A company’s capitalization table (cap table) tracks the number of shares that each investor owns as well as their ownership percentages. The cap table is one of the startup’s most important documents, yet it is often riddled with mistakes and not kept up to date especially when it needs to be reviewed by prospective investors, attorneys, accountants or partners. The importance of keeping it clean is highlighted here by Mark Suster, an entrepreneur (now VC) who said: “If you need to clean up your cap table first – while very hard to do – it will make outside funding easier.”
So to make it easier to get funded and raise your credibility with investors and partners don’t make cap table errors!
Here are the top 5 cap table errors that startups need to avoid because left unchecked, these oversights could cost the company a substantial amount of time, resources and money, plus some loss of credibility.
1. Not tracking grants on time
A startup can be fast-paced and (hopefully) grows like wildfire. When the company hires employees and grants them stock options, the person in charge of updating the cap table (usually overworked founders) should do so right away.
However, if they are too busy or merely deprioritize this task because it seems reasonable that it could be done at a later time, it’s possible that some option grants never actually show up on the cap table. They are completely forgotten. Oops.
2. Not tracking both shares and ownership percentage
Most cap tables track the number of shares each investor owns but fail to calculate their ownership percentage. Both stocks and interests should be tracked side-by-side to have significant meaning, especially to founders who want to make sure they don’t end up selling a higher rate of the company than intended.
3. Not tracking options exercise windows
When employees leave, they usually have a 90-day window to exercise their stock options. If they forfeit their options, then the cap table needs to be readjusted accordingly.
4. Legal documents that don’t match the numbers
For example, an employee’s vesting schedule is four years, but the cap table lists it as three years. This discrepancy will confuse should the employee decide to exercise stock options between the 3rd and 4th year. Also, convertible notes that could potentially turn into shares might not make their way onto the cap table at the time the note is issued.
5. Keep a manual Excel spreadsheet
Most of these mistakes are the result of keeping cap tables on Excel spreadsheets, where they are prone to human error. Most companies can start with a simple spreadsheet, but as their investors and employees grow in numbers and its cap table grows in complexity, they need to move away from spreadsheets as soon as possible.
Fortunately, cap table management software can help companies get off Excel, organize their cap tables accurately, and save them thousands of dollars in fees they might incur from attorney time spent on fixing their spreadsheets.