How to Fix Cap Table Management Problems?

Every company founder should have a clear understanding of what they own in the company and who owns the other aspects of the business at each stage. This is true whether you are starting a new firm or soliciting capital for an established one. You should concentrate on cap table management and grasp how to manage the company’s equity ownership.

Making a mistake on your cap table is one of the simplest and early ways to cause trouble for your startup. Venture capitalists, angel investors, and other investors will not back a company that has cap table concerns. The reasons are numerous, but the simple line is that messy cap tables create dangers that sensible investors wish to avoid.

Depending on the extent of the mess you’ve made, cleaning a cap table might be a difficult or impossible task. However, this does not rule out the possibility of doing so. In this piece, we’ll analyze several solutions to the issue of cap table management.

Understanding How A Cap Table Works

Your cap table helps to keep track of several things:

• Who owns your company’s stock?
• Who owns the convertible notes and SAFEs that will be converted into stock?
• What percentage of the corporation does everyone own?
• What kinds of stock do they have?
• Which stocks have vested and which have not?

A spreadsheet could be used to create your cap table. Many entrepreneurs make the mistake of using time-consuming Excel templates instead of a comprehensive cap table solution. Your cap table, in a broader sense, contains the contracts, stock certificates, and other documents in your document room that define who owns what.

The ownership structure of your organization is represented by the “cap table”. First and foremost, your cap table should consist of the one to three founders who own the majority of the company’s shares. Some of the company’s stock is kept aside as an incentive for prospective board members and C-suite employees to join the company.

Your cap table will become more complicated as you bring on more team members and investors, diluting the value of your stock, introducing new types of shares (such as preferred stock), and making it harder to keep track of who owns what.

Fixing Cap Table Management Problems

Here are the problems that arise from poor cap table management and how you can fix it:

Not keeping the cap table updated

Everyday financial management may be postponed to meet more pressing requirements. But nothing is more vital than cap table management and updating the cap table.

In fact, if you try to return later to update it, you will wind up spending more time tracing all of the company’s share movements and data. However, if you utilize a cap table program, you won’t have to worry about spending a lot of time updating the details. You can do it instantly, which is critical for cap table management and keeping things simple for you and your firm.

The cap table needs to be constantly updated on new employee grants, employee termination, option exercise, financing, and liquidation events. It is always preferable in cap table management to start working on things early and update everything as it happens. In brief, get the necessary information, record it, and keep everything up to current at all times. This will help you avoid problems in the future.

Human Error in typing wrong information

Manual entry errors are another difficulty that many people confront. Even if it appears to be a simple task, it is critical that you double-check each time you add information to a cap table. You would be unable to close a new funding round and make judgments based on an inaccurate cap table if you had any incomplete or inaccurate information.

In reality, you’d be stressed out trying to retrieve the correct information after you’d input it incorrectly. You could be wasting time and energy, and even if you do, you could lose the funding agreement because you were looking for the correct information to update your cap table with.

To avoid this, make sure you have all of the necessary information for your cap table. As you generate the cap table, double-check every detail and make sure you’re using everyone’s full name. As your firm expands, more employees will be hired, and some of them may share first names.

Furthermore, make a note of each person’s permanent address so that you don’t waste time looking for them in the incorrect places if you need to contact them.

Inability to access all or lack of a centralized system

Investors, central leadership, the accounting department, and even your lawyers would require access to your cap table. Failure to have a system in place where you can exchange all updates and details on a centralized system can be a significant problem for you. It would be an impediment while making a bargain, and communication could become a problem. Furthermore, if you have tax concerns to work out with your accountant or lawyer, things will become overly complicated.

Not having software to manage it.

If you want to scale your business and avoid problems, you’ll need to choose a competent cap table management tool, just like the other elements discussed above. Even though utilizing a spreadsheet is a straightforward method, it may become tedious after a time. You would have difficulty changing the tools for recording this every time.

Conclusion

Operating a startup can be quite overwhelming, especially if you are a new business founder. Therefore, if a startup wishes to expand and attract investors or allow employee stock benefits, it must first and foremost have solid cap table management. Investing in a team of management staff to manage the cap table using software is extremely critical in times when proper asset allocation would make a founder’s life easier and help make the foundation of the business stable.

You now know what to look for in a cap table and why many businesses are moving away from Excel in favor of dedicated software. Get started with Eqvista today, you may put it to the test right here!