Every day, we help businesses unlock the power of equity to incentivise employees, reward key players and ultimately, grow.
So, as you can imagine, we've seen plenty of companies make mistakes with their cap table and with their equity management in general. It’s easily done, but also easy to avoid.
In this article, we’re going to take a look at some of the most common cap table mistakes to prevent you from falling into the same traps. But first, let’s start with what a cap table is and why it’s important.
Cap tables explained
What is a cap table?
A capitalisation table (or ‘cap table’) is a breakdown of a company’s ownership. It's a record of all shareholders, the percentage of their stake and related information (e.g. dilution, value and vesting schedules). Typically, you can expect to see founders, directors, investors and early employees on a cap table.
Why is it important to get it right?
Equity is precious. Whether you’re just starting out or scaling up, you need to know who has a stake in your business, who has what rights and the impact that has on all shareholders.
Your company’s cap table can affect future investment, who gets what in the event of an exit and even dictate who has the final say when it comes to making crucial decisions.
With this in mind, we’ve highlighted the most common cap table mistakes that we see to help you keep your cap table in tip-top shape.
Common cap table mistakes
1. Picking the wrong people
As we said, equity is precious. When deciding who gets to be on your cap table, choose wisely.
Build relationships with your investors. Are they aligned with your values and vision for the company? Consider what else they bring to the table in addition to financial investment.
You want to set a precedent with your cap table. Think:
- Is your cap table diverse?
- Is equity distributed fairly and proportionally?
- Are early employees a part of it?
- Will future hires get a slice of the pie too?
Investors want to look at a cap table and see all of this. And feel reassured that the founder maintains a healthy stake. Pejman Nozad, founder of Pear.vc sums it up nicely.
“We want to make sure that founders own enough and make sure that there is a healthy option pool to attract employees.”
2. Rounding errors
Spreadsheets are useful for all manner of things, yes, but not when it comes to managing your equity safely and effectively.
Spreadsheets have a habit of rounding figures. Though this might not be harmful to a business in the early stages, it may have consequences later down the line. Rounding errors, albeit small and seemingly insignificant, start to add up as a company grows.
For instance, a rounding error could lead to an incorrect allocation of shares, conflicting with what shareholders were promised. And, though usually rectifiable, that could make things awkward.
Speaking from experience, more than half of businesses going through funding rounds have incorrect cap tables. And rounding errors are commonly the culprit.
3. Human error
Equity is complex. Capturing all the information you need and making sense of it in a spreadsheet is tricky. As the company grows, inevitably will the list of shareholders and, in turn, your spreadsheet.
A lawyer, accountant, or even local authority may need to take a look at one point. If you have a spreadsheet set up already, ask yourself, would they be able to make sense of it?
What’s more, if you’re sharing your spreadsheet with lawyers and accountants, you may end up with several variations instead of a single, non-disputable source of truth.
All too often, founders update their cap table on an ad-hoc basis (or even file it away and forget about it). This manual (and tedious) process leaves room for human error.
4. Missing information
If your spreadsheet is messy, overcomplicated or lacking key information, this could cause problems, particularly with Companies House. You want to avoid discrepancies between Companies House and your company’s internal records.
If crucial information is missing, such as (but not limited to) company valuations, share allocations and nominal values, it could have costly implications later down the line. And potentially render an employee share scheme non-compliant.
We offer a free cap table template intended for non-complex companies. But there's a better way. Bid farewell to Excel and say goodbye to Google Sheets.
Online cap table
A digital equity management platform is your best hope for recording a true reflection of your company’s reality, internally and with Companies House. It’s also a more effective way to keep tabs on your cap table and manage a company share scheme.
Vestd is the only platform fully integrated with Companies House. So you can notify Companies House, file valuations with HMRC and keep on top of important deadlines.
All documents and share certificates are digitally signed and securely stored. That means no misplaced paperwork and no need for spreadsheets. There are draft templates to draw on and prompts to complete actions or provide more information. So, nothing gets missed.
The best part is, Vestd displays a real-time cap table. An accurate view of all shares issued and outstanding capital that updates itself. A digital cap table makes it so much easier to visualise company ownership rather than rely on your mind's eye.
Say bye-bye to spreadsheets. Book a free consultation with one of our equity specialists and see how seamless digital equity management can be.