Every cap table problem stems from two basic principles: lack of institutional control and excessive versions. Carta can help combat these issues.
A capitalization table (or “cap table”) is a list of all the securities your company has issued and who owns them. Securities include stock, convertible notes, warrants, and equity grants.
Cap tables get complicated quickly, so starting with cap table software early in your company’s life cycle saves time and money as your business scales. When a company is formed, the cap table typically includes just the founders, because they’re the only equity holders. As a company matures, the cap table updates with each angel investment, funding round, employee option grant, and change to company ownership.
So, what is a cap table in investing?
Traditionally, the legal ownership of a private company “lived” on paper shares issued to founders, investors, and employees. Some of the biggest venture-backed private companies still have their lawyers issue paper securities and model their cap tables in Excel.
There’s usually more than one version of a manually updated Excel cap table model. The company’s attorney manages one copy (for an hourly fee) and either the founder or a finance or HR employee will manage another version. If an employee joins or exercises options and the company forgets to send the updated cap table to the lawyer or vice versa, suddenly there isn’t a single source of truth. Mistakes compound and things get complicated.
Lawyers and companies aren’t incentivized to maintain up to date versions between funding rounds, so when it’s time to raise capital, companies frantically throw money at lawyers to clean up their cap tables. We’ve seen quotes of over $20,000 in legal fees to reconcile different versions of a company’s cap table.
It’s ironic that there are AI, blockchain, and information security companies who rely on paper certificates and Excel. Especially considering that Carta allows companies to issue and track securities in real time.
Cap table software shouldn’t just help you keep track of who owns what. Transactional platforms like Carta make sure that whenever a security is issued or accepted your cap table updates automatically. There’s no need to enter things twice.
Carta cap tables help with compliance
Early-stage companies may think it’s OK to defer compliance because they’re less likely to attract the attention of auditors or the IRS. No matter the company size, it’s important to follow a few key rules when it comes to equity. Carta has automatic compliance checks to reduce risk for companies of all stages.
For example, Section 409A of the Internal Revenue Code requires private companies to set the strike price of stock options at fair market value (FMV) before issuing option grants. Failure to do so could end in significant tax penalties for the option grant recipient. The Carta platform requires that companies have an FMV on file before issuing options. For private companies, FMV is determined through a 409A valuation, which is a process that answers the question “how much is your common stock worth?”
Data from a company’s cap table helps drive the 409A valuation and an up-to-date and accurate cap table makes preparing a 409A less expensive and faster. Early-stage companies who plan to issue option grants and eventually become successful should find a reputable 409A provider. You can streamline the process by using one provider for both cap table management and 409A valuations.
In addition to Section 409A compliance, lawyers traditionally ensure companies are compliant with Rule 701, Rule 144, and the ISO $100k limit, among others. It can take a lawyer many billable hours to issue a single option grant if they’re guaranteeing compliance for all IRS and SEC equity rules. Carta helps you follow these regulations without checking in with your lawyer.
Carta cap tables help when raising a round
Raising a new round of financing changes the equation of who gets what if you exit. Carta’s cap table software has round-modeling tools so you can understand what raising a round would do to your cap table and dilution. There’s also a waterfall model which you can use to see how much each stakeholder would get if you exit at different valuations.
Most VCs have rooms full of analysts handling round and waterfall models. With our tools, you’ll have the same information when you walk into a negotiation.
The bottom line: Starting with your cap table on Carta will help you manage all aspects of equity as you grow.
DISCLOSURE: This communication is on behalf of eShares, Inc. dba Carta, Inc. Transfer agent services are provided by a Carta affiliate, Philadelphia Stock Transfer, Inc, an SEC-registered transfer agent. This communication is not to be construed as legal, financial or tax advice and is for informational purposes only. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein.
Stay up to date with monthly blog highlights