The cap table is one of the most important documents in your startup because it tracks ownership. So, managing this properly is essential. A key question for many startups is where they should build and manage their cap table. Below are some thoughts.
Startup Platform Options
Many startups indeed begin their journey with a simple Google or Excel sheet to manage their capitalization table. In the early stages, when the company has only a few stakeholders, this can be a cost-effective and straightforward solution.
A basic spreadsheet cap table would typically include columns for stakeholders’ names, the type of shares (common, preferred, etc.), the number of shares held, and the fully diluted percentage of total shares each stakeholder owns.
However, as the company grows and goes through more funding rounds, the cap table becomes more complex. It begins to include elements like stock options, convertible notes, warrants and various classes of shares. This can make the cap table increasingly difficult to manage with a simple spreadsheet. Manual errors can creep in, and tracking the various changes can become a complex and time-consuming task.
That’s where dedicated cap table management platforms come into play. These platforms can handle the complexities of a growing startup’s equity structure and provide valuable features such as scenario modeling, compliance tracking and 409A valuations.
Here are some of our favorite cap table management platforms:
Starting on a Platform Versus Migrating to a Platform
The decision to start with a cap table platform versus migrating from a spreadsheet has both advantages and disadvantages. Let’s explore them.
Starting with a Cap Table Platform
Advantages:
- Minimize Errors. Platforms are designed to minimize errors that can occur with manual data entry in spreadsheets. They also handle complex calculations automatically, ensuring accurate data.
- Compliance. Platforms help with regulatory compliance, such as Rule 701 disclosures, and can streamline complex tasks like 409A valuations.
- Time Efficiency. Cap table management platforms automate many administrative tasks, saving the founder valuable time.
- Scale. Platforms are designed to scale with your company as it grows, handling increasing complexity without the need for constant restructuring.
- Investor Relations. Platforms can offer investors easy access to their equity information, facilitating more transparent and efficient communication.
Disadvantages:
- Cost. Platforms come with a recurring cost, which might not be justifiable for very early-stage startups with simple cap tables and limited resources.
- Learning Curve. Although these platforms are designed to be user-friendly, there can be a learning curve involved in understanding how to use them effectively.
Migrating to a Cap Table Platform from a Spreadsheet
Advantages:
- Flexibility. Spreadsheets are flexible and can be structured in a way that makes sense to the specific user, making them a good initial choice for small startups.
- Cost Efficiency. Spreadsheets are free or already included in commonly used office software packages, offering a cost-effective solution for early-stage startups.
- Control. When using a spreadsheet, you have complete control over every aspect of your cap table. This can be appealing to some founders.
Disadvantages:
- Time-Consuming. As your company grows, maintaining an accurate cap table with a spreadsheet can become time-consuming.
- Prone to Errors. Manual data entry and calculations can lead to errors. One small mistake can cause significant issues.
- Complex Migration Process. As you transition from a spreadsheet to a platform, there may be complexities in importing data and ensuring it’s accurately represented.
- Limited Features. Spreadsheets don’t offer the advanced features of dedicated platforms, such as scenario modeling, compliance tracking and direct investor communication.
The choice between starting with a platform or migrating from a spreadsheet largely depends on the specific circumstances and needs of the startup. The complexity of your equity structure, the stage of your company, your budget and your personal preferences as a founder are all factors that should be considered.
When to Migrate from a Spreadsheet to a Platform
If you decide to start with a spreadsheet, you’ll want to make the transition to a platform eventually. Migrating to such a platform from a spreadsheet can significantly reduce administrative burdens and increase accuracy. It also makes it easier for startups to share information with investors, who can benefit from a clear view of their holdings, dilution scenarios and exit proceeds forecasts.
The question is: When is the best time to make the migration?
Rule of Thumb: Make the migration two months before you start the fundraising process for your first equity round.
Even for a fairly straightforward cap table, the migration can take some time. It’s not uncommon to see the process stretch out for weeks. Often the founders realize that an equity issuance wasn’t documented or wasn’t properly documented, and it needs to be fixed.
You want your cap table in perfect shape on a platform before you are having conversations with investors.
Conclusion
In conclusion, managing a startup cap table is a crucial task that requires careful consideration and attention to detail. While using a simple spreadsheet may work in the early stages of a startup, a dedicated cap table management platform is necessary as the company grows and goes through more funding rounds. It’s important to understand the potential legal and financial consequences of incorrect or incomplete cap table management, and to follow best practices for managing the cap table during fundraising rounds. By maintaining an accurate and up-to-date cap table, startups can make informed decisions about equity grants and exits, provide transparency to investors and employees, and avoid legal and financial issues down the line.
