatory.

2. Understand the basic terms and formats

A cap table can take many different forms and contain many distinct elements. It can be a spreadsheet, table, or even a chart. Also, a startup’s cap table can differ significantly depending on where it is in its growth phase.

Even though the cap table is simple in the early stages of the business, it gets much more complicated as the business expands.

The cap table would have to display the capital structure of the startup at a glance.  Additionally, it should always be up-to-date and include detailed ownership details for every series of stock outstanding and equity classes.

3. Understand the value of the executive alignment

A cap table is created to solve business problems. If a startup is not using it to make decisions for the business as an executive team, then the cap table does not serve the core purpose. The cap table is essential to the management and the legal team. However, there is an issue if the company’s management does not find the cap table useful.

For example, the hiring process – One of the main factors in talent retention and recruitment packages is equity. If a startup does not have an accurate cap table, it will find itself in situations where it will have to routinely ask itself how many shares it can offer to a recruit. This delays the hiring process. Hence, a startup can use a cap table to gain alignment on matters and solve many problems.

4.  Sharing information with investors

There is no right or wrong answer regarding how much information a startup must divulge to its investors. Many startups usually give investors a summary cap table. It makes it simple for investors to understand their ownership status for internal tracking and auditing needs.

There are chances that investors may ask for a detailed list of all the shareholders in the company. However, it is not a must to provide it. If an investor wants to view the detailed cap table, a startup can share that without creating another spreadsheet. Cap table management will significantly help reduce stress and paperwork.

5. Sharing information with employees

Another crucial factor for any founder to consider is how much information they should share with their employees.

While some founders choose to withhold the key details of the cap table from them, others tend to be entirely upfront. So, a startup needs to see what it wants its employees to know and share the details accordingly.

6. Review the cap table regularly

Even if a startup is using cap table software, it must review its equity plan and update the cap table whenever there is a change in the business, such as when it raises funds or hires a new employee.

A startup must monitor its cap table on the same schedule at a minimum. A founder needs to understand how much of the company everyone owns. It will help keep control and ownership of it secure.

The Bottom Line

The best way to ensure a cap table is error-free is to use cap table software.  An early-stage company does not have many details to hold initially. But as the business expands, generating the cap table becomes more challenging. For this reason, switching to a cap table management software is advised. It helps in controlling everything right from one place.

trica uses cutting-edge technology to make tracking and managing all of your company’s shares simple. Take the first step in building an effective and easy cap table and stock options management process at your start-up. Contact us for a free demo.