Why do we need a cap table platform?
Takeaway: In the old days (pre-2017 or so), most people kept track of cap tables in spreadsheets of their own design. There was no institutionalized process for ensuring entries were correct and finding errors was difficult. Nowadays, we have cap management platforms that, for the most part, solve these problems. Using a cap management platform to avoid the pain of being unsure of your cap table is well worth the up front effort required.
As a startup grows and raises capital, the need for an accurate and up-to-date cap table becomes increasingly important. A cap table is a spreadsheet or chart that outlines the ownership structure of a company, including the names of stockholders, the number of shares they own, and the percentage of the company they hold. It is a critical tool for tracking equity ownership, calculating the potential value of equity grants, and ensuring compliance with legal and regulatory requirements.
While cap tables can be managed manually using spreadsheets, this can quickly become overwhelming and error-prone, particularly for companies with complex equity structures or multiple rounds of financing. This is where cap table platforms come in. A related note - although startups can often keep track of their early capitalization by hand, I recommend onboarding to a capitalization management tool early because they are typically free or very cheap while the company is small and they ensure that the company’s capitalization is correct and agreed by all parties.
Capitalization management platforms typically offer a range of features, including:
Automated calculations: Cap table platforms can automatically calculate equity ownership, taking into account factors such as vesting schedules, stock options, and convertible notes. This can save time and reduce the risk of errors.
Scenario modeling: Cap table platforms can help startups model different scenarios, such as the impact of new rounds of financing or the exercise of stock options. This can help founders and investors make informed decisions about the company's future.
Collaboration: Cap table platforms can facilitate collaboration among founders, investors, and legal and financial advisors, making it easier to share information and ensure everyone is on the same page.
Compliance: Cap table platforms can help ensure compliance with legal and regulatory requirements, such as filing Form D with the SEC or complying with Section 409A of the Internal Revenue Code.
Using a cap table platform can provide a number of benefits for startups. First, it can save time and reduce the risk of errors, particularly for companies with complex equity structures. Second, it can facilitate collaboration and ensure everyone is on the same page. Finally, it can help ensure compliance with legal and regulatory requirements, which can be critical during fundraising and acquisition discussions.
There are a number of cap table platforms available for startups. When choosing a cap table platform, it is important to consider factors such as pricing, features, and ease of use, as well as any specific needs or requirements of the company. My preference is that companies use Carta but I also recommend Shareworks.