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Cap Table Management for Small and midsize Businesses
A cap table manages your company's cap assets. In simple terms, it is the table where all the shares of stock are kept. A cap table helps you and other investors know your firm's capital structure, and it enables you to make informed decisions. Managing this cap table correctly is an important task to establish early on in a new business, yet surprisingly, many startups neglect it. Why do they do this? This article offers some clues.

Many startups mistakenly believe that they can effectively manage their own cap table management, by simply defining their ownership percentage and defining the terms of their financing round(s). However, the reality is that the actual funding round specifics must be agreed upon between the founders and venture capitalists, before the money is released. Furthermore, during the round(s), many potential investors walk away without investing at all, as the terms of the capital structure do not favor one investor over the other. All of these factors lead to missed opportunities for future profits, shareholder dilution, and company-loss issues.

Another common mistake made by startup founders and venture capitalists is assuming that they can effectively manage their cap table management and make the best use of equity and capital. Unfortunately, there is no singular or single method of capitalization. A successful entrepreneur must make thoughtful decisions about how he funds his ventures, depending on how he views the value of his business as well as what type of risk he is willing to take. The key is to recognize when your business is achieving its ultimate potential and when you can safely extract equity for your company.

Some startups try to do their own cap table management using third party vendor cap table software or by hiring professionals. While these options can be effective, they are expensive and can be risky. Many startup law firms choose instead to outsource their cap table management tasks to startups with less than stellar records. By outsourcing, you can avoid the risk and worry that goes along with hiring inexperienced professionals.

One of the most common mistakes startups make in their cap table management is failing to properly align capital purchases with shareholder interests. In our experience, investors value entrepreneurs that they see demonstrate an interest in building a strong business that will attract and retain long term shareholders. For this reason, companies that provide information about their business's cap structure to its shareholders are much more attractive to them. If you're a new startup seeking capital, we encourage you to work with an experienced company that can create a well aligned capital structure that rewards shareholders and avoids the potential problems associated with incorrect capital structures.

Often startups make the mistake of buying shares from too many different investors. Equity owners often have a very limited experience with the company, which may result in them being under-informed about the business's operational performance or valuations. As a result, they are likely to pass on bad news about the business to other shareholders. This can lead to inefficient trading, which can reduce overall shareholder wealth. We recommend outsourcing your cap table management tasks to a company that has significant experience in creating and maintaining a comprehensive cap structure that effectively aligns capital purchases with shareholder interests.

The cap table created by a competent provider should provide a clear picture of a company's capitalization and liquidity. It should also allow you to quickly and easily determine the value of your shares based upon the current market price. Our reliable suppliers utilize state of the art proprietary algorithms to ensure that the valuation and liquidity reports provided to clients are accurate and complete.

Cap Table Management is the backbone of effective capitalization management. If you don't have the expertise or time needed to maintain your own cap table, it's best to hire a provider that offers this service as well as other core accounting functions. To ensure that the entire company is being managed properly, an entire database should be maintained with information regarding all of the companies assets, liabilities, ownership shares and preferred stock holdings. By integrating your spreadsheet with the Cap Stock Search Tool from Equity Effect, you can quickly and easily see which shares are most valuable and thus most worthy of investment. Cap Stock Search Tool automatically updates your spreadsheet with new information as it is introduced by the various cap companies.