Tips to Manage Your Startup Cap Table

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The financial implications that come with starting a company can be very difficult. As the founder, you will have to grapple with ways on how to handle advisors, employees, and the founding team, which is very crucial as they all form the business’ core talent. The following fundamental data can be included in a cap table:

  • Stakeholders of the company
  • Categories of shares and their worth
  •  Each share category and the amount owned plus those owning them.
  • Total ownership of the company whether on a fully diluted basis, be it issued or non-issued.

As a startup business owner, the cap table should be your most important asset. It so unfortunate that many startups do not take the cap table seriously.

What Goes Wrong With Cap Table Management

A Cap table is very crucial when it comes to reporting tools to be used by investors, board members, acquirers, attorneys and auditors. In this regard, there are many ways on how to manage or mismanage a cap table:

Mismanaging A Cap Table:

  • Not centralizing your data; not putting your data in order in one central place is inviting a catastrophe.
  • Failing to connect to ‘live’ data; your cap table must be incorporated with real time data, and should be up to date at all times.
  • Failing to automate calculations; any miscalculations can lead to great problems.
  • Failing to integrate reports; reports, which are static in nature is inefficient and leaves a lot to be desired.

Tips to Proper Cap Table Management

As an investor, you should look at the long term ways of sustaining the business. Below are some of the ways you can achieve your long term Cap table goals.

  • Get down to basics early. Know your key players well in advance. It is also important to woo them by setting aside an option pool of between 10 and 20% of the total equity for these people. In case your hiring formula stipulates that your employee base is bound to grow, then you should establish a separate pool for their incentives too.
  • Centralize and share the data with your accountant and lawyer. As opposed to keeping separate spreadsheets, you should centralize all data and share it with your accountant and lawyer. It ensures consistency and accuracy at the same time.
  • Review quarterly or anytime an event occurs. It should be done consistently. It also ensures accuracy of data and ease of doing things.

Why Is A Cap Table Important?

A Cap table shows the growth rate of the business, investments made over a certain period, and the principal shareholders of the company. This in the long run makes it so easy when it comes to hiring and making financial decisions on behalf of the company.

Company Valuation

3 Business Valuation Methods

  • There are a number of reasons for having an up-to-date valuation for your business.
  • You may be forced to sell your business for a number of reasons. It could be retirement, health, divorce, or due to family reasons.
  • You may be in need of debt or equity financing for expansion purposes, or due to cash flow constraints. Moreover, in regards to this, is what potential financiers or investors may be looking for. The viability of the business entity.
  • You may also be intending to add more shareholders.

Three Business Valuation Methods

Asset-Based Approaches

In this category, asset-based business valuations can be undertaken either on a going concern or a liquidation basis.

  • The former can be used to list the business’s net balance sheet value of its assets, which is then deducted from the liabilities. On the other hand,
  • A liquidation asset-based approach is used to determine the business’s net worth in terms of cash, if all the assets were to be sold, and liabilities paid off.

Earning Value Approaches

The above business valuation models have been hinged on the premise that the true value of a business lies in its ability to generate wealth. Thus, the most common earning value approach is Capitalizing Past Earning.

When using this approach, a valuator will determine the projected cash flow levels for the company using its record of past earnings, before normalizing them for unusual revenue or expenses, and multiplies the projected cash flows by a capitalization factor.

Discounted Future Earnings. This is another method of Cap table Valuation whereby instead of using the average of past earnings, an average of the predicted future earnings is used, thereby, divided by the capitalization factor.

Market Value Approaches

These are just simply ways of establishing your business’s net worth by comparing it with other similar businesses that have been sold recently. Even though popular, to get the true value, other combinations of valuation methods will be very handy.

Non-Competition Clauses Can Affect Valuation

These are most common in agreements for selling a business, especially in situations involving goodwill, which forms an integral part of the Cap table valuation. It has the following clauses:

  • It prohibits the seller from opening up a similar business in the same geographical location.
  • It attaches a time frame to any competing activity, where the buyer can request the seller not engage in any direct competition for a certain period of time.

 

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