What is equity management?
Keeping an accurate record of shareholders is so important. Nothing will stop a funding round or exit quicker than a broken cap table. About half of the existing share schemes we digitise are broken in some way. And relying on a spreadsheet for equity management is a terrible idea.
There is a better way: do everything online with a purpose-built platform. But before you do let's explore equity management in detail so you know what to look out for.
Table of contents
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What is equity management?
Equity management is the process of creating and managing company owners - typically founders, employees and investors. But a lot of things fall under this term, including regulatory, compliance and governance obligations.
Make no mistake, equity management is admin, but essential, necessary admin.
When done right, founders/business owners have total visibility and control of who has shares in their company. That is a piece of the pie - ownership.
If equity management falls by the wayside, founders can find themselves in trouble with Companies House and shareholders (investors and employees alike).
So we’ve identified the pillars of equity management - what you need to keep in mind even while you’re busy running your business, to help keep you out of trouble.
And those cornerstones are:
1) Cap table management
2) Cosec management
3) Shareholder management
4) Share scheme management
The cornerstones of equity management
Managing your cap table
A capitalisation table – or cap table – is a document that breaks down a company’s ownership.
Every limited company with more than one shareholder should have a cap table, whether it’s planning on giving its employees equity or not. But it becomes especially important when you start a share scheme.
A cap table should show what a company is worth and how much each shareholder owns of it at a glance. It, therefore, needs to record information like:
- The name of each company shareholder
- How many shares they own in the company (and what kind of shares)
- The percentage of the company each shareholder owns
You could create your cap table in a simple spreadsheet using our free cap table template.
But you probably shouldn’t since it needs to be updated every time ownership in your company changes – which is every time you award equity to a new employee, raise a round of investment, or there are any significant changes to shareholders' details.
This isn’t so complicated early doors. But things can get very complicated, very fast when you start to scale.
Cosec is short for company secretarial. Company admin isn’t the most exciting thing in the world, but somebody’s got to do it.
Not every startup has a dedicated company secretary, so these tasks often fall to a company’s founder(s) or director(s).
In terms of equity management, there are key activities that fall within that category that must legally be taken care of.
For example, under the Company’s Act, you have a legal obligation to update Companies House with any material changes to your equity. Those changes include but are not limited to:
- Any new shares issued (within the last 20 days)
- Any changes to your legal share register
- Any changes to directors’ details
- Any changes to People with Significant Control (PSCs)
All UK limited companies are also required to file a confirmation statement to Companies House every year to verify the company’s address and all of the items above.
What’s more, to issue new shares in the first place, you’ll need written consent (a board/shareholder resolution) from shareholders and directors confirming that they’re happy with any dilution that will occur. Another item on a CoSec’s to-do list!
As you can see, equity management entails a whole lot more than just issuing shares.
Ongoing management is essential, and the most effective way to do this is via an equity management platform with cosec functionality and Companies House integration.
Probably the most challenging aspect of equity management is shareholder management.
Everyone who owns shares in your business with voting rights attached to them gets to have a say in whether certain things go ahead.
This includes things like changing your company’s name, adopting new Articles, authorising a share scheme and potentially, key commercial decisions too.
Most changes you’ll want to make are “ordinary resolutions”, which just need over 50% of shareholder votes to pass. Someone who owns more than half a company’s shares can pass those resolutions alone.
But some changes require a 75% or 95% majority to get pushed through, which is something well worth keeping in mind when it comes to distributing your shares.
Let’s take a look at three types of shareholders that you’ll most likely have to manage at some point (if you don’t already).
Founders’ shares are shares held (or originally held) by the founders of a company. These shares are usually ordinary shares and may vest over time.
Ordinary shares – as the name suggests – are the most common kind of equity. They give the holder of each share the same rights to dividends, capital, and voting in the company, unless otherwise varied by their share class rights.
If you’ve launched a business with a co-founder, then it’s worth designing and signing a founder prenup - to ensure that equity is released in the fairest way possible to prevent any future conflict.
For instance, it’s quite common for two co-founders at the start of their journey to agree on a 50/50 equity split and then regret it later when one founder doesn’t pull their weight.
Selling shares in your company to investors is one way to raise the money you need to grow your company. As well as or instead of issuing ordinary shares you can also issue:
Shareholders who own preferred shares – known as 'prefs' – have rights to specific dividends and a specific amount of capital at a winding up of the company ahead of people who just own ordinary shares.
When you’re looking for investment to grow your company, your ordinary shareholders might well vote in favour of offering preferred shares, despite that meaning new investors will get a bigger slice of the pie than they will.
