CEO and Founder of Kruze Consulting
Table of contents
The two best cap table management software providers right now are Carta and Shareworks (formerly known as CapShare, now owned by Morgan Stanley). Shareworks used to have a free version, but now it starts at $3 per month. Carta is more expensive, starting at $2800.00 per year, but it is a good solution. There are also 3 decent “startup” cap table players we are tracking. Pulley seems to have the most traction amongst these three, and we are starting to see early-stage companies using them with success. Their free price point for early-stage companies is a plus. A second, Figure, used to be called Adnales until Figure acquired it. We haven’t actually used their cap table management software, so can’t speak to it’s quality, and we are a little worried that it’s now just a feature of a startup trying to do something tangental (they have a lot of different product lines on their site!). We’ve heard good things from outsourced CFOs about two12.co, but also haven’t used it yet - their pricing is quite low, so that’s appealing. Finally, Captable.io is now owned by the LTSE; it has a pretty good UX.
For many reasons, it’s very important for a young company to keep careful track of equity ownership and stock options. Most importantly, it’s very likely that the majority of your employees (and founders!) are working hard to try to make their ownership and options worth something - so you owe it to them to keep careful track of each and every share. Your cap table matters, so pick a good software vendor to help you get it right and keep it straight.
Here are several key items to look for as you try to choose the best cap table software.
The sales teams at the cap table vendors have some great features that they’ll tell you about - that you may never use. Don’t obsess over the differences between the vendors on these features:
Carta is clearly the leading cap table management solution in the VC backed startup scene. However, there are some legitimate Carta alternatives:
Carta has maintained a lockhold on the capitalization table software market for quite a while. While new players like Pulley are entering the market, they have yet to take market share from Carta. Instead, Shareworks has given up some of their position to the new players, while Carta continues to make gainse. We believe this is because capitalization software purchasing decisions are typically made by the law firms that assist startups in their earliest fundraises - and attorneys are notoriously slow to make technology changes.
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How startups initially set up their ownership split between founders is a question that we get a lot! Here are some important things to think about as you set up your capitalization table.
Tips for setting up your cap table
Founders should always take common stock, everyone on the management team should get common stock. You don’t want to have one of the founders having preferred and a liquidation preference over everyone. That’s just weird, it can lead to misaligned incentives down the road and VCs will probably not like it.
The second thing is you really need to have is a vesting period on everyone’s shares. What this does is that it protects the founders that end up staying with the company for many years from some of the other founders who might leave after a year or two. By having a vesting period, (typically it’s a four-year or a five-year vesting period) where your ownership vests, if it’s a five-year vesting period you vest 20% of your stock every year and usually there’s a one-year cliff, so you vest 20% after the first year and then you do the rest of it on a monthly basis.
But what that does is if someone decides they need to leave because they don’t believe in the vision anymore, they can leave and their remaining unvested equity can be used in the stock option pool to attract other senior-level, really strong talent to help the company be successful. What you don’t want is to have everyone vest everything on day one and then one of the two founders decides they’re going to go live in Hawaii and take off and not actually do any work for the startup and not advance the cause. Because then a big piece of your cap table is owned by someone who isn’t helping the business.
So vesting periods are really, really important. It’s very friendly to the founders that are gonna stay there, it’s also something that VCs want. When they invest in a company, they’re really investing in the founders; there may be some great technology, maybe it’s a great vision, but venture capitalists know that the founders and the executive team are the ones that are going to make it happen and bring the company to success. So they want to make sure the founders are emotionally and financially vested in the company.
Now there’s another thing that gets discussed, it’s kind of a tough topic, but sometimes you do not want equal ownership between the founders. Not everyone should have the same percent of the cap table. Now this is the case when one of the founders is going to make a more significant contribution than the others. A typical founding pair might be one kind of business or sales or strategy person and a technical founder. That’s kind of the combo we see quite a bit at Kruze Consulting, but maybe the technical person was recruited late to the idea and they weren’t the person that really took the germ of the idea and really built it out. Or maybe everyone knows that the CEO’s is going to do a lot of product stuff while also raising money and doing a lot more work or maybe a lot more important to the company’s future.
