Founders who lack in-house resources to keep the cap table up-to-date often put it to the back burner until necessary. Usually before the next round of financing. Not prioritizing it earlier can result in a last-minute panic-attack. Cue the expensive lawyers and accountants to clean up the spreadsheet at an exorbitant fee before they can present it to potential investors. By the time the founders of a company realize any cap table errors, potential investors and employees might already think the company is disorganized and go elsewhere.
When an early stage startup only has a few initial investors, likely friends and family, the capitalization table is typically managed with that Excel file sitting on your desktop. Founders write up such a cap table, and it works well at the start.
However, things start getting uglier as the capital expands with the company. For example, securing financing from angels or VCs and giving out options or shares to entice more talent to join, will result in greater complexity. Also, investors will expect to see an up to date and highly accurate cap table. Any attorneys you engage will likewise want this tool to be legally accurate and in compliance with all sorts of regulations.
Preventing Unwanted Surprises
If the spreadsheet isn’t kept up-to-date with an understanding of equity financing, it can become riddled with omissions and errors. Many manually updated cap tables become inaccurate and out of date. Errors can create issues for founders and officers that potentially impact their employees, investors and attorneys and accountants.
My advice: Put your cap table on the front burner during your happy days and give it a lot of attention and time. Early time and attention could mean engaging attorneys early on; that is expensive and not scalable. It could also mean you take the DIY approach which can be time-consuming and distracting for founders and officers of a startup. What’s the ideal option, you say? Start using an Equity Management solution keeping your data and growth on an upward trajectory. Thus, avoiding an expensive and unnecessary wastage of resources and most importantly your time. We all know that its better spent on getting to know your customers or improving your product for scale.
You will prevent mistakes and find it easier to get further investment and keep your shareholders, employees, attorneys, accountants, and investors happy!!
By Fas Mosleh
To learn more, contact us at Startups@Certent.com