This is because if your company gets the money it needs, there’s a better chance your ordinary shareholders will see a return on the equity they have in your company rather than it losing its value.
Studies show that employees with skin in the game work harder and stick around for longer, which for startups can make all the difference.
In the early days, it’s one way that startups can reward early hires for their vital contributions, without coughing up a load of cash they don’t have.
But even after that, startups can use equity to attract new talent to the team. And that’s where an employee share scheme comes in.
As is the case with founders and investors, adding employees to your cap table will mean that they too (at one point or another) will become shareholders to manage.
That’s why an effective equity management platform should also serve as a share scheme management platform.
Managing share schemes
The final pillar of equity management - share scheme management. Not every company, nor everyone, will want to set up a share scheme, but there’s a strong case for doing so.
An employee share scheme can make your startup a very attractive proposition to top performers – and help keep them on your team for years to come.
Plus, studies have shown employees who are also shareholders work harder, since they feel directly responsible for increasing the value of their company.
However, the most tax-efficient share schemes require a certain amount of management and admin. Doing this manually can result in errors, or annual paperwork not being filed on time.
Miss a HMRC deadline or fail to put in place the required authorisation and you may find that your scheme is non-compliant. Shareholders could lose their tax benefits, or worse, their shares.
Traditionally, share scheme management is costly and time-consuming, as it often involves a lawyer's or accountant’s time and expertise to get it right.
Thankfully, equity management platforms have transformed this process, making it much, much easier (and cheaper) to set up and manage a share scheme.
Getting your company valued
Before offering anyone equity it's a good idea to work out how much your business is worth. Three reasons why a business valuation is beneficial:
1) For investment purposes
2) For short and long-term financial planning
3) For rewarding teams with equity
There are various ways to share equity with the people that make a difference, including those not on the payroll whom you feel make a valuable contribution, like an advisor or contractor.
For tax-advantaged share schemes like the Enterprise Management Incentive (EMI), an HMRC valuation is a pre-requisite, but that's not to say that a valuation isn't important when issuing something like Growth Shares, for example.
Before issuing EMI options to UK-based employees, you need to have your company’s shares valued by HMRC so everyone – from the taxman to your employees – is clear on how much they’re worth.
You can pay an accountant to prepare a valuation for you, but you can expect that to put you back around £1,000-£2,000 per valuation at the very least.
Alternatively, our specialists can provide an initial valuation for HMRC on your behalf when you sign up for Vestd as part of your subscription.
If you want to grant stock options to US taxpayers, your company will also need a 409A valuation.
If you grant stocks without this in place, your company and any US taxpayers whom you’ve granted stocks could get hit with a tax penalty.
So, while you can technically roll out a share scheme without a 409A valuation in place, we’d strongly recommend you hire an accountant to apply for one if you’re going to be including US taxpayers in your share scheme.
A lot of things fall under equity management, but with Vestd, you can manage it all in one place.
Equity management made easy
Hopefully, this guide has helped you unravel the minefield that is equity management. And we think you’ll agree that a dedicated equity management platform makes a lot of sense.
Vestd can help you take care of it all
Set up your share scheme on our equity management platform and you won’t have to worry about cap table headaches.
The first thing we do when you join Vestd is check that your cap table is accurate for you.
Then we transfer all that data into a digital cap table that automatically updates whenever you file documents with Companies House through our two-way integration.
In fact, Vestd is the only digital equity management platform with two-way Companies House integration (and we’re FCA-authorised and regulated, too).
That means you never need to worry about there being any discrepancies between your internal records and what's been filed with Companies House.
Plus Vestd automatically sends all the relevant documents and updates to Companies House on your behalf.
Pop-ups on the platform will also warn you whenever you need to double-check whether something you’re doing is compliant.
In short, Vestd helps you make informed equity management decisions every step of the way (without having to pay an arm and a leg in accountancy and legal fees).
Take a free tour of our platform today to see for yourself how Vestd can take all the stress out of managing your employee share scheme.
Compare Vestd with other equity management platforms
Our buyer’s guide will help you quickly compare what the UK’s top equity management platforms do and don’t do so you can find the right fit for your needs.
What Our Customers Say
Head of People at Lazy Susan
Since the implementation of the scheme, we have had 100% retention of staff.
Director at Kaizen Furniture
There is nothing better to retain your staff than to recognise their talents.
CEO of ATEC-Security
Our EMI scheme was instrumental in securing the services of two new leadership team members who have since made a critical difference to our business performance.
Founder of Newsquawk
Every employee is a part of the EMI and we are recruiting more people based on EMI.