From a view of someone not familiar with processes related to company management, it might seem that raising capital is one of the hardest processes. Of course, it is true, but a struggle doesn't stop here. Proper equity management is equally important and might require even more time, resources and effort to be managed properly.
When it comes to equity management, the first and most vital task is cap table management. The capitalization table is a spreadsheet or table that analyzes a company's equity capitalization. This can include things like:
- The company's percentages of ownership;
- Equity dilution;
- The value of equity in each round of investment by founders, investors, and others.
Put another way, the cap table lists all of your company's securities that have been issued (like stock, warrants, and equity grants) as well as who owns them.
However, there is no "right" way to format your cap table. The main rule is: keep it organized and simple. The right cap table for a CEO might look different than the right cap table for a CFO. And the right cap table for a company that is trying to analyze multiple VC term sheets might look different than the right cap table for a company that just closed its Series A financing. Even though the form of the cap table may change depending on the use case, the underlying data should remain constant. If it is not, your company may face significant issues, including fines, outraged investors, and issues with the next financing rounds.
As most cap tables now are managed manually, it becomes almost a full-time job. But according to several companies working on the market, this manual work leads to mistakes, as a result over 90% of capitalization tables are wrong.
As a result, companies have to attract legal firms in order to clean up this mess. In most cases, it costs between $5,000 and $15,000 to clean up your cap table using a law firm. Most early-stage startups will only do it before a financing round. That leaves months and possibly years of corrections to make, certificates to find and options to be exercised. Stock Options
Employee ownership is a proven model to build healthy companies and workers who are highly satisfied with their jobs. As employees can see a direct link between the work they do every day and the performance of their company.
However, just like everything related to equity, ESOPs (Employee Stock Ownership Plans) have complex operating rules and require significant oversight. If the company does not staff the ESOP properly, they risk problems and potential violations. Small companies and those with unsophisticated accounting processes are particularly ill-suited to ESOPs because they lack the infrastructure to follow the protocols and provide the required support and information to employees.
No matter how many shareholders own equity of your company, constant communication is a must. So what might be flawed here?
First, all procedures, such as votings, reports, and just general day-to-day communications require constant direct involvement of your team. Usually, it might take up to 1–2 months to notify and inform shareholders. Gather them in one place and prepare a separate online voting system for those not able to attend.
In general, you need 2–3 people to run the process, while current technology allows you to do all of those things in a blink of an eye. With everything said in this series up to this moment, we've decided to change these processes for companies by creating one system that will allow them to incorporate a company, issue and manage the equity, build strong investor relations from one account. Without any need to visit officials but fully compliant with EU regulations.