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6 Most Common Cap Table Mistakes to Avoid for Startups in India. Detailed Explanation on Cap Table and Common Errors in Cap Table
The management of a CapTable for your early-stage startup may appear to be extremely easy, but there are high chances that it will contain errors as your CapTable changes with additions and deletion of Shareholders / directors. You cannot afford to be unclear as the company's founder when it comes to ownership. There are numerous aspects and small things that you must constantly keep in mind.
Any error not only has an impact on your current CapTable, but it also persists in newer versions and will gets worse with each update in your Cap Table.
In this article, I'll go through 6 Common Mistakes Startup founder's make in relation to the CapTable and how to avoid them.
A startup capitalization table is a list of all the shareholders of your company, including the founders, angel investors, venture capitalists, and any employee or advisors that are involved in the business plan and own shares in your company. The ownership structure of your firm is displayed in the cap table, which also analyses the percentage of ownership, equity dilution, and value of equity at each round of funding for your business.
The cap table is a dynamic resource: Your cap table has to be updated to account for changes as your startup expands and moves through fundraising rounds. Each new fundraising round should be disclosed, as well as each new company valuation. (Read here for detailed understanding on Startup Cap Table)
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The company cap table is frequently kept on a spreadsheet in the early stages and updated on an ad hoc basis by the CFO, founder, or anyone else with a valid reason to make changes. Unsurprisingly, this laissez faire approach leads to human error.
As your company expands, it will attract new investors, advisors, and employees, many of whom will become shareholders. That's a lot of information and data to keep track of on a spreadsheet. Adjacent data, such as contact information, transaction dates, and share certificates, must also be kept secure but accessible.
Working from a collection of spreadsheets, PDFs, and emails will result in multiple versions of your cap table. When a potential investor or lawyer requests information from you, you're left wondering which source of truth is correct and which is the final updated version of your cap table.
It takes time to reconcile multiple records, especially when you don't know which documents are correct. It takes time and money to reconcile contradictory information about who invested, when it happened, and how many shares they received.
The incorrect allocation of shares is one of the most common errors our onboarding analysts see in offline cap tables. This frequently occurs when a company calculates investment in totals rather than using a share price that can be easily divided into whole numbers of shares. Due to inaccuracies in rounding up or down, the shares are then allocated incorrectly. This error is easily caused by computerized spreadsheet features that round off decimals.
While this error isn't difficult to correct, it can be difficult to spot once it's made. Many businesses end up hiring outside lawyers to identify and resolve the problem, which quickly becomes costly.
A share split, in which the shares in an existing share class are subdivided into two or more new shares, appears to be simple. Shareholder rights remain unchanged, which means that voting control and dividend rights remain unchanged following the split.
However, share splits are complicated, and finance professionals without experience – or simply a lack of time – frequently document them in a way that can be easily misinterpreted. Unauthorized additional shares necessitate a significant amount of time spent backtracking to correct the error and accurately reallocate the new shares.
Keeping track of cap table movements, particularly share transfers, necessitates a thorough understanding of your company's trading history. Even if there are mistakes beneath the surface, the overall balances and transactions will frequently appear correct.
When a shareholder sells some or all of their shares, the buyer is not required to buy the exact amount offered. Multiple sellers may give shares to multiple buyers, and multiple buyers may receive shares from multiple sellers.
Investors, advisors, frequently require a complete history of these transactions, no matter how complicated, in order to have confidence in the company. A company's reputation and prospects can suffer if these details are not properly tracked.
An incorrect date entry in your cap table can set off a chain reaction of problems. Even if the grant was issued through an approved scheme, if an option grant is incorrectly dated and signed outside of the valuation window, the shareholder may face harsher taxation.
At Jordensky, we are committed to providing an experience of the highest caliber while specializing in accounting, taxes, MIS, and CFO services for startups and expanding businesses.
When you work with Jordensky, you get a team of finance experts who take the finance work off your plate– ”so you can focus on your business.
Also Read,
10 Most Important things to do after Raising Money from Investor for your Startup
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