Problems with CapTable management

Introduction

In the first article of Svested’s new CapTable series published last week, we discussed the importance of keeping a comprehensive, accurate and up-to-date CapTable.  A CapTable should serve as a single source of truth for both investors and employees regarding who owns what, and how much, within the company.

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In the second article of our CapTable series, we proceed to explore the problems with CapTable management using Excel spreadsheets, and discuss the solution to these issues – digital CapTables.

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The traditional way: Spreadsheet-based CapTable management

According to the State of ESOP in Southeast Asia 2021 report, a collaboration between Svested and Saison Capital, it was found that 56% of startups still use Microsoft Excel as their CapTable management tool, while 15% of startups still relied on hard-copy documentation.  In contrast, only about 17% of startups used a purpose-built dashboard for ESOP management, although usage of such dedicated software has been increasing.

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There are a few reasons why Microsoft Excel remains a commonly used tool for CapTable management.  These include, but are not limited to:

• The company is still small, with a simple capitalization (ownership) structure, making data entry and tracking on spreadsheets relatively straightforward
• The company prefers the sense of control that comes with managing its entire CapTable manually, by its own hands
• CapTable management platform interface issues, such as interface complexity, non-user-friendliness, or lack of relevant functions for company’s use

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However, as the company grows and engages in new rounds of fundraising, it soon becomes evident that manual CapTable management is no longer an effective strategy.  This is also why we suggest that even early-stage companies and start-ups should use digital CapTables from the get-go: to avoid the eventual hassle of having to manage a complicated CapTable.  The two main reasons underpinning the unsustainability of spreadsheet-based CapTable management are: inaccuracy and inefficiency.  

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Typically, when a company has grown and engages in later-stage fundraising, the process will involve more shareholders, bigger amounts invested, and possibly conversions of notes and bonds.  On a spreadsheet already containing dozens of columns and rows of data, the likelihood of committing human error is significantly magnified when adding new data.  The wrong calculation method may be used for certain investors if they have different investment terms – for instance, if there are several convertible instruments with different terms (such as the interest rate, discount rate and valuation cap), or if there are investments made on both pre-money and post-money basis (all this to be covered in the next article of our CapTable series).  

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Even if the right calculation method is used, the cell references in calculation may be incorrect, or the final values may be entered in for the wrong investor.  Worse still, if there are many investors joining the same fundraising round, a specific investor may be missed out in the calculations.  As can be seen, there can be numerous inaccuracies resulting from spreadsheet-based CapTable management, and these can pose massive headaches down the road if committed, affecting deal closures for subsequent financing rounds, or even creating legal problems for the founders.

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Coupled with inaccuracy, there is the double whammy of inefficiency.  Using a spreadsheet, the founders must find and apply the right calculation formula to each investor – there is no formula which conveniently applies to all investors.  Should the numbers not tally, the founders will need to go through the agony of searching through possibly the entire spreadsheet for any calculation errors made previously, which entails digging up old documents, cross-referencing, et cetera.  

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Inefficiency and inaccuracy can even form a vicious cycle – for instance, if founders change a correct number from earlier rounds, they basically have created an additional error in their CapTable, which they may or may not be able to catch.  To top it all off, spreadsheet-based CapTables do not automatically update, meaning that each time an event occurs which changes the equity ownership within the company, the founders will need to spend time carefully updating their CapTable.

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New and improved: Digital CapTable management

Instead of labouring over manual CapTable creation and updating, CapTable management software is increasingly being used.  While such software and platforms are not immune to errors, there are several indisputable advantages to them.

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Most importantly, CapTable management software simultaneously tackles the problems of inaccuracy and inefficiency.  The key to this is automation.  By entering the key details of each stakeholder or employee, the company’s CapTable is generated or updated by the system.  This reduces the quantity of data to be entered in the first place, and saves founders the need to create and check their calculation formulae.  Variations in investors’ investment or conversion terms would already have been accounted for when adding them on the CapTable platform, by clicking the right boxes, selecting the right options, or entering the right details – a far cry from having to perform manual calculations for each individual.

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Any non-financing related events which cause changes to the company’s CapTable can also be quickly accounted for through automatic configuration.  For instance, ESOPs can be configured and customised for each employee, including details such as granted options, vesting period, vesting schedule, and vesting frequency.  Once the employee is onboarded, ESOP can then be automatically vested, without the founders having to personally update anything – no more worries about missed deadlines or documents.  Other such cases where CapTable management software helps include share transfers, splits, repurchases, and employee departures (on Bad Leaver terms, which typically requires ESOP cancellation).

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In addition, the administrative hassle relating to document generation and signing can be reduced.  Certain CapTable management platforms (including Svested’s) come with document auto-generation, signing and tracking for each employee and stakeholder.  On Svested’s platform, for instance, by copying and pasting certain key terms (code words, if you would) onto relevant ESOP documents, the employee’s details, as well as those of their ESOP plan, will be auto-populated within the document.

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Second, with CapTable management software, founders can control who accesses which parts (or versions) of the company’s CapTable.  While CapTables are supposed to be a single source of truth regarding the company’s equity ownership structure, it may be a good idea to selectively share CapTable information with different stakeholders (e.g. investors, versus employees), as a means of protecting company information.  

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An example of this would be that employees need not get access to the shareholdings of the company’s investors, to protect the latter’s confidentiality.  CapTable management softwares allow role customization, so that depending on whether the relevant individual is an investor, or employee, or a founder, differentiated levels of information access can be granted.  In contrast, using a spreadsheet, different variations of the company’s CapTable would have to be created and shared with different individuals.

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Thirdly, CapTable management platforms also come with a host of helpful features.  Some of these functions include scenario and payout analysis, compliance-ready valuations (especially for US-based companies), as well as ESOP liquidity (where founders can conduct ESOP buybacks).  Other platforms even offer stakeholder communication capabilities, centralising any CapTable discussions and making these easier to track.

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Conclusion

As seen from above, CapTable management software is now the way to go, compared to spreadsheet-based CapTable management.  While the latter is not entirely obsolete – most CapTables today, when downloaded from online platforms, are still in Excel or PDF format – it is certainly an impractical tool for creating and updating a CapTable at a later stage.  Not only do CapTable management platforms tackle the biggest problems of the traditional approach, they also offer benefits which add-value to founders, stakeholders and employees.

As such, even if you are just starting out as a company, start strong by using a good CapTable management platform, to save yourself a ton of trouble and time in future.