By , Miklos Grof
Published September 13, 2016
Capitalization tables (Cap tables) are among the most important documents every entrepreneur should understand. This misleadingly simple document, which looks like a standard spreadsheet, lays out who the stakeholders are in a company and how many shares each person owns.
However, this simplification does not do justice to the complexity that cap table management entails. As a company grows, more people will jump on board and the ownership will get increasingly complex. Each new investor and significant employee will want a piece of the upside - i.e. to get on your cap table.
Investors will want to understand who is already on your cap table, and more importantly, you will want to know how your ownership will be affected by the new sailor that just jumped aboard. This story - and more -- is all told by your cap table. Besides this, your cap table includes drafting and signing legal documents; recording transactions; communicating with shareholders; and complying with regulations.
When I founded my company Fundacity, I encountered firsthand many of the expected pain points in using a simple DIY Excel sheet to manage our cap table. I had a co-founder, an option pool and three family, friends and fools (FFF) investors before raising our first seed financing from an early-stage fund.
Related: Deal or No Deal? Here Are 7 Ways Due Diligence Can Help Before a Final Commitment.
Using our amateur Excel sheet, it was challenging to negotiate the investment and fully understand the dilutive effect of the new financing round on existing shareholders. We were essentially flying blind into the negotiation. Fixing our broken cap table cost us $5,000 in legal fees - not to mention the stress of reconstructing past transactions in order to rebuild the integrity of the cap table.
Unfortunately, we continued to maintain our cap table internally, and when it came time to sell Fundacity, neither us nor the opposing counsel, relied on our Excel sheet, and a new audit was required.
This time the fees were much steeper. Both parties had to look at every shareholder agreement, option agreement and convertible note. It created additional work, costs and stress at a time when we could least afford it. The lesson was clear: when it comes time for another fundraising round or exit, the last thing anyone wants is a lawsuit or a lengthy exercise in due diligence.
Related: 6 Tips for Successfully Splitting Equity in Your Startup
These 12 rules will save founders from costly mistakes during hiring, fundraising and acquisitions.
An entrepreneur, who can stay on top of these 12 rules, will be well positioned throughout negotiations, and stakeholders can rest assured their shares are being accurately managed. While it may seem overwhelming, the good news is that there are platforms out there, like Gust Equity Management, which can help you easily build and accurately keep track of your cap table.
Related: What People Don't Tell Entrepreneurs About Investors
It’s important not to let your cap table run out of control and become a roadblock for you to close a deal in the future. Equally, don’t let cap table management be a complex daily task. Find a process that works for you and is easy to manage so you can focus on what matters most - building and scaling your business.
https://www.foxnews.com/us/12-rules-entrepreneurs-must-know-about-cap-table-management