As their company gains traction and matures, the way in which they manage their business needs to evolve to enable strategic decisions for growth.
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.
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.
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.
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.
The cap table should show the company’s 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).
The cap table is also critical to your legal team, so certain aspects may be primarily for their use, but if the company’s management doesn’t find the cap table helpful, that is a problem.
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.
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.
Because the cap table’s 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.
It is best to rely on the expertise of your legal team for this to ensure the most accurate business decisions are made.
Understanding the appropriate levels of information about your cap table to share with employees is another top consideration for founders.
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.
Some founders will want to share this number with the team so that people can understand that their stock is appreciating.
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.