It’s surprising how often we get calls from startups or other privately held companies who are interested in our equity management software but get hung up on (they think) a sticky issue. “But what do we do about our transfer agent?” The issue is easily resolved by clearing up the misconception that just because you have shares, you need a transfer agent.
The fact is that the vast majority of private companies don’t need a transfer agent at all. While these SEC-registered service providers are vital for handling the complex tracking and recording needs of public (or going-public) companies, for most private companies, they’re an unnecessary cost.
Public companies have more complex needs
Companies that have publicly traded securities typically use transfer agents to keep track of the complex web of individuals and entities that own their stocks and bonds. According to the SEC, most transfer agents are banks or trust companies, or sometimes a company acts as its own transfer agent. A transfer agent handles all administrative burdens related to tracking and recording changes of share ownership, shareholder correspondence, cancelling and issuing certificates, and distributing dividends and tax documentation. For a publicly traded company with strict SEC filing obligations, outsourcing these burdens to a transfer agent makes sense. It’s usually far too complex, time-consuming and risky from a compliance perspective to go it alone.
But for an LLC with a few dozen or even hundreds of shareholders? Hiring a transfer agent is not only overkill, it might not be in your company’s best interest. Most of the routine tasks a transfer agent would handle can be accomplished more cost-effectively with automation and an occasional call to your lawyer. After all, it wasn’t long ago that maintaining a cap-table used to be done on a simple spreadsheet. Today’s software platforms make it infinitely simpler than that, even to manage what you truly need. Outsourcing the unnecessary is throwing money away.
Do you need a transfer agent?
Let’s be clear. Transfer agent companies have an important role. But if you’re still privately owned, your fundraising is conventional, and you’re not on the cusp of an IPO, then, your money may be better spent elsewhere. There are also other benefits to doing it in-house:
Cost. Transfer agent fees will cost your business far more than a software subscription. While public companies can have millions of shares in circulation with multiple layers of ownership and complex regulatory obligations, tracking who owns what in a private company is pretty easy to DIY, especially with the right technology. You probably know most of your shareholders by name, as they are likely to be your employees, key investors or even members of one family; share’s don’t circulate much; and there isn’t a huge volume to track.
Control. Key shareholder and investor relationships and company data are all valuable assets, and you may wish to maintain control of them inside your four walls. While most transfer agents provide adequate security and confidentiality, it is almost always the case that the fewer hands that touch your data, the better.
You have options
There are only a few SEC-regulated fundraising circumstances that require a private company to engage a transfer agent. And if an IPO is imminent, it’s probably wise to partner up with a good transfer agent company to guide you through and carry you forward.
But chances are, the lion’s share of your month-to-month tracking and recording of share ownership can be managed by your staff using web-based tool like Certent Equity Management. For occasional needs like issuing new shares, your can enlist transfer agent services as-needed or your law firm can serve as your transfer agent. But barring those special circumstances, save your money, keep your shareholder relationships and data close, and leverage the software tools of your choice.
Want to see how easy equity management is with insightsoftware? Request a demo and we’ll get you started.