Approaching a serious investment round or exit? Your cap table better be right. – Vestd blog

We spend a lot of time talking to founders, investors, lawyers and accountants who have been involved in numerous major investment rounds and exits.

We keep on hearing the same thing. One of the biggest (if not the biggest) reasons that there are serious issues (and therefore costs) for the company involved is that what they believe to be their current equity structure and future option liabilities proves not to be the case, when formal due diligence gets underway.

Our Complete Guide to Setting Up a Company Share Scheme goes into detail on how you can avoid some of these issues before starting out.

If it can be sorted, then the time and costs involved at this point are likely to be very high. Or, even worse, this has often been the cause of deals to fall apart.

Finally, if things haven’t been done right, to then retrospectively provide equivalent value to the employees of the firm, many years after you thought it was all sorted, can be extremely difficult, maybe even impossible.

3 things to get right

So, a few pointers from our experience to ensure you do not fall foul of a broken cap table.

1. When you issue shares, do it right. This may sound unbelievably obvious, but it often doesn’t happen.

a) Unless otherwise authorised in your Articles, you need to get formal Board and Shareholder approval ahead of issuing ordinary shares.

b) You need to ensure pre-emption waivers are received from any existing shareholders.

c) You need to inform Companies House within a month via the submission of an SH01 form which states what you have issued that is new, and what your up to date complete capital structure is.

d) You have a legal obligation to provide new shareholders with share certificates within two months of their issue.

2. If you have any outstanding equity liabilities or promises (usually options of some sort) make sure that they have been done properly.

a) Before awarding any options, make certain that you do not have any covenants in any existing Shareholder Agreement that might prohibit them (either in terms of their number or their exercise price and conditions).

b) Ensure their award (and subsequent exercise) has been approved by Board and Shareholder resolution, and all initial and ongoing notifications to HMRC are carried out.

c) Make sure that they have been properly signed and final versions have been kept both by the company and the recipient.

3. Keep all the authorisation documentation and final form agreements associated with your equity and future equity liabilities in one place, preferably online, to maximise ease of due diligence for anyone.

Getting all the above right can be a real headache, but it matters.

Learn how to make that headache disappear with our Guide to Setting Up a Company Share Scheme.