Before we go into the exploration of this question – “Why digitize cap table” – let’s break it into two parts, first: Why digitize, and the other Cap Table itself.
The answer to the first part might sound very easy – because the world always moves forward and is always looking for better and easier ways for operations. This is one of the reasons why services companies are moving faster than product-based companies at the current time. Another reason for this is the shifting work environment which needs data transfer more than ever when the digital transfer is both feasible and easier.
Though there will always be someone resistance to the change (like the one in the image below) it is possible to convince them only with enough proof, which we’ll be giving further down the line. Let’s now jump into the core topic for the day: Cap Table.
A cap table or a capitalization table is the document or the summary of a company's ownership structure, including the ownership percentages and types of securities held by investors, founders, employees, and other stakeholders. Simply stated, it is the ledger that shows who owns what in an organization’s equity.
What makes a cap table such an important document is basically due to what it contains. Some of the key components of any cap table include:
Depending on the level of company growth, funding status, ESOP pool status, and the funding of the organization there can be a lot of other parameters like exit scenarios, dilution, vesting information, etc., that can be added to the cap table.
In short, it caters to the breakup of 100% of the company’s equity. In case you are thinking about what equity is: mathematically it is the difference between a company’s assets and liabilities. Theoretically, it represents the ownership stake in the company and represents the right to take part in the company’s decision-making, profits, assets, etc.
Equity can be issued in various forms, such as common stock, preferred stock, or equity options. Founders, investors, and employees can obtain it through equity compensation plans, or through public offerings where shares are available to the general public. And the people who have equity in companies have voting rights in the company and may receive dividends or capital gains based on the company's performance.
That’s why this ledger, which manages the entire equity breakup is considered one of the most important documents for finance, HR, and legal teams.
If you’re looking to know more about the components of cap table management or want to know answers to most asked cap table questions, then this blog is for you. Before we go into the details of digitizing the cap table, let’s take a look at how it looks in Excel.
We discussed a few of the components that a normal cap table includes above, let’s also just look at how would you maintain a cap table in Excel – image below:
This is just an example of a cap table with the parameters:
But with the increasing funding rounds and the growing complexity of maintenance of the ESOP pool and breakup, maintaining all the data in Excel starts becoming difficult. This is where digitizing cap tables come into play.
Spreadsheets can look deceptively easy to maintain, but when you start scaling your startup from 2 investors and 4 employees to double-digit investors and hundreds of employees that’s when things get starting heated and that’s where the issues start. Some of the reasons why you should start thinking about your cap table right from the start-up stage is:
Instead of multiple versions of the same cap table with the finance, HR, and legal teams with either repetitive or missing information, digital cap tables help you have one single source of truth irrespective of the function or the person looking at it. This would also help you prevent:
Though both Excel and spreadsheets now have version history to check who edited what cell but normally issues caused by entry errors or typos don’t come to light until it is too late. And rectifying these errors can amount to wasted man-hours of legal (which is generally outsourced) and finance teams.
By implementing cap table management software (digitizing it), you gain the ability to access and track the version history of your cap table effortlessly. This allows you to make changes and easily revert them with a simple click.
Which founder or investor doesn’t want to see any changes made to the ownership stake in real-time or the effect of change in valuation on the shared values? Probably none. By having a digital format of a cap table, you can provide all the stakeholders involved like founders, investors, HR, legal, and finance teams with real-time insights and visibility into any changes or insights.
Also, they can gain real-time scenario inputs into the possible effects of any funding rounds or valuation scenarios.
As a company grows in strength and complexity, it becomes necessary to generate various legal documents, ranging from ESOP certificates for employees to funding certificates and investment documents. Sending and storing these in a digital format not only helps with tracking any authorized changes but also helps with the creation of a data repository for long-term tracking.
Companies can restrict access to sensitive information, control user permissions, and implement encryption and other security measures to safeguard ownership data. This reduces the risk of unauthorized access or data breaches.
What does a cap table mean for investors – it is more than just a spreadsheet of details with securities. It sends signals which are powerful to the future and potential investors. All investors need regular updates about the total ownership and compliance details along with any changes that are going to be made especially in the case of funding.
Founders nowadays need to focus on their role as equity owners and leaders of their organizations. They need to be mindful of the total ownership and the amount of incentives that they’re creating for the employees all the while ensuring consistent cash flow for both short and long-term incentives.
Digital cap tables can facilitate growth, investor relations, compliance, and strategic decision-making, which are critical for startups navigating the complex landscape of funding, equity management, and corporate governance.
While we have extensively covered the reasons behind digitizing the cap table, the primary benefit is that it allows founders to closely monitor and track crucial details that may otherwise be overlooked. It helps with:
Before delving into the "how" of implementing a digital cap table, it is important to address the "why" behind it. If you remain unconvinced, it is recommended to speak with a founder who has experienced the benefits firsthand. They can provide a more comprehensive understanding of the advantages and guide you through the process. Now, let's proceed to discuss the practical aspects of implementing a digital cap table.
Let’s keep it simple:
Select a Digital Cap Table Platform: Choose one platform that suits your needs and capabilities. Consider factors like security, scalability, features, etc. We would say try Vega Equity for a few days (Hello! – Take a free trial) and then decide.
Gather Existing Cap Table Data: Collect all the relevant information from your current cap table, including shareholder names, share classes, number of shares, ownership percentages, investment details, and any other relevant data. This may involve reviewing legal documents, shareholder agreements, and transaction records.
Input Data into the Digital Platform: Enter the collected data into the chosen digital platform. Vega Equity provides templates/import options to streamline this process.
Verify and Reconcile Ownership Information: Review the digitized cap table to ensure accuracy and completeness. Verify the ownership percentages, share class allocations, and any other relevant details. Reconcile the digitized cap table with your legal and financial records to confirm alignment.
Update Ongoing Changes: As ownership or equity-related events occur, such as new investments, employee equity grants, or stock option exercises, promptly update the digital cap table. Maintain a regular cadence for recording and reflecting these changes in the digital platform to keep the cap table up to date.
Implement Access Controls: Set up appropriate user permissions and access controls to ensure the security and privacy of the cap table data. Limit access to authorized individuals or teams within your organization and establish protocols for granting access to external stakeholders, such as investors or legal advisors.
Generate Reports and Analytics: Leverage the reporting and analytics features of the digital cap table platform to generate customized reports, track ownership trends, perform scenario modeling, and visualize the impact of future transactions on ownership and dilution.
Regularly Review and Audit: Conduct periodic reviews and audits of the digitized cap table to ensure accuracy and compliance. Regularly update and reconcile the cap table with any changes in ownership, funding rounds, or other relevant events.
Train and Educate Stakeholders: Provide training and support to key stakeholders who will be interacting with the digital cap table. Educate them on how to access and utilize the platform effectively, as well as their roles and responsibilities in maintaining the accuracy of the cap table.
Note: Remember that the intent of digitization is to create seamless and strategic documentation for the future. So, the sooner you start the better.
If you want your Cap table to look like this, feel free to either get a free trial or talk to our experts.
That’s it. Thanks for making it here.
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Vega Equity offers companies an effective, intuitive, and paperless platform for managing equity. It provides accurate cap table management, customized user experiences, and precise information. Additionally, it assists in measuring KPIs, analyzing data, and tracking performance towards goals.