Equity management

Equity management

Author: The Carta Team
|
Read time:  5 minutes
Published date:  May 31, 2023
|
Updated date:  April 15, 2024
Equity management is the process of creating and managing owners in your company. Learn more about what it involves and how Carta can help.

Giving employees equity is more than a perk—it’s an investment in your company’s success. But with this particular investment comes the obligation to track and manage the equity you’ve distributed. 

Equity management doesn’t stop with your employees; investors, advisors, and board members are stakeholders, too. Without streamlined updates about the company’s ownership, you may jeopardize the trust (and future funding) of your investors. The admin, paperwork, and communications surrounding equity management can be challenging—and 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 ownership in your company. It involves:

  • Tracking and reporting changes in ownership on your cap table

  • Updating equity documents like your stock option plan and stock purchase agreements

  • Communicating changes with stakeholders

  • Consulting your board of directors and, if applicable, obtaining requisite approvals from stockholders

  • Staying compliant with various regulatory and accounting obligations

What is equity administration?

Equity administrators are the people responsible for maintaining compliance and overseeing your equity management system and processes. This includes maintenance of your company’s cap table and 409A valuations. 

A company will typically hire an equity admin when it’s more mature (after a Series C funding or later). However, setting up equity management software early can benefit early-stage startups, too. Having quality software in place can help you save on legal fees and headcount by delaying hiring an equity administrator until later.

Here’s a deeper look at what a typical equity admin’s role requires:

Cap table management

A cap table is a record of all your company’s securities—including stock, convertible notes, warrants, stock options, and other 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 recording board-approved equity issuances to stakeholders, processing exercises and transfers, and updating your cap table after a round of financing, a liquidity event, or other material event. They also send an updated version of the cap table to relevant stakeholders to comply with any reporting obligations you may have to investors.

409A valuations

If you want to offer equity in your company to service providers, you may need to get an appraisal called a 409A valuation. The purpose of a 409A valuation is to determine the fair market value (FMV) of your common stock. The valuation then helps the board set the price of a single share.

You generally need a new appraisal every 12 months or whenever a material event occurs, if sooner. A material event is anything that could change the FMV of your company’s stock, such as a qualified financing round, merger, acquisition, or other significant business change.

Maintaining compliance

To meet accounting standards, most companies abide by the Generally Accepted Accounting Principles (GAAP) for recording employee equity issuances. Companies may also need to comply with federal and state-level securities laws for issuing and reporting equity. These rules include:

Accounting

ASC 718 is a set of accounting standards that outline the steps your company must follow when reporting employee U.S. stock-based compensation or other equity interests 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 may have to address International Financial Reporting Standards (IFRS) as well.

Additional compliance checks

Any time your company issues new equity, securities laws and regulations should be reviewed to ensure compliance. For option grants, this includes Rule 701 and the $100K ISO limit.

It’s also important to keep track of employee 83(b) elections after an early exercise of stock options or an issuance of restricted stock with vesting requirements. Employees and founders must file an 83(b) election form with the IRS to receive potentially favorable tax treatment.

Whose equity do you need to manage?

Equity management software allows you to distribute stock to everyone from co-founders and early investors to advisors and employees. We’ll break down what equity management means and the benefits for each party involved.

Investor stakeholders

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 that detail:

  • Your company’s trajectory

  • Key financial metrics

  • Hiring updates

  • Customer wins

  • Investor asks (e.g. whether you need more funding or want help with an introduction)

Carta customers can automatically send and track investor updates.

Employee stakeholders

Your employees are owners too. Equity management means creating an employee option pool, issuing options to employees from that pool, and creating agreements between the company and each equity recipient detailing the terms of the issuance. 

Employees often need additional resources to better understand their equity. Equity management means giving employees access to basic equity education, vesting schedule timelines, post-termination exercise (PTE) window information, and tax deadlines.

Board members

Another crucial component of equity management: board management. Most companies require board approval to issue equity, increase option pools, accept new rounds of funding, and hire executives, all of which require sharing sensitive documents and providing updated cap tables and valuation reports.

Liquidity events and equity management

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 like tender offers and secondary transactions. 

In a secondary transaction, shareholders sell their company stock to a third-party investor. A tender offer is a type of secondary transaction in which the company sponsors and controls the process, and  gives multiple sellers (including employees and early investors) the opportunity to sell their shares either to another investor, a group of investors, or back to the company at a predetermined price. 

Secondary transactions can come with heavy paperwork and administrative costs. Plus, you have to update your cap table each time there’s a change in ownership. Managing equity means managing every stakeholder’s liquidity options during these events. 

How to start managing your company’s equity

Equity management isn’t as simple as updating your cap table (which isn’t very simple at all). Managing equity involves several different types of stakeholders, from employees to investors to board members. As your company grows and you continue to raise more money, equity management becomes even more complicated. 

Using one streamlined equity management platform can help your company:

  • Stay organized. The right technology tools enable you to spend less time on paperwork and more time building your company.

  • 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.

  • Stay compliant all year. Equity management software helps you keep track of your compliance with rules like the $100K ISO limit and Rule 701 disclosures.

  • Impress your stakeholders. Investors and employees can accept electronic securities, track vesting schedules, model their potential tax obligations, and exercise options in one central location.

With Carta’s equity management software, your cap table automatically updates after you issue equity. Carta also provides scenario modeling for financing rounds and exits, which includes breakpoint and sensitivity analyses as well as payout and dilution modeling. Modeling gives you a better idea of how your company ownership will respond to various changes like investor exits, new rounds of fundraising, and shifting stock values.

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. 

Start issuing equity with one click
Get a demo

DISCLOSURE: This publication contains general information only and eShares, Inc. dba Carta, Inc. (“Carta”) is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. 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.