One of my good friends, a lawyer, has a saying “If you think getting good advice is expensive, you have never paid the price for bad advice“. That especially applies to keeping a clean and updated cap table.
At Capdesk we see a lot of cap tables, shareholder registers and employee share plans. Part of our onboarding is to migrate data from the old company records which comes to us in many different varieties to Capdesks’ upload standard. In the process of migrating data, we are correcting and cleaning up the cap table data. Here are 7 common mistakes:
1. Wrong share allocations
The mistake we see most often is wrong share allocation to shareholders. Quite interesting since the idea of cap table calculations and shareholder registers is to keep track of the number of shares held by each shareholder. Many shareholder registers are kept in Word format with paralegals as admin. Word is good for many things, but not summing up totals and type errors of allocated shares often go unnoticed even by investors until a more detailed reading. Another recurring reason for wrong share allocations is excel rounding errors. This mistake happens when a company calculates investment in totals and does not find a share price that can split the amount into whole numbers of shares. A very simple mistake that can easily be fixed, but can easily cost hundreds of pounds when a lawyer has to correct the errors.
2. Missing shareholders
Uber lost track of shareholders and so are many other companies. Especially investors with convertible notes are often forgotten when it comes to converting their investment to equity. The reason is simply founders forgetting about the note and investor not following his investment in the company.
In contrast to missing shareholders, we have also seen potential investors reported as shareholders despite never investing in the company. This is happening during crowd equity rounds where hundreds of shareholders have signalled an interest to invest, but never did and accidentally ended up in the wrong excel column.
3. Share subdivisions
Share subdivisions (or share splits) are a common phenomenon in startups and something many get wrong. A subdivision means that one share is divided into two or more shares. It is usually done straightforward by dividing one existing share into 10, 100 or 1000 new shares. When a share is divided the price and nominal value is divided by the same denominator e.g. 100 shares with a nominal value of £1 split by 10 into 1,000 shares would have a nominal value of £0.1.
What we see founders (and their lawyers) getting wrong is simple mathematical errors such as issuing 1000 shares on top of the existing 100, resulting in a total of 1,100 shares instead of the intended 1,000. It seems so obvious, but these mistakes can go unnoticed and only later create trouble for the company.
4. Finding the right document
More often than not founders are sharing outdated documents with us. Missing details of the latest funding round, a share transfer or employee shares that has been exercised. Most cap tables are created in excel and are not easy to share with multiple stakeholders. During funding rounds things get hectic and several file versions are flying around to investor and lawyers. As a result founders are not always saving the latest file in the correct folder. When closing the round, reporting to authorities (or onboarding to Capdesk) it is not easy to establish who invested, for how much and how many shares they received.
5. Audit trail on dates and share prices
Getting the right date entries in a cap table is very important and can be a big difference for shareholders when it comes to tax. We typically see founders going wrong when closing bridge rounds with existing shareholders while fundraising. In an attempt to save legal bills or whatever reason the registration and dating of the bridge round are deferred to the dates of the larger funding round. The result is different share prices registered on the same day. Though it’s legally possible to have several share prices of the same share on the same day it creates unnecessary confusion which potentially can discourage new investors.
6. Registration of share transfers
Keeping track of cap table movements especially share transfers can be a pain for startups and transfers are usually restricted by the shareholder’s agreement. Despite, with equity crowdfunding as a main driver, we see a growing trend where more and more early-stage companies where shares are traded frequently. We have several times had to look through the entire trading history to find erroneous trading entries and it can be extremely difficult and time-consuming to correct mistakes. Use a system to track transfers and get it right from the beginning.
7. Contact information
Maintaining updated contact information on shareholders is a challenge for many companies and is amplified by large numbers of shareholders. Some of the companies we serve have thousands of shareholders making it extremely difficult to structure pre-emption rounds and liquidity events if contact information is not easily available. Companies have to think about storing contact information on shareholders and easy maintenance.
The common denominator for all mentioned mistakes is that startup cap table management sooner or later becomes a messy business. It is very easy in the beginning when the cap table consists of founders with common shares and a couple of angels with convertible notes. But, as the company grows, hire the first employees, introduce share plans, get more investors and new share classes it gets increasingly difficult to maintain the overview of ownership. All these mistakes are easily avoided with the right tools. Avoid paying the price for bad advice and get Capdesk to help you keep track of ownership.