Investing in Small Cap Stocks - How to Use a Cap Table Management System to Help You Make Smart Buying Decisions
A cap table is an incredibly important document throughout any startup , from Seed to exit capital. Beyond being a standard business document, a cap table essentially details exactly how much of your business can be attributed to you, and just how much of your business is owned by others. That means any oversights or mistakes in your cap table are going to be errors in your company's official ownership documentation. Beyond being legally binding, that also means it is incredibly useful as a guide to your business's ownership responsibilities and decisions.
So why is cap table management so critical? Well, just as seed money is a crucial component of your funding round (and arguably more so since your seed investment is your business's only potentially tangible asset), your cap table must work with your financing round as well. By effectively tying your overall capital structure into your angel investor relations, you are ensuring that you are appropriately leveraging your resources. Additionally, by clearly articulating how much of your company is based upon your own equity and how much is based upon the investment of others, you are better able to comply with your local regulations. In essence, you are able to "play within the rules." This goes far beyond ensuring you are following regulations, however; it goes further, preventing you from potentially losing your business to compliencies or errors in documentation.
One area that often comes up in conversations about cap table management is vesting periods. The vesting period refers to the number of days after you have received your Series 7 equity offer that you can sell your stock options. If you are not able to trade all of your stock options within the specified three day period, then you will lose your investment. In most cases, however, even if you are unable to trade all of your options within the specified three day period, the day-to-day trading opportunities that are inherent in small cap stocks make it possible for you to complete most of your trades within the designated vesting period.
Some small business equity investors, including attorneys, focus primarily on what is known as the Regulation D and E Waiver exemption. Regulation D and E waivers are designed to protect small cap equity investors from having to pay taxes on their investment if the Small Business Administration or the IRS disallows them from engaging in certain transactions. For instance, the Regulation D exemption prevents an investor from being required to purchase more than 50 percent of the total equity of a business in order to acquire a preferred stock. Conversely, if Regulation D is waived, an investor cannot be required to pay taxes on their investment until they sell their shares of stock.
If you want to properly manage your cap table management, you must be cognizant of both regulation D and E Waivers. In addition to keeping careful track of when you purchased your stock options and exercised them, you also need to keep careful track of your shares of equity ownership. Equity shares are also referred to as equity memberships. This means that in a typical equity ownership plan, a percentage of the company's ownership (a "share") is reserved for "equity members". This percentage is always a multiple of 10%.
If you are looking at small cap table management, you will find that there are several different types of cap tables you can choose from. One of the early days of cap table management platforms like TradeKing are E*TRADE and TradeKing AutoTrader. These two trading platforms use very different approaches to building their equity membership numbers, but both are extremely popular with their investors.
E*TRADE has historically offered much higher returns on its investments than other cap tables have. As a result, many large institutional investors use E*TRADE to execute their own buy/sell stock options and employee stock options. If you are planning to do some buy/sell stock option exercise, using an E*TRADE platform may be a good idea. However, if you are just getting started or have only recently started investing, you should probably use one of the smaller cap tables on the market, such as TradeKing AutoTrader. Both these smaller cap stocks offer excellent dividend yields, but don't have nearly the reputation of the larger, more mainstream investment firms like E*TRADE.
When you're looking into buying a cap table software program for determining your owners equity, you should keep two things in mind. First, the price and the number of shareholders will have a significant impact on how well your program performs. Second, the value of the ownership stake should correlate closely with the return you're looking for. So, for instance, if you want to determine your value by calculating the annual dividend yield and then dividing that by the number of shareholder, you'll need to multiply the dividend yield by the number of shareholders to get your owner equity. You should make sure that the valuation is accurate and make any changes accordingly before you publish your results.