How to Manage Cap Tables Effectively
A cap table helps you understand your business s capital structure, and it also helps you see who owns everything that belongs to whom in your company. Managing this cap table effectively is an important task from a new startup s even early stages, but surprisingly, many startups fail to implement this strategy into their business plan. Why do they do this? Many startup founders believe that cap tables are too complex and cumbersome to have effectively implemented in their business plan. However, by implementing cap table management correctly, you will notice a significant increase in both the efficiency and profit of your business.
Most startups start with one or two cap tables managed by private investors (friends, family members, angel investors). Unfortunately, these investors rarely share the full picture of what's going on inside your company, especially in regards to cash flow. They tend to focus only on the "money picture", and as a result, very few startups get to see how they are spending their money. As a result, most startups spend much of their funding rounds (typically over $100k) on administrative expenses, marketing, and general operations - all while barely breaking even.
A cap table management service provides capital structure analysis and negotiating guidance from seasoned professionals who have years of experience in setting up, consolidating, and liquidating private equity. By bringing in the outside perspective, startup owners are able to focus on building their company instead of worrying about how they're going to pay the rent in a few months when their business opens for business. While it is possible to manage the capital structure by yourself, it is highly recommended that you outsource the task to a professional service because it is so time consuming. In addition to this, you can easily miss key opportunities that come up during a funding round due to a lack of familiarity with the ownership percentage structures used by various lenders and investors.
There are some cons to outsourcing your cap table management. Perhaps the biggest con of outsourcing is the fact that you do not have the time to focus on the details of every transaction that takes place during a financing round. If you are pressed for time, you will simply miss an opportunity to increase your company's valuation and make more money. It can be difficult to schedule enough attention to your own valuations, let alone the constant back and forth communication that takes place between your attorney, CPA, accountant, and financial reporting team. Cap table Pros can be expensive, but they are worth the money if you cannot personally perform the complex financial reporting responsibilities associated with these tasks.
One of the key benefits of Cap Table Management is the ability to properly model capital raising transactions using historical data. This scenario modeling allows you to run through potential deal structures to identify the risks inherent in each scenario. You can then easily remove or incorporate specific market conditions to create different funding scenarios. In this way, you can model potential sales with the assumption that only preferred shares are available for purchase by investors.
The second benefit of outsourcing your Cap Table Management responsibilities is the ability to eliminate risk without significant upfront expenses. The best companies use experienced financial advisors and expert traders to execute their Cap Table Management on a regular basis. These advisors are aware of the share price trends as well as fundamental and technical analysis. In most cases, they also have access to multiple real-time investment information services, including real-time stock quotes. In order to effectively manage preferred and common share issues, financial advisors will often times use both the waterfall and shock analysis models.
Cap Table Mangers are also skilled at working with a limited portfolio of issue shares and making informed decisions regarding these highly leveraged securities. Many CAs serve as financial advisors to private companies and public companies, assisting in both the purchase and sale of preferred and common shares. They are usually highly specialized, with many specializing in specific areas such as options trading, foreign exchange, or secondary cap tables. They are typically involved in one or several fields and do not simply trade in one stock type.
Outsourcing Cap Table Management to a professional, managed service provider allows startups to free up valuable internal time that can be invested in other areas of business development. As more startups seek capital to fund their growth, issues that involve issuing shares of stock are likely to continue to be a challenge for entrepreneurs. Shifting resources away from issues that do not lend to startup expertise could prove to be a costly oversight. Hiring an experienced Cap Stable Management provider, however, proves to be a solid investment in the future of your business.