A company’s cap table is one of its most important records. It shows the ownership of the company’s stock, options, and other securities, and is key to understanding the owners’ economic and voting interests. A poorly managed cap table can lead to bad decisions, diligence issues in transactions, as well as costly and time-consuming “clean-up” exercises.
Startups are increasingly using third party platforms to manage their cap tables, even as early as incorporation. Many startups find these platforms more transparent, easier to use, and more cost-efficient in the long run than maintaining (or having their lawyers maintain) capitalization information in a spreadsheet. Some platforms include other features that startups find useful, such as maintaining stock certificates in electronic form, issuing option grants electronically, providing analytics on the company’s capitalization, performing Section 409A valuations and modelling future financing rounds and exits.
Our clients often ask us for recommendations on cap table platforms. While the offerings are constantly evolving, and all platforms have their pros and cons, here are some of the factors (in addition to obvious ones like cost and ease of use) that we suggest startups consider when making this decision.
Will the platform be around for the lifetime of your company?
It typically takes several years for a startup to go from formation to exit. If your platform goes out of business, you will have to find a new one mid-stream. At best, you will have to spend time and effort transitioning your information to a new platform. At worst, important information might be lost altogether. When picking a cap table platform, consider whether the platform is likely to be around for your company’s expected lifetime as a private company – e.g. a platform that has already been around for several years, or that has the backing of an established investor.
Will the people administering your cap table be familiar with the platform and be able to use it efficiently?
Especially if you will be paying someone else to keep your cap table updated, we recommend that you select a platform that will be easy, familiar and efficient to use. For example, if you will be relying on your lawyer to administer your cap table (which is not unusual and has its pros and cons), you should ask your law firm what platforms they know and like the most. We aren’t saying that your law firm should necessarily make this decision for you, but we are saying that if you pick a platform that your lawyer is familiar with, then you will likely spend less paying your lawyer to administer your cap table.
Understand your platform’s defaults.
Different platforms have different defaults around things like stakeholder access to cap table information and stakeholder notifications, just to name a couple. Make sure you understand what the defaults are and are thoughtful about their implementation. For example, it might be perfectly appropriate for your lead VC investor to have access to your detailed cap table, but it might create problems for employee option holders to have this same level of access. In addition, if you don’t familiarize yourself with notification defaults, you might find yourself surprised at some of the alerts that may go out (e.g. automatic reminders to terminated employees about option exercise deadlines).
What else is the platform selling?
As the marketplace for cap table providers evolves, some platforms are differentiating themselves by providing new features in addition to cap table management. Depending on the stage of the company and its anticipated path, these functions may be useful for you, or you may experience them as “feature creep” resulting in distraction or inconvenience. You should consider whether you want to get a “bare bones” cap table management platform, or whether you want to sign up for an entire suite of products.
Once you’ve made your decision…
Most cap table problems arise not from choosing the wrong cap table platform, but from failing to administer the cap table properly. To avoid things falling between the cracks, we suggest that you set up a clear division of labor with your lawyer or other third party administrator from the beginning. Who is going to update the cap table when you issue more SAFEs? Who is going to update the cap table to reflect the cancellation of options when an employee is terminated? Who is in charge of reflecting new stock issuances? An experienced startup lawyer can advise you on how to allocate responsibilities depending on your company’s stage, complexity and cost sensitivities.