INSUBCONTINENT EXCLUSIVE:
Jared Verzello
Contributor
Jared Verzello is a startup and venture capital lawyer and GM of Atrium Seed
where he guides companies through formation, fundraising, hiring, and managing board meetings.
More posts by this contributor
Pre-
and Post-Money SAFEs: Choosing the right one for your startup
Founders start a company because they have an idea they want to bring
As their company gains traction and matures, the way in which they manage their business needs to evolve to enable strategic decisions for
growth.
Developing and properly managing acapitalization table(cap table) is one such necessary business evolution
In this context, capitalization is the sum and itemization of all those who hold equity in the company or the right to receive equity in the
Tracking these items through a central means helps illustrate the ownership stakes in the business and what securities the company has
outstanding.
For a first-time founder, it can be overwhelming to develop a cap table and make all related decisions
However, with the right resources and adoption of best practices, founders can better manage, maintain and leverage their cap table to
provide actionable business intelligence and management.
For better business intelligence, look to your cap table
In many ways, the cap
table is akin to the balance sheet in the sense that it represents the company position as of a certain point in time
The balance sheet shows the company assets and liabilities
The cap table shows the company ownership and accompanying economic and voting rights
The cap table includes factors such as shareholder information, ownership position, rights to purchase additional equity in the future,
vesting schedules, voting percentages and purchase price
It takes all of the material information related to capitalization and summarizes it into a digestible format to help founders make
executive-level decisions for soliciting stockholder approvals, issuing grants to new hires, raising additional rounds of financing,
calculating liquidation waterfalls for a liquidity event, etc.
When it comes to how much founders need to own the cap table, think about it
this way: Not every CFO needs to build out the financial statements
However, every CFO needs to have a high degree of confidence that their financial statements are accurate — with systems in place to
ensure accuracy so they can spend their time using the financial statements to make strategic decisions
The same is true for founders& involvement with their cap tables
Most companies rely on competent legal counsel to maintain their cap table and provide their executive team with actionable information in a
digestible format.
Here are six best practices that help founders improve and maintain an effective cap table management process.
1
Familiarize yourself with its basic elements and formats
There are many different elements and formats of a cap table
Viewed as a spreadsheet, table or chart, the cap table can look different for every company at every stage of its growth
While the cap table tends to be simple in the beginning stages of the company, it will naturally evolve and become much more complicated as
the company matures.
At a basic level, the cap table should list the equity stakes in a company, including common stock,preferred stock and
stock options, and outline all of the ownership details for these securities
Other elements include transaction history and legal restrictions, such as sales, transfers, exercises of options, transfer restrictions and
the conversion of debt to equity, among others.
The cap table should show the company overall capital structure at a glance, as well as
detailed ownership information for each class and series of stock outstanding (see an example at the end of this article)
Most importantly, it should always be accurate and up to date.
2
Recognize the importance of executive alignment
At its core, the cap table should be designed to help solve business issues for you
If you&re not using it to make decisions as an executive team, then it not serving a core purpose
The cap table is also critical to your legal team, so certain aspects may be primarily for their use, but if the company management doesn&t
find the cap table helpful, that is a problem.
Creating good habits early on will serve you well as the business grows.
A
good example of this is its role in the hiring process
Equity is a key consideration in talent recruitment and retention packages
Without an accurate cap table, you&ll find yourself in situations where you have to routinely ask yourself how many shares you can offer to
a new hire, which can unnecessarily slow down the hiring process.
However, if you can use the cap table as a way to gain alignment on such
matters, you can begin to use it to solve actual business problems
Rather than argue about which equity package to grant a new employee, your HR team can provide routine feedback on standardized equity
packages to help improve or maintain competitive compensation.
3
Evaluate and implement tools to help you manage it
When it comes to understanding how detailed your cap table needs to be, compare it once
again to the financial statements
In the early days of the business, financial statements don&t necessarily feel as valuable as they do in later stages of growth
They aren&t as critical to the business — yet — because it not hard to recreate it whenever you need information to make a
decision.
However, as the business matures and grows, it becomes more difficult to recreate the financial statement on an ad hoc basis, and
virtually impossible to hold the information accurately in your mind
The same holds true with the cap table: In the beginning, you might be able to rattle it off the top of your head or have it documented
simply in Excel, but as you grow, the information becomes more complex and you need better, automated systems in place
As with financial statements, creating good habits early on will serve you well as the business grows.
