More common cap table mistakes

We recently published an article looking at five common mistakes to avoid with your cap table, but when it comes to managing a cap table there is nearly always something else to be mindful of.

Here are three more potential pitfalls to be wary of, but first, a quick reminder on the key background information:

A cap table is a record of the ownership of your company, including, who owns stock, the size of the individual stakes, and what type of securities have been issued.

A cap table is important because, aside from the obvious point of founders needing to know the ownership structure of their own enterprise, potential investors often tend to look very closely at it when assessing whether to enter into an agreement with a startup. An accurate and well-organized cap table that includes all expected information in a clear, easy to read way, can go a long way towards reassuring investors as to your credibility.

Neglecting regular updates

We highlighted some tripwires associated with attempting to maintain your cap table on spreadsheets in our previous post. It’s worth expanding on this and noting that the time and effort involved in relying on manual entry may see you postpone or neglect regular updates, which can create even more space for human error.

As a startup develops, every change caused by new investors and equity awards must be recorded on your cap table, and ideally you will want it to be fully up to date at all times. While that may prove relatively straight-forward when using automated software, relying on manual entry at the very least makes the process more of a production, and if the document doesn’t reflect the full ownership picture at any given moment – whether by delay or omission – that, in turn, could lead to mistakes and omissions.

No employee equity pool

When potential investors and VCs are looking at a company, they will often want to see that employees are being incentivized to give their best efforts.

One of the most effective ways to encourage high performance is to give employees the opportunity to own stock in the company they work for. With reward being linked to company performance the better the company does the more the employees benefit. That being the case, investors may become concerned if they inspect a cap table and see no provision for an employee equity pool. In

that scenario, they may wonder how the company will recruit and retain the quality talent necessary to help it succeed into the long-term.

Legal documents not matching up with cap table info

When information contained in relevant legal documents does not match up with the cap table, that may lead to confusion, e.g., if a particular vesting schedule is specified in a legal agreement as being of three years duration, but listed as being for four years in your cap table. Errors of that nature may concern potential investors and it is not outlandish to imagine them wondering along the lines of, “If they made a mistake on that, what else might be incorrect”?

As stated in our previous blog on mistakes to avoid, most cap table errors can be traced back to issues related to using spreadsheets and poor decision-making. Automated software can help address the former, while the latter is a matter of understanding how best to proceed.

Global Shares, a JP Morgan company, stands ready to assist on both counts. Our industry-leading automated cap table management software can greatly reduce your admin burden and enhance your peace of mind as it relates to the possibility of human error, while our dedicated personnel can also offer you the benefit of their years of experience working with clients on their cap tables.