*This is part one in our article series “Mastering the Cap Table”.
The first step for any starting company, right after the basic idea, is dividing the company into shares and deciding how it will be distributed to each owner. From that moment forward, this aspect of equity will keep on growing, exponentially. For this reason, the capitalization table was invented and is considered the foundation for the company's financial database. From the occasional check-ups to due diligence or a financial valuation, the cap table will remain the knowledge base, source of information, and source when an equity query needs solving.
This is why deciding who should run the cap table is sometimes crucial and needs deep consideration. The majority of times, equity management is done either externally via the company's lawyer or outsourced CFO as an added service, or internally with one of the founders’ team or via a CFO. Each of these cap managers has its own unique pros and cons, in this article, we will discuss them all, so by the end, you will have all the information to pick the best fit for your company.
Digital vs The Sheet Way
Before we break down each cap manager, there's one important thing that should be addressed. Long long ago, when dinosaurs walked the earth and a company's equity data would be written on paper and kept in file cabinets, came the computer. With it, a new way to save data was introduced and most professionals started creating a digital spreadsheet cap table.
Today's spreadsheet belongs to the ancient history section, and most professionals in 2022 use an automated cap table, where the two most significant differences are: the decrease in human error & dependency, and the options section that used to need constant maintenance, and now goes fully automatic.
To put it in practical words, a requirement for information from the cap table relayed on the availability of a person: sick day, working hours, phone reception, etc., as well as his notice for details, as many small updates would commonly fall between the seats only to be discovered at the moment of truth. This is why although we will consider every aspect of each cap table manager, it is crucial to understand if they use an automated cap table because no matter who it is, they can’t be professionals if they use a spreadsheet, as it leaves an opening for many mistakes that can easily be avoided.
In many cases, a law office will offer cap table management as part of their service. A designated person in the firm will be in charge of the process and will add their working time for you to the charged hours the firm agreed upon.
You will probably pay for legal representation and advice either way, so this service won't cost much and you will be required to a minimum to no interaction with this financial subject on a day-to-day basis. For people that aren't nervous to get everything the second they ask for it, this is a highly cost-effective partnership.
Consider that in most cases the firm running your cap table has its own way to note everything, so there isn’t coherency when a dedicated professional tries to understand it. As in most law firms, the cap table is run in its spreadsheet version, once the person trusted to manage it becomes unreachable, the cap table they’ll leave behind will be impossible to understand. So you might be stranded on an island of equity chaos, surrounded by sharks asking for rapid information.
Furthermore, even if the cap table is automated, if you will not have access to it, it’ll stay unavailable as long as the firm is closed or preoccupied (as you're not their only client). In this case, low-cost might be priced as time, for the “here and now people” the need to wait for the information to the morning is a nightmare.
Similar to lawyers, this is a service provider, offering everything a CFO does in a company without a large paycheck or a seat at the shareholders' table. Here the cap table management will be integrated as part of the responsibilities of the person in charge of your company at the service giver office.
A professional from a company specialized in the CFO responsibilities at your disposal. No need to allocate shares, open a benefits plan, or look for the perfect candidate for the job. Founders looking to get a dedicated manager with strong abilities but don’t wish to add a seat around the table might find this a good solution.
As described earlier, the problem with every service giver out of the company’s employee manifest is the availability. Although a professional might run your cap table, there will be times the information will be unobtainable as they might go on vacation, become sick, or simply unavailable at the moment you need them to be.
The matter of cost has a strong play when it comes to an outsourced CFO, as it is not a must like a law firm. Taking this kind of service will be costly to beginning companies or founders that prefer to get a full availability in exchange for their money, so a cost-effective game here is hard to establish with this kind of outsourcing.
The “I'll do it myself” approach, although most entrepreneurs aren't equity masters, with an automated cap table it isn’t very hard to play it solo. Some people prefer to keep the financial management and specifically the equity management of a company close to heart as it is a delicate subject.
You know everything. As long as you keep everything updated (with an automated cap table it isn’t hard) you should have an immediate and complete picture at all times. As an extra feat, some automated cap tables have the ability to create funding and waterfall scenarios. So for those lying in bed, imagining things that might happen with the company, and thinking how it should look and affect everything. All they need to do is log in, run the scenario, and put their mind at ease.
Founders have their hands full constantly, adding another thing, small as it might seem can be a lot. Forgetting to address the minimum requirements might create chaos in equity management and will create significant problems ahead. For people that prefer to keep improving their business with their expertise, and let professionals take over where they lack, this might not be the best fit.
Chief Financial Officers - CFOs
The ace of all trades when it comes to in-house financial management, a professional taking the control of the cap table management and making sure it stays updated and reliable at all times.
When you employ a professional they're at your disposal, so as long as you work on an automated cap table, everything they update, you can access at any time. You enjoy all the benefits the system can give like scenario runs, growth & upcoming reports, and real-time equity presentation, and all that without giving it a second of your time.
You might not give your time but you probably will be asked to give some of your company. A CFO is considered to be at its minimum at a VP level, so most people will ask for company shares in some kind of form. For founders looking to keep the dilution as thin as possible, this is a thing to consider.
The spreadsheet vs automated comes to play once more, because a CFOs time is worth a lot of money, spending it on updating the spreadsheet is a true waste. That being said, when utilizing automation at its finest, it shouldn't take a long time and will stay productive and useful.
Many people tend to think of the move from a cap table manager to another as a linear line relates to the company’s growth: you start by doing it alone, moving it as quickly as possible to a law firm. As you get larger and the equity gets tricky you move to an outsource CFO and eventually recruit one of your own.
After reading this article we hope you understand this decision shouldn't be linear and must be based on the style and tone you run the company. Changing the person in charge of your equity so many times is an opening to undeniable chaos. We recommend you take one path and consider changing it no more than once more.
On a final note, as you probably noticed the automated cap table is considered a game-changer in this field, so no matter the path you choose, make sure they let the spreadsheet go extinct.
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