Founders who lack in-house resources to keep the cap table up-to-date often put it on the back burner until absolutely necessary. Usually before the next round of financing. Not prioritizing it earlier can result in a panic at the last minute with a need to bring in expensive lawyers (read $600 per hour or more) 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, most likely friends and family, the capitalization table managed via that Excel file sitting on your desktop. There are usually a few columns and rows that an Excel novice can manage. Founders write up such a cap table, and it works well at the start.
However, things start getting uglier as the venture and its company expands. 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 a kick in the teeth
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 Many manually updated cap tables become inaccurate and out of date.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 so scalable. It could also mean you DIY (Do It Yourself) it and this can be time-consuming and distracting for founders and officers of a startup. Probably the ideal option? Start using an Equity Management solution keeping your data up to date and grows with you as you continue your growth. That way you won’t ever get into expensive and unnecessary wastage of resources and time.
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