It’s much, much better to have that conversation early in the startup. You don’t want a lot of resentment building over the years where someone feels like they didn’t get their fair share or someone feels like maybe the cap table being equally split wasn’t the right amount because they’re doing so much more. This is a really tough conversation to have, we really recommend having it on day one or day two instead of day 365, where tensions could be much higher. Do it right away, before you and your co founders really start working on the project.
Feel free to lean on your angel investors for advice here or even your CFO firm like Kruze. We have helped hundreds of companies manage their cap tables (using software of course!) and see this a lot - our basic advice is to align the ownership amounts with the expected contribution amounts.
The vesting period and these ownership splits are really all about doing the right thing for the company and making sure everybody is aligned. These honest conversations between founders really sets the stage for you to have many more honest conversations down the road. There’s is going to be a lot of tough stuff that comes up over the years and having just this first one around the ownership split will really help you and be beneficial going forward.
We have one other pro tip for all the founders out there. This isn’t about the ownership split but instead is for your taxes - file your 83b filing with the IRS within 30 days of founding the company and buying your founder shares, it is so important. Make sure that it is certified mail, keep that receipt for the rest of your life. You do not want to screw up the 83b. This happens occasionally, it is really hard to reverse. The 83b basically gives you a really low cost basis and you can get capital gains on all your appreciation after that. It should save you a ton in taxes.
So have the tough conversation with the ownership split, have the tough conversation around the vesting period, and then after you have that conversation shake hands, hug, and then fill out that 83b form and walk over to the post office and mail it together.
Once you go beyond the founders, it’s time to get a cap table management software to help you keep careful track of everyone’s ownership and vesting. Again, Carta and Shareworks are the two biggest players in the space.
No discussion about cap table management would be complete without going over what a vesting period is. For a typical stock option plan, a vesting period is the amount of months/years that a startup employee must stay employed at that startup in order to be allowed to exercise their stock options.
A vesting period or schedule prevents a startup employee from leaving the company early-on and taking a large piece of the company’s equity, leaving no room on the capitalization table or options pool to hire another employee.
In Silicon Valley, the typical vesting schedule is over four years, with a one year cliff. More notes on stock vesting:
The typical capitalization table is a spreadsheet with a list of the investors and equity-holders on the left. The columns across the top will list the type of security/equity (i.e. common stock, preferred by round or class, etc.). The corresponding cells will show which equity owner has what number of that particular share type. There is usually an ungranted option pool amount, and finally, a sum total of the shares outstanding given conversion. There should be calculation of the percentage owned by each entity, which sums up all of their share types, on the far right of the table.
The output of a typical, detailed capitalization table will be a spreadsheet tab with names of stockholders/investors in the left most column, one listed in each row. The next column(s) will contain the number of shares held of the specific share classes by each investor; common shares, Seed shares, Series A Shares, etc. Don’t forget option holders granted, vested and exercised shares (exercised are usually listed in the “common” column). The next columns will have total shares owned on an undiluted and diluted basis. Then there are ownership columns which show the percent of the company owned for diluted and undiluted ownership. Finally, at the bottom, the last row will summarize the totals for each column.
You’ll need to include the total shares outstanding, by class, plus information on your investors, founders and other stock holders.
The right cap table software, like the ones we mention in this article, will make it easy to add VC investors to your cap table after you raise a Series A (or later round). Hopefully you are working with an experienced law firm that has put you into a solid software system for managing your company’s investors, shares, options, etc. If not - the Series A is the time to do it!!!! Don’t delay; mistakes could cost millions of dollars at a successful exit.
