Startups need investment in order to raise capital and grow their business. This funding comes from investors who are known as shareholders and it is no secret that any potential investor will want returns.
This means that startups need to realize the importance of a well-structured share management proposition from the get-go. Without one there is sure to be unnecessary conflict. This makes putting in place and effectively managing your startup cap table a key requirement.
With that in mind, here’s what to know as your startup grows:
Defining Captable Management
Cap table management in a startup can be compared in a similar way to a company organization chart. These charts clearly state the responsibilities and power of all involved. A cap table achieves the same thing by showing who holds the money power in a startup.
Cap tables are designed for everyone who owns stakes in your startup and the nature of the stake they own. This provides a granular breakdown through such attributes as:
- Quantifying capital investments.
- Defining share allocation and ownership percentages.
- Accounting for multiple types of securities.
This makes it essential that cap table management in a startup is implemented in a clear and effective manner.
Here’s 4 important steps that will help a startups funding management process starting with:
Cap table management while bootstrapping
Taking a bootstrapping approach can be a real benefit to startups. It allows them to create something out of virtually nothing. Correct implementation can also be effective in terms of putting in place good purchasing habits from the beginning.
This makes it necessary for bootstrapped companies to optimize equity management. Using a cap table, particularly for startups who are focused on attracting the right talent with equity packages should be seen as an effective way to achieve this.
Early implementation of a well-kept cap table gives startups an opportunity to prepare themselves for success before they take on early investors. This means sufficient time needs to be spent on developing a cap table structure that supports growth.
Founders need to plug-in relevant formulas that will eventually model valuations as well as equity dilution during those crucial seed-stage negotiations. This should be seen as the absolute minimum for founders to have in place. A startup’s bootstrapping process must also be carried out with due diligence and in consideration of the above.
Beyond this initial process, founders should take advantage of dummy data that will assist them to double-check their proposed formulas. The knock-on from here comes through the development of muscle memory needed to allow the plug-in of any “on the fly” hypotheticals. Such ‘what-if’ scenarios are likely to be raised during early-stage negotiations.
From the beginning, founders should also have an eye on future needs. This can be achieved by preparing your startup cap table for series funding. It should allow columns to be broken out into groups that reflect new shareholders and also detail the investment capital raised in each round.
Make no mistake, stepping out that extra mile from the outset really will reap rewards. This is because it shows seed and angel investors that your startup has prepared itself for a successful business journey.
Managing Cap Tables in Seed and Angel Funding
When entering negotiations at this early funding stage a clear, well-formatted cap table should include equations to show pre- and post-money valuation. It also needs to highlight equity dilution.
Many startups see this as being sufficient to enter such negotiations. However, thinking ahead and putting a ‘series funding roadmap’ in place will attract far more early investor attention.
Seed capital is also referred to as seed financing or seed money. It is so-called because it is the money that startups want to raise at their infancy stage. Seed financing generally covers a startup’s essentials.
Outlay expense examples include the formation of a business plan, initial operating expenses such as rent, equipment costs, payroll, and insurance as well as any possible R & D (Research & Development) costs.
Startups should primarily see seed money as their way of attracting additional finance. This means grabbing the interest of bigger players including banks, venture capitalists, and those known as angel investors. Convincing larger investors to invest in your business requires a startup funding management and capitalization table management strategy that is well-prepared and clearly laid out.
This is necessary because you can be assured that these investors (particularly angel investors) will want an understanding of what their funding is being used for and how any of their shares could be diluted. This means that startups need to show such dilution based on their capital goals for each funding round.
It also stands to reason that before committing to investing the vast majority of investors will be looking to establish an estimate of what they stand to gain. This can be when they anticipate their exit or in various (hypothetical) liquidity events. Anticipation of these factors enables founders to prepare different dilution scenarios in advance of such investor negotiations.
Managing Cap Tables for Startups in Series Funding
As series funding takes shape, a startup’s cap table management needs to shape with it. This can be achieved by breaking out separate sets of columns. These will account for all investments made at each round of funding.
During these funding sessions, a startup may decide to disclose the actual capital amounts they hope to raise on a round-by-round basis. Doing so gives potential investors increased clarity by demonstrating to what degree their equity might be diluted assuming the startup meets their proposed goals.
To achieve this effectively founders will need cap table management flexibility. This is because they will be required to rapidly input different examples into their cap table management system during these investor negotiation meetings.
Data required will include such things as shares, investment amounts, and ownership percentages. Having the ability to input and display the results of different scenarios in an efficient and confident way will have a positive impact on startups during these funding discussions.
This takes us back to the ‘what-if’ scenarios. Founders must have the ability to input data in order to show investors needed information such as the mentioned share dilution possibilities at the time of exit or, in various liquidation event scenarios.
Ongoing Cap Table Management in a Startup
Once a founder has reached the starting up point for their business it would be easy to think they can rest on their successful cap table management laurels. That is not (and never will be) the end of timely, accurate cap table management. If anything, as your fledgling business grows, effective ongoing cap table management procedures are even more essential.
It cannot be stressed enough how important ongoing cap table management in a startup is. Having the data and ability to cope with any number of scenarios means you will be far better prepared. Examples of where this is critical come during any liquidity event or in a crisis.
Consistently adding to the baseline of your cap table should be seen as a tool to keep management and company shareholders informed with up-to-date information. It should also clearly state details of expiry dates as well as exercisable windows.
While it is fairly easy to keep track of key dates in terms of investor securities, complexity is added to startup cap table management as the business expands. A clear example here comes from the many startups that offer stock options as incentives in order to tempt executive talent into the business. You may also be a startup that implements an ESPP (Employee Stock Purchase Plan).
Keeping track of shares as they are issued or when they expire should be a given. This ongoing cap table management means the person(s) nominated in a startup’s organization needs to be tasked with regularly updating records. The updating of data must take into account any additions, deletions, and adjustments relating to employee shares. It is very important that this essential cap table admin management does not slip.
Another highly effective and proactive initiative for startups that have baseline scenario modeling in their cap table is to put in place a monthly scheduling session. During this, existing scenarios can be bolstered and new models added.
There should be no doubt in any founder’s mind that a startup’s funding management program will benefit from an easily understandable and organized cap table. Achieve this and you will be heading in the right direction.
The takeaway from the early introduction of a well-structured, flexible cap table is that it is a vital cog in the best business practice wheel.
To ensure fluidity and the introduction of a highly effective cap table management system it will pay to lean on the experience of highly knowledgeable experts in this field. Here at WOWS Global, we are ready to assist.
Our highly effective capitalization table management system will ensure your startup venture not only gets off on the right footing but that you stay ahead of the game through ease of update and cap table clarity.
Any startup looking for a solution to manage their equity seamlessly will benefit from implementing the WOWS Global digital capable management tool. Not only will this increase transparency for stakeholders, but it will also mean you are due diligence ready.
Want to find out more about how our highly experienced team can partner with you to give your startup the edge?
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In addition to this, any founder who is ready to optimize their startup and fundraising strategies should contact WOWS Global now on:<a "mailto:email@example.com">firstname.lastname@example.org