New firms help startups keep track of their owners

SOME HOT startups in Silicon Valley, including some “unicorns” worth $1bn or more, have a problem: they are not sure who owns them. As fast-talking founders pitch to deep-pocketed investors, junior staff back at the co-working space maintain simple spreadsheets with investors’ names and the number and type of shares they hold. They often get things wrong. This may lead to disputes when a company lists, is acquired—or goes bust.

Enter “equity managers”, which offer to help keep track of stakes. Carta, a seven-year-old pioneer of the industry, hosts data for 11,000 companies. Ledgy, a Swiss rival founded in 2017, caters to around 300. In Britain Capdesk’s 400-odd clients include Nutmeg, a hit fintech startup.

Capitalisation tables, as the spreadsheets of shareholdings are known, were fine in the early 2000s. Back then firms had few investors, few funding rounds and plenty of enthusiasm to go public, says Ilya Strebulaev of Stanford University’s business school. In a study of 135 American unicorns, Mr Strebulaev found that the average unicorn raised money seven times, often issuing different share classes each time. These promise different shareholders different things in terms of who gets what returns when.

Misunderstandings between investors, who believed they were guaranteed a certain return, and founders, who remembered things differently, occur more regularly than either group cares to admit. Employees are promised shares that may not exist. Founders forget that when their firms issue convertible debt it may one day need to be converted to equity.

Add in errors, which can be introduced into spreadsheets through forgetfulness or fat fingers, and you have a recipe for lawsuits. Mr Strebulaev, who has served as an expert witness in startup litigation, has seen many mistakes over the years. In 2014 shareholders in TIBCO, a software firm, were shortchanged by around $100m on its sale to Vista Equity Partners, a private-equity firm, after some shares were accidentally miscounted. Two years or so later TIBCO, Vista and Goldman Sachs—the deal’s advisory bank—agreed to pay some $30m to settle with the investors.

In the wake of such snafus ever more investors encourage startups to employ equity managers. This in turn is attracting investments into firms offering such services. Ledgy has received backing from European venture capitalists. In May Carta secured $300m in a funding round led by Andreessen Horowitz, a storied venture-capital firm. This values the company at $1.7bn, itself in unicorn territory. Every cent of that is no doubt properly attributed to all of Carta’s 650 or so shareholders.