Using cap management software
provides better capabilities and version control than spreadsheets to manage this process
Free software, such ascaptable.ioand Carta are great starting places for early-stage founders
Carta also provides additional features to manage your more complex cap table
Because the cap table ultimate purpose is to enable the executive and legal teams to make informed decisions, safeguards on administrative
access and version control are critical features to consider when choosing which tool or application to use.
4
Determine and delegate ownership of the cap table
As you model new rounds of financing and analyze the impact on stakeholders, cap table
management becomes a significantly valuable activity
This is where your legal team or outside counsel becomes even more advantageous to you as a founder
Delegating cap table management to your lawyer can further help you stay on top of critical changes and minimize errors, while enabling you
to focus more on building and scaling the business
Creating and maintaining an accurate cap table requires an ability to read, understand and translate legal documents into numbers and
It is best to rely on the expertise of your legal team for this to ensure the most accurate business decisions are made.
Your cap
table should be well-managed, well-understood and up-to-date
We frequently see founding teams make seemingly small mistakes, such as adding an individual name to the cap table before an
equity grant has legally been made
This may lead one to believe that more stock is outstanding than is technically the case and can create errors when calculating the number
of shares to be granted to subsequent stockholders — or miss making the grant altogether, which can have unfortunate tax consequences for
the stockholder and potential liability for the company
Order of operations is critical to legal workflows and it best to leave the day to day cap table maintenance to your legal team.
5
Decide how much information to share with investors
When it comes to how much cap table information you should disclose to your investors,
there isn&t a right or wrong answer
Commonly, providing investors with a summary cap table is a fairly standard practice
That allows investors to calculate their ownership position for their internal tracking and audit purposes
More often than not, investors don&t receive an itemized list of every shareholder or investor in the company
While preferences differ on this point, many of our clients prefer that any company-related discussions are directed to the executive team
so they can address and control messaging
Of course, in many instances investors will know which of their peers have also invested, but sharing detailed equity positions, contact
information and individual employees& equity stakes is less common.
In Carta, investors generally have portfolio views with visibility into
They might send you a request for access to your cap table so they can add you to their portfolio
In this scenario, the summary cap table is the most common approach people default to for the investors
If an investor feels strongly about receiving detailed cap table viewing privileges, they can make their case to the company, which may
consider the request on an individual basis.
Major investors will typically have specific, private contractual rights to get regular
financial statements and cap table updates
They might even have a representative who is a board observer or board member, in which case, they will have access to the information they
want, as agreed to in the equity financing paperwork.
6
Choose how much to share with employees
Understanding the appropriate levels of information about your cap table to share with employees is
another top consideration for founders
The key to this is determining the balance that you, as a founder, feel comfortable with in terms of employer transparency.
Some founders
choose to be transparent about their cap tables and others opt not to disclose much and provide equity information on a need-to-know basis
The important part here is determining how you can best use the cap table to help your employees understand what they need to know.
For
example, employees with equity want to understand what their payout is if the company sells
Regular communication or resources that provide employees with access to their holdings and options is a great approach to help motivate
employees and improve talent retention, but can have unintended consequences.
For example, most companies will have their common stock
valued after each round of financing
Some founders will want to share this number with the team so that people can understand that their stock is appreciating
That is very exciting and motivating — so long as everything is going well
However, if the stock appreciation is not meeting the team expectation (whether reasonable or not), then providing that information can
significantly decrease morale
For this reason, the vast majority of companies choose not to disclose this information to the broader team.
Get proactive with your cap
table
Your cap table should be well-managed, well-understood and up-to-date
Fortunately, the management process doesn&t need to become just another headache: With the proper considerations, communication, resources
and ownership, you can put the correct processes and legal team in place efficiently, and effectively manage your cap table so it continues
to help you scale your business — rather than slow it down.
Sample cap table
This table represents a simple cap table showing a
hypothetical breakdown of seed preferred stock, Series A preferred stock, common stock and the available option pool.
All content
presented herein is for informational purposes only
Nothing should be construed as legal advice
Transmission and receipt of this information is not intended to create, and does not constitute, an attorney-client relationship with Atrium
There is no expectation of attorney-client privilege or confidentiality of anything you may communicate to us in this forum
Do not act upon any information presented without seeking professional counsel.
