Where should Cap Table be maintained; Excel or Software?

A cap table, which summarizes the current capitalization (i.e., stock ownership) of a startup or venture-backed business, is monitored by venture capital (VC) firms. Having a properly managed cap table allows startups to fund, allocate and sell a percentage stake of the company to help grow the business. In this article, we compare the best ways to maintain a cap table: in Excel or Software.

What should a cap table consist of?

A cap table is helpful for the following things in addition to displaying current equity ownership:

• Doing an ownership scenario analysis of a planned next round of investment by existing investors at different pre-money prices
• Building 409A appraisals, due diligence by new investors or prospective buyers, and the discovery of any unallocated alternatives for recruiting new employees
• Analyzing anticipated returns and revenues to various capital providers based on specific exit value assumptions
• Ownership rights and tax compliance

After the firm changes ownership, whether, through a purchase or an IPO, the cap table is no longer relevant.

Why does having a properly managed cap table attract investors?

Having a properly managed cap table helps ease the minds of investors and bankers considering your business. Investors want to know that key documents are accurate and up to date to ensure the investment is being treated in accordance with the founders’ intentions.

Apart from that, a properly managed cap table lets investors know exactly who is holding shares, how much they own, and who has a right to exercise options. It can reduce confusion and mistakes, saving time and money.

Why do people use Excel to manage their cap table?

Having Excel to keep track of each shareholder of the company is a great way to note down the percentage allocation of each investor. With Excel, you can build and maintain your personal or business cap table.

Cap tables make it very easy to quickly see summary sections such as the number of shares owned by each shareholder, their purchase price, and tax information like capital gains rates.

You can insert other important data, such as outstanding options and restricted stock grants and update it on an ongoing basis. Then you can transfer all that data into a proper cap table format for a complete picture of your company’s ownership structure at any time.

Excel may not be the right way for long-term

Even though Excel may be an easy way to do it, it may not be the most optimal way to maintain the cap table in the long run. You’ll eventually have to show your cap table to others, including staff members, investors, and venture capitalists.

The problem with that is you have to ensure that each user only gets the information they require based on their role while using Excel to keep data private and confidential. To cope with that, a new spreadsheet would need to be constructed that only displays the necessary data.

However, that will create more long-term problems as the business management team managing the cap table must consistently update the cap table when ownership changes. Although not impossible, there is much possibility for error.

Why do people use software for managing their cap table

When using Excel, it can be difficult to make future projections while you’re going through a period of rapid development and funding rounds due to a tight schedule. In some circumstances, using Excel can be problematic when an investor makes you an offer. There are a lot of manual computations involved that could fill your cap table with discrepancies.

Utilizing software, you can automate and perform scenario modeling to determine the precise effects of a new funding round or offer on your business. Additionally, using a waterfall analysis tool is your best bet when considering exit scenarios. Those exit scenarios and assessments are made much simpler by having precise, audited documents available.

Understanding Software Solutions

Using Excel in the early stages of your business is manageable. It’s free, easy to use, and effective. Nevertheless, as your firm grows, you raise money, recruit staff, and provide equity options; maintaining this information’s accuracy can be difficult and Excel might not be able to effectively handle it. At this point, mistakes are expensive, and depending heavily on legal counsel for each decision can cause you to slow down your growth. It might be best to consider using a more efficient and smart way to maintain your cap table.

Factors to consider in looking for a Cap Table Tool

Early to late stage entrepreneurs should consider the following five important factors when selecting a cap table management solution:

Simplicity and Ease of Use

Without a steep learning curve, an equity management system should enable you to automate and streamline the intricate stock management process. Your time and money should be saved, and the interface should be easy to use.

Cap Table Administration

A good system will allow you to legally comply with activities like option exercises, cancellations, debt conversions to equity, transfers, and stock issuances while centrally tracking and managing who now possesses equity and has the right to exercise equity in the future.

409A Valuation

A 409A valuation is used to establish the strike price for issued options as well as the market value of a company’s common stock. To avoid costly audits and fines, 409A valuations should be performed annually or whenever the company experiences a major event, such as a new financing round.

Compliance

Utilizing an equity management system has several advantages, including the ability to comply with applicable laws and taxes without constant guidance from a lawyer.

Modeling of growth and exit scenarios

Planning an exit event or your next round? A solid system should assist you in creating several scenarios, evaluating the effects on stakeholders, and ultimately assisting you in selecting the best course for your startup.

Having a long-term vision for the company

Any startup with a long vision for their company would invest in a proper cap table management software tool to ease their workload. While having Excel to do simple tasks does help. It does not provide little to no value in the long term as your business starts to expand. So, who’s your better partner in managing the cap table software tool? Talk to our experts and try out Eqvista today as a solution to using an Excel spreadsheet. It uses cutting-edge technologies to make keeping tabs on and manage your company’s stock simple. Connecting with your investors is also possible. Here, give it a try!