Raising capital with an investor is just the beginning. Startups founders should regularly update investors about their progress, business challenges, and recent industry developments.
It helps investors understand and evaluate how a startup is performing and provides a scope of value addition based on their experience.
A cap table holds information about who owns how much equity of the company and their equity class. Having this information assists the existing investors to forecast future payouts and potential dilution in specific situations.
As you raise multiple rounds of funds, your cap table changes frequently. As a result, if you manage the cap table on spreadsheets, the chances of errors also increases. And when such mistakes happen, most investors expect transparency and want to communicate with founders directly rather than going through the legal routes.
But there is a better way to prevent such mistakes from happening or at least catch them up at the first step rather than later.
In this post, we are going to discuss the following things:
- Common objections by founders for not sharing the cap table with their investors.
- Why you should share a real-time version of your cap table with your investors.
- Consequences of not sharing the cap table with your investors.
- How to share the latest version of your cap table with your investors.
Common Objections for Not Sharing the Cap Table With Investors
Before discussing why you should share your cap table with your investors, let's go through common objections from founders for not sharing their cap table with their investors.
- Lack of trust. Founders feel uncomfortable sharing the cap table with their investors as it contains sensitive stakeholders details. But what you need to keep in mind is that taking external funds is always a long game.
Note that, we are not saying to share your cap table with any investor. We are making arguments on sharing your cap table with your existing investors, who have already invested in your company.
By investing in your startup, an investor has shown confidence in you. They gave your company their (or limited partners) money and want it to grow. Hence, it's crucial to show back trust in your investors and sharing the cap table with them is one way of doing it.
Therefore, it's essential to do your due diligence before taking any investments. You can research your investor's portfolio (usually, it's available on their website) and talk to founders who have raised funds from them. It'll equip you with information about investors that's not available anywhere else. It'll also help you decide whether you can trust them or not.
Next time when you think of a founder-investors relationship, remember, transparency is the key to building a great relationship with your investors.
- Lack of tools. Even if a founder wants to share the cap table with their investors, they are not equipped with the right tools. Firstly, how do you update your cap table in spreadsheets when it's changing so frequently?
As the number of stakeholders increases in your company, managing the cap table in spreadsheets becomes challenging. It keeps changing with every subsequent funding round, vesting period completion, and grant offers.
Secondly, even if you spend a lot of time updating the cap table in spreadsheets, how do you manage so many files?
Therefore, it becomes hard to keep your investors updated with the latest version of your cap table.
With a cap table management tool, such as Qapita, you can easily manage and update your cap table and give access to its latest version to different stakeholders. Before we show you how to do it with Qapita, let's first discuss why you should share your cap table with your investors.
Why You Should Share Your Cap Table With Your Investors
To Build Trust With the Investors
Sharing your cap table with your investor acts well as a confidence-building measure.
"If you keep your investors engaged with honest updates, they will reward you by participating in future rounds.” (Jason Calacanis)
Transparency: Investors expect transparency and regular updates from companies they have invested in. When you share the cap table with your investors, it provides them information about how their investment is performing, which is a common requirement for anyone in the investment space.
It reduces the risk for investors: Usually, cap tables contain information about how much equity stakeholders have along with the type of security. Since different securities classes have different rights, such as liquidation preferences, it helps investors understand the risk to their investment and plan their exit strategy.
Having access to the cap table gives investors the flexibility to model different case scenarios and understand their investment values at various instances. They can also understand the payout at the time of liquidation events.
Understanding team (ESOPs): The team plays a vital role in a startup. So, their alignment with the company's growth is very crucial. ESOPs distribution helps investors understand the key employees and how much are they invested in the company growth. It also helps investors understand the nature of dependencies on key employees, and how the company rewards its employees.
It's in Your Interest to Share Your Cap Table with Investors
-Makes you investment ready: Sharing the cap table is a chance for you to interact with investors. The more the investors spend time with you, the more they are invested in you. The more an investor gets invested in you, the better is the possibility of them helping you at different stages of the company.
Building a healthy relationship with investors can help you in many ways, such as getting advice from investors or with hirings.
It may also help you in your next rounds of funding. Investors often are in touch with each other and refer to relevant investment opportunities amongst themselves. Your investors can introduce you to other investors or directly invest more money in the company.
-Saves time and money: When you share your cap table with investors, they can communicate any discrepancies with you and get them resolved early on when the differences in figures are small.
Otherwise, these mistakes compound with each successive iteration if you're using spreadsheets. It becomes challenging and time-consuming to trace errors as the cap table gets complex with every funding round.
All this can lead to serious issues if the difference in figures is large. Sometimes, it also causes legal issues, which can cost you a lot of time and money.
Consequences of Not Sharing the Cap Table with Your Investors
Now that we've discussed why you should share your cap table with your investors let's see the consequences of not doing so.
Discrepancies in ownership data: Cap tables are dynamic and with every additional round of funding, stakeholders' ownership gets diluted. Giving investors access to the cap table helps avoid surprises and sudden deviation of their current understanding of their equity in the company.
Missing opportunity to get investor's help: Many investors were founders once, so they come with rich founders experience. Sharing the cap table allows you to communicate with them—and get their advice by regularly engaging them.
An investor's experience can help you anticipate problems, as most of the time, they may have been through similar situations in their founder's journey or may have seen something similar in their portfolios.
Missing diversity of ideas: The mindsets of investors and founders are different as they deal with different situations. While founders are in love with their idea and mission of changing the world, it's less emotional involvement for investors, and they often judge the company based on metrics. They see things more objectively.
Having a good relationship with investors will help you have a deeper level of discussion and develop an understanding beyond what's immediately visible.
Though the mindsets of investors vary widely from founders, both are in the same boat.
Not sharing your cap table is a missed opportunity to create an alignment with your investors for building a successful company.
How to Share Cap Table with Your Investors: An Easy Way
Qapita (that's us 😀) is an equity management software. It helps you manage your cap table, administrate ESOPs, and keep all the stakeholders updated.
Using Qapita, you can always keep updated your investors with the real-time cap table.
You've to share your cap table once, and they can view the cap table anytime on any device at their convenience.
Here's how to do it:
Step 1: After signing to the Qapita dashboard, click users
Step 2: Add the investor's details.
Step 3: Select Investor in the role.
Step 4: Choose the type of access you want to give.
Individual View: Only has access to view their own shares and equity awards; no share class level breakdown nor stakeholder level breakdown of other's shareholding.
Summary Cap Table: They get access to view their own shares & equity awards, and a share class level breakdown of the cap table, but not stakeholder level breakdown. They don't get access to scenario, stakeholder, transactions and users pages.
Detailed Cap Table: They get access to the entire cap table including share class level breakdown and stakeholder level breakdown. They also get access to scenario but not stakeholder, transactions and users pages.
Step 5: Finally, click on Send Invite. The investor will receive an email to sign up from Qapita, and then they can view the real-time cap table anytime at their convenience.