Your cap table management software isn’t just for keeping your investors and option holders happy - it also helps your accountants. Here are the reasons that your CPA firm has been requesting access to your cap table:
If you don’t provide access to your cap table software to your accountant, a December 31 download will usually suffice. However, having direct access to the cap table management system is very nice for the accountants, so that they can easily look up information that tax authorities may require on forms, such as investor addresses, etc.
This is a pro-tip for companies that are raising venture capital (and especially raising seed financing) - don’t forget to reconcile your cap table! Your cap table software won’t do this for you, ask your accountant to do this (if they don’t do it automatically after you’ve raised). This is a service that we regularly provide for our clients after they’ve raised a funding round, and it matters because if you don’t it’s possible that an investor’s wire may have not come through, meaning you don’t actually raise as much capital as you sold! Basically, your accountant will review your cap table line by line and match them the stock purchase agreements and the bank account wires to make sure all the money you are supposed to have raised has arrived. We have a blog post on how to reconcile a cap table, check it out.
Startups 1) really, really need a cap table and 2) ought to be using software once they’ve raised real money from outside investors or issued stock options to employees. A capitalization table is one of the most important legal and accounting files that a startup has - manage it diligently!
Why a Capitalization Table is Important:
Defines Ownership and Equity: A capitalization table provides a clear visual representation of the ownership structure of a company. It shows the percentage of ownership for each person or investor involved in the company. This is especially useful in cases where there are multiple stakeholders, such as multiple founders or a large number of investors. Having a clear understanding of ownership can help prevent misunderstandings or disputes about who owns what portion of the company. Keeping track of it in a software system that your lawyers can easily access and update is a major way to reduce the changes of a dispute!
Aids in Decision-Making: A capitalization table also determines the voting power of each shareholder, which can be critical in making important decisions about the direction of the company. Most preferred stock - the kind of stock VCs own - has voting rights that are important to track. This includes the preferred stock voting as classes, with the ability to accept or reject mergers, fundraises, debt, even CEO pay. You need to know who owns what.
Plans for Equity Grants: A capitalization table is a useful tool for planning future equity grants to employees or new investors. It allows a company to see how much equity is available and how it should be distributed. This information is critical in making informed decisions about how to allocate equity, which can have a significant impact on the company’s future. And options pools are a secret way that VCs negotiate down valuations with founders (read about the option pool shuffle).
Useful for Fundraising: Startups often use a capitalization table to showcase their ownership structure to potential investors. The best cap table software providers offer fundraising scenario planning, which can help founders understand the dilution they will have from various financing strategies. However, these scenario analysis tools are usually only available on the more expensive pricing plans.
Simplifies Share Issuance: When a startup issues new stock to investors or to employees via stock options, a capitalization table makes it easier to determine the impact on the ownership stakes of existing shareholders. This information can be critical in ensuring that founders is aware of how the issuance of new shares will affect their ownership percentage.
In summary, a capitalization table is a critical resource for any company, as it provides a clear understanding of ownership, aids in decision-making, assists with planning for equity grants, is useful for fundraising, and simplifies the process of issuing new shares. It helps ensure that all stakeholders are on the same page when it comes to ownership and equity.
Carta is a tech firm that specializes in software that manages your startup’s capitalization table and valuation. Most startups that we work with at Kruze Consulting use Carta. But startups need to give their accountants access to their Carta accounts so the accountants can access the information for your tax filings. The steps are:
Your accounting firm will now have read-only access to your capitalization table. Clients often ask us “Why click on law firms?” The reason is that lawyers normally control the cap table for companies, so the software is set up that way.
An 83(b) election tells the IRS that a founder is buying a startup’s stock immediately, locking in the cost basis now rather than later, when it may be worth more money and generate more taxes. The 83(b) election has to be physically mailed to the IRS, and Carta now lets you print out the notification with a cover letter. Founders can specify how much stock they want to buy before printing the notification, and should consult their tax professionals before filing the notification. Carta will provide a tracking number to help you follow the status of your notification with the IRS, and you should make sure you send it via certified mail, so it won’t be lost.
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