Updated on September 1, 2020
Giving employees equity is more than a perk—it’s an investment in your company’s success. At Carta, we believe equity is a fundamental employee right, but it’s also a great way to attract and retain talent.
Managing your company’s equity, however, can be challenging. There’s a lot that goes into it, particularly as your company grows.
What is equity management?
Equity management is the process of creating and managing owners in your company. This may sound simple, but it involves everything from tracking and reporting changes in ownership to updating documents, communicating with stakeholders, consulting your board of directors, and staying compliant.
Equity management encompasses everyone’s experience—from equity admins and outside investors to employee stakeholders and board members. Let’s take a look at the process for each party involved:
Equity administrators are responsible for overseeing your equity system and processes. They’re in charge of the following three areas:
Cap table management
A cap table is a record of all your company’s securities—including stock, convertible notes, warrants, and equity grants—as well as who owns them. The more securities your company issues, the more complex your cap table tends to be.
An equity admin is responsible for issuing board-approved equity to stakeholders, processing exercises and transfers, and updating your cap table after a round of financing, liquidity event, or other material event. They also send an updated version of the cap table to relevant stakeholders whenever a change is made.
If you want to offer equity in your company, you may want to get an appraisal called a 409A valuation to qualify for an IRS safe harbor. The purpose of a 409A valuation is to determine the fair market value (FMV) of your common stock. The valuation sets the price of a share.
You generally need a new appraisal every 12 months or whenever a material event occurs. A material event is anything that could change the FMV of your company’s stock, such as a qualified financing round, merger, or acquisition.
A 409A valuation is one way to maintain compliance, but your equity admin also has to help enforce set rules when issuing and reporting equity, including abiding by Generally Accepted Accounting Principles (GAAP). In the U.S., part of that involves following ASC 718, a set of accounting standards that outline the steps your company has to take when reporting employee stock-based compensation on an income statement.
Accounting for expenses can be tricky, especially when you factor in new valuations, ever-evolving accounting rules, and scaling for growth. If your company issues equity to international employees, you have to address International Financial Reporting Standards (IFRS) as well.
Many equity admins also review issuances against securities laws and regulations, such as Rule 701 and the $100K ISO limit, and trace 83(b) elections to accurately withhold taxes.
Part of equity management involves updating your investors and employee stakeholders on your company’s growth and finances. The more knowledge and support your stakeholders have, the more likely they are to continue investing in your company.
Keeping stakeholders in the loop requires time and technology. In addition to issuing electronic certificates to stakeholders, you may also want to send regular investor updates. Updates should include information about your company’s trajectory, key metrics, hires, and customer wins. An update is also a good place to spell out investor asks, whether you need more funding or want help with an introduction.
Make sure you regularly update employee stakeholders as well. Keep in mind, however, that updates aren’t the only step you should take. You also need to give employees access to basic equity education, plus information on their vesting schedule, PTE window, and the company’s performance. It may be helpful to designate a point person employees can turn to to ask questions about their equity.
Providing employees with continual support and offering fair, flexible equity options can go a long way toward improving their experience at your company.
Another crucial component of equity management: board management. You typically need to get your board’s approval to issue equity, accept new rounds of funding, and hire executives, all of which requires sharing sensitive documents and providing updated cap tables and valuation reports.
Managing equity also means managing liquidity options for everyone with equity. Historically, it’s been difficult for employees to sell their private shares, but many private companies are now realizing the value of offering liquidity programs.
You can either hold a tender offer—which gives employees the opportunity to sell their stock back to the company or to an investor—or allow employees to sell their shares on a secondary transaction. Both transactions come with either heavy paperwork or administrative costs. Plus, you have to update your cap table each time there’s a change in ownership.
Fortunately, more options are becoming available to private companies. Later this year, pending regulatory approval, we’ll be launching CartaX, our new liquidity platform that will make it easier for private company employees to sell shares and investors to buy them, while reducing the issuing company’s administrative burden.
Why you should use one platform for equity management
Equity management isn’t as simple as updating your cap table—it encompasses a variety of different people, processes, and tasks. As your company grows and you continue to raise more money, equity management can become even more complicated.
That’s why using one streamlined equity management platform can help. With Carta, your cap table automatically updates after you issue grants. A single equity management platform simplifies tedious (yet time-consuming) tasks, like granting cap table access, getting approvals from board members, running liquidity events, and sending investor updates.
Carta also provides scenario modeling, which includes breakpoint and sensitivity analysis as well as payout and dilution modeling. Modeling gives you a better idea of how your company will respond to various changes like investor exits, new rounds of fundraising, and shifting stock values.
When you use one equity management platform, you can:
- Lead the charge in creating more owners. An equity management platform helps you stay organized, so you can spend less time on paperwork and more time attracting new investors.
- Scale with ease. With one platform, all your equity and liquidity information is connected and automatically updated, saving you time and money as you grow.
- Be audit-ready all year. Equity management software helps you comply with rules like the $100K ISO limit, so you never have to worry.
- Impress your stakeholders. Investors and employees can accept electronic securities, track vesting schedules, model their potential tax obligation, and exercise options in one central location.
- Get help whenever you need. At Carta, we pride ourselves on stellar service. We’re always here to answer questions and help you make the best decisions for your company.
Good equity management is critical to your company’s success. If you’re considering offering equity or starting to build your company’s equity plan right now, an equity management platform can help. See how Carta can help you save time, support your stakeholders, and onboard new investors with ease.