Cap Table Management for Startup Companies

A cap table helps you and other investors know your firm’s capital structure, and makes it very easy to identify who owns what. However, managing this cap table effectively is an important task to establish early on in a new startup, yet many entrepreneurs often ignore this function. In fact, only 25 percent of start-ups ever perform a cap table analysis, according toenture management firms. The optimal number depends on the size of your company, but some firms recommend no more than four shareholders. If your start-up firm holds fewer than two shareholders, the number must be cut down, so as not to discourage capital investment.

Many venture capitalists and angels invest in a company based solely on its ability to successfully execute a venture capital round. While the company’s business plan and financial statements are important for that purpose, they’re not nearly as essential as the cap table management. In Two12 , without a well-managed cap table, you may have trouble getting additional financing at a later date.

Good cap table management starts long before the seed investment is secured. A well-constructed cap table management system will help you avoid problems later on by helping you spot potential ownership issues. Some startups lose money when the shares they issue to the public (or “borrowed”) do not perform as well as expected. There are three primary ways to deal with these problems, including:

Determining the value of your portfolio can be difficult, especially if your business grows rapidly. This is particularly true of newer businesses that rely heavily on seed capital. Good cap tables enable you to make informed decisions on where to invest your profits in order to maximize returns. As your businesses matures, you can forego selling in order to raise capital for newer, higher-valued ventures. In Two12 , startups should consider selling some of their shares to raise funds.

Another type of startup problem related to existing businesses is poor management of stock options. When companies issue stock options, they must determine the strike price by considering current market prices, expectations of premium revenue from the selected option, and the risk of loss. However, the option may not be exercised for several months or years. The company must then carefully calculate the cost of capital, the premium received, and determine whether to exercise the option at all. The most common type of cap table management involves assigning a financial advisor to handle these ongoing management tasks.

Capitalizing for growth and future profitability is one of the more fundamental issues involved with startup businesses. Good cap table management will help you achieve maximum return on equity while minimizing costs and eliminating unnecessary paperwork. When your company becomes profitable, you can sell the equity shares for a profit and save time and expense disposing of the remaining equity. Properly managing equity allows you to effectively spread out your investments and reinvest profits in new ventures.

Properly managing stock during startup also requires diligence. Determining the value of an equity stake at the right time can be difficult unless you have accurate information available from inside sources. A professional cap table management firm can provide solid stock options valuation estimates from their experience and knowledge. They can also review and analyze startup plans, help in negotiating ownership issues between investors, and handle issues related to the transferability of ownership when the company becomes a publicly held company.

Cap table management software can provide a valuable service by providing startup companies with effective and organized methodologies for tracking equity ownership and spending. Two12 of software will enable startups to properly plan for capital appreciation while avoiding excessive costs. Thus, cap table software is the ideal solution for startups striving to efficiently manage their total capital investment portfolio.

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