Is Your Cap Table Updated?

Discover what is preventing you from holding an updated cap table. Hint: It’s the stock options segment.

Reading Time: 6 minutes

One of the most important actions a company needs to take when starting a substantial financial change is ensuring its books are ideally updated. Working with an updated capitalization table (cap table) is crucial for any successful funding round, IPO, or Exit.

 

The cap table's most elusive data is the one regarding vested stock options. Unlike most of the information there, the stock options data changes on a regular basis and needs constant updates to stay relevant and correct. This article will shed light and help you understand how to make it as precise as possible.

 

Does it matter?

This pesky task of updating the options part of the cap table might be small but keep in mind there's a good reason it's there. For small to medium companies, there might not be many employees with allocated stock options but as the company grows this section will increase in volume. As you might have heard, size is not everything but a neglected cap table sends a problematic message to potential investors. 

 

As we are about to finish 2022 it is becoming clearer that the market is not at its best, investors tend to hold their money close to their chest and founders struggle to raise funds. Trying to avoid dealbreakers as much as possible is now crucial and founders go out of their way to wow and seal the deal. Showing a potential investor that you don’t know exactly how the company's capital is divided might send an amateurish vibe and put a spoke in your wheel.

 

The ins and outs

A well-constructed cap table consists of updated, relevant information about the entire shareholders base. The problem is that options holders aren't shareholders just yet, we do not neglect them from the cap table yet they appear altogether. The option holders define only people that hold vested stock options, which means only after the options are ready to be purchased do we add them to that section in the cap table.

 

To keep the options section in the cap table fully updated this is the information you should require on daily basis:

 

Newly vested options - add the amount and data about people that have stock options that are just now allocated.

 

Expired options - after a person parts ways with a company, he receives a grace period in which he can still exercise his vested options. The grace period is commonly 90 days, after that time has passed, his options return to the pool and should be deleted from the cap table.

 

Exercised options - when a person pays the set amount and exercises his options, he becomes a shareholder. Here there are two approaches, some, remove the exercised amount from the options pool and add the person to the cap table as an individual name. Others prefer to summarize those small shareholders into one line, they are removed from the calculation of the option but added to an identical line regarding exercised option. The bottom line here is no matter how you state it in the cap table, just don’t forget to remove the data from the options line.

 

Spreadsheet vs automated cap table

The two preferred ways to run a cap table today are via spreadsheet or with an automated platform. The question is, is there any difference between these two ways regarding the stock options section? The short answer is yes. And here’s why:

 

When people say spreadsheet they often refer to an Excel sheet so we will treat it as such. Creating a cap table vs Excel is highly effective because of the variety of computation capabilities, graphing tools, and pivot tables. The problem is the constant updates required to keep the data relevant. Any change should be reported manually to reduce the gaps that might grow when the cap table is not updated regularly. 

 

Furthermore, if there is no strict method for applying the data, there's also a decent chance of confusion between people updating and different versions. If you prefer to work on a spreadsheet, we recommend giving google sheets a chance as it consists of one shareable file.

 

Although effective, the spreadsheet is not the best solution, Running your cap table via an automated platform can keep the data fully updated without you needing to deal with it every day. An automated cap table will require uploading new data once and because the employees also have their dedicated platform, everything stays updated. This tiny time thief named options segment can run on its own and won't need constant care and attention. 

 

Conclusion

The line in the cap table referring to stock options is small but might create a butterfly effect with a high impact on a company. We recommended giving it attention and making sure it’s updated. The three most important events to give attention to are newly vested options, expired options, and exercised options. If you prefer using a spreadsheet we suggest trying google sheets yet we believe an automated cap table is a right step toward the future of cap table management and a precise stock options segment.

 

About altshare

altshare is a leading, fast-growing Equity Management & Compensation Plans Administration solutions provider. We love challenges. We are obsessed with our clients. We are on a mission to redefine the way founders do equity. All our products & services are supported through the altshare platform - the only equity management platform built for entrepreneurs.

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