Now that you have started a new business in the market, and decided to grow to achieve stable transactions and maturity, what are the next steps to grow your business?
Besides looking for the investors, you would also need to organize the ownership and equity among co-founders in a properly planned manner.
This will help you to manage all the resources, funds, and people in one place. In order to manage the company’s shares, conversions of debt to equity, transfers, sales, and stock issuances, some people use the excel sheets.
Do you think traditional excel sheets can help you to organize everything? Well, it can! But there are some significant downsides that you need to know.
Even though most clients prefer to use Excel as their equity management tool irrespective of their startup stage, there are some drawbacks to this traditional sheet.
Let’s take a case; your startup is proliferating at a faster pace.
The co-founders, investors, rate of issuing shares are also increasing. And you are managing your equity distribution table in the traditional excel sheet. In the early stage of the startup, everything was going smoothly. But now, the new investors are also funding the company. So, you need to add the names of the investors in the table. Don’t you think it would be a cumbersome job?
The amount of energy and time you will invest in maintaining the accurate cap table will be higher than any cap table management software. And if you somehow added inaccurate figures or names in the excel sheet, it can result in lofty losses. These kinds of mistakes could hurt the next financing round, which could lead to mispriced option grants and even legal system problems.
That’s where cap table management software comes into the picture. It helps to grow and systematically develop the business shares. To be clearer, the cap table is a record table of the ownership. This table helps the business owners by providing an analysis of the investor’s and founders’ percentage in case of equity dilution, ownership, and the equity’s value in every investment round.
Now, the question arises, ‘how to manage the cap table?’ Many business owners have started using the cap table software to organize their business transactions rather than the traditional excel sheets. Let’s dive into the article to know, the reason behind using the cap table software:
Why Cap Table Software?
When you start using the equity management software or cap table software to manage your business records and stocks, you can significantly limit the risks of recording the improper transactions. Businesses can also use the cap table software to handle the complex calculations such as estimating the fair value of the share-based compensation on various assumptions like volatility, discount rates, equity value, and much more.
Moreover, there is some cap table software in the market that offers stock compensation recognition schedules. This feature will help your firm by automatically calculating and posting essential compensation costs to the firm’s general ledger without any hassle. Does it sound good? Of course, it is! Now, it is high time to switch over the cap table software after ditching the Excel spreadsheet!
How Do You Know When You’re Ready?
This is the most common question asked by early-stage startups. How do they know about the requirement of the cap table software? The answer is pretty simple; when you have decided to uplift your business strategy by incorporating specific methods such as a merger, change in the corporate structure, or even acquisition, you need it. At that time, the traditional excel sheets won’t be able to give you the correct results! Here are a few cases when you need to have cap table software:
# Merging with Multiple Companies
The first and foremost scenario that can lead to the importance and requirement of your firm’s cap table software is the merging criteria. At that point, an excel sheet will break your figures and budget plan. It won’t give a precise idea about the things that are working.
Let’s say; a company Software solutions decided to merge with three giant-tech companies named Digital Marketing Pvt Ltd, Sunflower Tech Company, and Pinaak Pvt Ltd. During the merger, they have added almost 100 stakeholders into one larger entity.
In order to manage the equity, and share records among shareholders, one company decided to use the excel sheet. However, other companies started using the cap table. The cap table of all the four companies was quite complicated and difficult to understand.
It contained 25 shareholder classes, five various warrant, and different option grant types, certain vesting schedules for each set of the shares, and the requirements for the hybrid options. Do you think it would be simple to add all the details in the excel sheet or cap table? That’s where cap table management software can help you.
To make the process even simpler, the merged companies decided to follow a set of rules. These regulations entail how each share class can be transformed into the new company’s share classes. This could help your company to solve complex calculations. Moreover, it will also help the company save the old company cap table to avoid risks or errors.
# Changing Your Corporate Structure
The next situation that sprung up the requirement of the cap table management software is the modification of the business structure. Many companies change their corporate structure after achieving one goal. At that period, cap table software plays an important role. It also manages all the records of the company in one place and in a synchronized manner.
Let’s take another example to explain this point:
A company named Danny Pearson was thinking of changing its business structure after one year of span. Since the company was incorporated as a C-corporation in the US, therefore, they had to pay the heavy taxes on the business transaction.
To save money and resources, they decided to form two LLC companies and save tens of thousands of dollars in taxes. Well, this was a great idea in case of saving taxes. But it was really difficult for the companies to convert the common stocks to the membership units and the optional units.
Therefore, they needed cap table software. Dabby Pearsons had hundreds of shareholders. In order to process the changing business structure procedure, every shareholder needs to sign off the change. It was equally important for the company to check the shareholder’s shares, their vesting cycles to properly map the shares. But after incorporating the cap table software, everything seemed to be very easy. They completed all the tasks of distributing the shares without any human error. So, here cap table software was the key.
# Getting Acquired
Another situation where you need to have cap table software in your firm is in times of acquisition. Every entrepreneur dreams of an IPO for their firm. And if they can’t reach this level, they prefer to have the option like getting acquired.
The acquisition is an incredibly sensitive process, and gives birth to numerous challenges. Only a few selected employees take the lead during acquisition, while other employees just remained focused on growing the business.
However, a provision in the acquisition process that needs to be completed properly is to present the current cap table to the acquirer. Also, to create the waterfall scenarios for all the current investors and employees. These business transaction snapshots help the businesses to have a clearer picture of the company operations. To be very honest, the excel sheet can prepare these snapshots.
This is next to impossible for the traditional excel sheets. Companies prefer to have cap table management software to pull all the information in one place. Moreover, it also helps the business firms access all the information with few clicks. Getting your table right from the onset sets you up for success.
By now, you would get a better idea about the importance of the cap table software over the traditional excel spreadsheets. Many companies in the business world don’t take care of their cap table and end up facing heavy losses.
But if you want to operate your business firmly, you should always keep an accurate cap table. According to your business needs and requirements, you can choose the best cap table service provider.
The cap table management software will help your firm save time and resources in sifting through piles of equity documents or sharing potentially outdated and inaccurate Excel files.
About the Author:
Sarath CP is a Digital Strategist and Consultant, Growth Hacking Specialist worked for both startups & big brands, helped them to build a strong brand presence and achieve sustainable business growth. Follow him on Twitter