A capitalisation table, commonly known as a cap table, is a record or a spreadsheet that shows the equity ownership of your company. It gives an analysis of the company's percentages of ownership, equity dilution, and value of equity from each round of investment. However, after several rounds of financing and issuance of equity instruments, the cap table can become significantly more complex due to numerous changes and updates, hence prone to mistakes that can be rather costly.
Founders need to ensure that their cap tables are accurate and updated to make informed decisions such as determining the percentage of options to issue to employees. It is also an important document for investors when deciding on investing in the company. If investors come across a cap table that is reek of errors and inconsistencies, it is a huge red flag which may affect your chance of securing funding.
After working with many founders, Team Qapita has distilled a list of common mistakes in managing cap tables and how to avoid them.
Most start-ups keep their cap tables in excel spreadsheets and update any changes in equity ownership or perform analysis directly into them. A simple typo or referencing of a wrong cell in excel sheets may result in a ripple effect of errors in the whole spreadsheet. Even basic details like entity names (eg. Vulcan Capital vs Vulcan Inc.) may be inaccurately recorded, resulting in confusions and errors in ownership structure. Such minor errors might not be noticeable until the time of transaction due diligence.
To avoid making errors, always use official titles or full legal names for entities.
Updating Contact Information
While this might sound trivial, it becomes increasingly challenging as the company grows and involves large numbers of stakeholders. Without access to the most updated version of contact information, it is difficult to reach out to stakeholders when decisions need to be made regarding liquidity events. You might end up spending time tracking down their contact information that would have been better utilised elsewhere.
Although it is fundamental to keep your cap table up to date, many founders put off updating their cap tables timely due to other more pressing issues. However, when the time comes to actually update their cap tables, the accumulation of backlogs and transactions will result in major headaches and confusions. This is especially so when transaction history gets lost or information was inaccurately recorded. It can become quite expensive when lawyers and bankers have to be involved in cleaning the errors for what could have been easily avoided.
Never put off until tomorrow what you can do today. Make sure cap tables are updated as soon as possible.
Oftentimes, deals may be made over a business chat or with a handshake deal. Without a proper recording of the details in a written form, founders may forget crucial information when updating the cap table, hence recording inaccurate details. This may even result in a misunderstanding between shareholders, and in some unfortunate cases, lawsuits.
The main reason for multiple versions of cap tables is because cap tables are usually kept as excel sheets, which is a form of static data. The cap table you receive today may not be the same as the cap table you receive tomorrow. There are many things that require the cap table to be updated such as liquidity events, exercising of options, granting new ESOP etc. With every event, the cap table will be updated, but not everyone will be notified of that update. The person holding onto a cap table that they received prior to an update would think that it is the latest version, and sends it to another person. This cycle ends up repeating and at the end of the day, there are multiple versions of the cap table (each claiming to be the most updated version) floating around in the company.
Share Allocations Errors
Since updates on share allocations and equity ownership happen on excel spreadsheets, excel rounding errors may occur. This small error occurs when investment amounts do not translate into a whole number in terms of shares allocated due to decimal points. While these mistakes may be simple, it may result in serious errors especially when the ownership structure of the company gets complicated and results in incorrect valuation of the start-up.
As you can see, most of the common mistakes made by founders can be easily avoided if prudence and care were exercised. To avoid making such mistakes:
- Ensure that information are precise and accurate
- Frequently update cap tables and contact information
- Do not rely on verbal deals
- Consider digitizing cap tables
Talk to Team Qapita to learn more about managing your capitalisation tables and how to make your equity management simple!