Equity Compensation

You’ve Got VC Money: Cap Tables

Authors: Andrew Shawber

Get a Cap Table Platform

The company’s cap table is a historical record of who owns how many shares of the company’s stock, stock options, warrants, convertibles, and other ownership stakes in the company. As a VC-backed company with a more complicated cap table, you must keep track of all this information and ensure it is accurate and up to date.

The cap table platforms in the marketplace (e.g., Carta and Shareworks) have developed solutions to help companies, their investors, and their counsel keep track of this data at reasonable cost to ensure it is accurate, complete, current, and readily accessible.

Which Cap Table Platform Should We Use?

We commonly use one of two solutions at Perkins Coie: Carta and Pulley. Each has its pros and cons.

Carta is an easy-to-use, visually pleasing platform widely used in the startup community. Some VC investors require their portfolio companies to use it. Carta is fee-based and requires a direct contract with the company. Carta also offers a free version called Launch for companies to use while they scale up. Pricing is generally determined by a few items, including the number of company “stakeholders” (e.g., shareholders and optionees), the amount of capital raised, and the company’s desire for a Section 409A valuation report by Carta. (Carta’s annual fees include this valuation.) Because the pricing is between the company and Carta, you may be able to negotiate. To ensure that a company receives the Perkins Coie discount, it is important that we introduce you to Carta; from there, you may discuss pricing with Carta directly.

Pulley is also very commonly used by tech startups. In fact, Y-Combinator portfolio companies all receive Pulley accounts as part of the YC program. As with Carta, our clients are eligible for discounts.

While Carta has a longer track record in the market and is probably more robust in terms of functionality, both programs are very good and widely used. Perkins Coie will support you on either platform.

Note that there are other cap table platforms in the market, such as , Global Shares (JP Morgan)Qapita, and OptionTrax. While we may have less experience working with other platforms, we are always happy to explore them with you.

Assign a Cap Table Point Person

After you sign up for a cap table platform, assign a member of the company (usually the CEO or CFO) to review and approve board-approved securities transactions on the company’s behalf.

Why the Company Can’t Update Its Own Cap Table

Although the company needs a point person, Perkins Coie will be responsible for updating the cap table. Why?

The cap table needs to be accurate, which means that all the information must correspond perfectly to the underlying documentation. This is easier said than done, and in many situations you will need to apply the experience and professional judgment of your legal team. In our experience, in almost every case in which the company has maintained or edited its own cap table, the table has been inaccurate, costing the company significantly in legal fees, time lost, hassle, and stress.

Moreover, in connection with financing transactions, investors will often require that outside counsel provide a legal opinion, which includes representations about the company’s current capitalization. It is much easier and faster for us to provide this opinion if we have been maintaining the cap table from the outset. If we haven’t, full cap table diligence will be required, significantly increasing legal fees. This necessary diligence may cause delays at the closing of a transaction as well as hinder the company from getting much-needed cash from investors.

Cap Table Responsibilities: The Company or Perkins Coie?

We’ve broken down the responsibilities of the company and Perkins Coie, respectively, with respect to the cap table:

Company Responsibilities Perkins Coie Responsibilities
Refrain from editing the cap table. Edit and maintain the cap table consistent with executed documents, corporate approvals, and due diligence.
Inform Perkins Coie on upcoming equity grants (e.g., names, share amounts, and vesting schedules) at least one week before each board meeting. Draft resolutions for equity grants based on information provided by the company; update the cap table with equity grants, as approved by the board.
Ensure Section 409A valuation is up to date for any material changes in the company’s valuation (see FAQs on Section 409A above for more information). Counsel company on timing for new Section 409A valuations.
Notify Perkins Coie about employee terminations or modifications within 48 hours. Process employee terminations on the cap table and handle necessary paperwork.
Notify Perkins Coie about option exercises within 48 hours. Prepare necessary paperwork and process option exercises on the cap table.
Confer with Perkins Coie to ensure appropriate corporate actions have been taken and securities laws requirements have been met before promising or issuing any equity grants, stock, simple agreements for future equity (SAFEs), convertible notes, or other securities. Counsel company on necessary corporate actions and securities laws requirements before promising or issuing any securities.
Provide Perkins Coie with investor information (e.g., names, dollar amounts, and share amounts). Draft documents for investments and necessary corporate approvals. Update cap table as appropriate.
Assist in obtaining signatures from the company, investors, and others as applicable. Accept or sign securities issued via Carta/Shareworks. Create fully executed versions of documents. Issue securities through Carta/Shareworks and update cap table as appropriate.
If using Carta, the company pays Carta directly with a current credit card. If using Shareworks, software and one Section 409A report are included through a firm license.
The company securities administrator should review each security for errors and accuracy prior to signing or accepting. Do not sign/accept any erroneous securities. Immediately fix any errors identified by the company.
Review the cap table for errors or omissions at least quarterly or in advance of each board meeting (whichever is sooner). Immediately fix any errors identified by the company.

When Should I Double-Check the Cap Table? What Should I Do if I Notice an Error?

Before you “accept” or “sign” a security, you should always review the information and confirm its accuracy. This is the best time to double-check the information entered in the cap table. If you notice an error, notify your Perkins Coie legal team immediately. DO NOT accept or sign the security if it is incorrect in any way.

Also, your CEO/CFO or other applicable cap table point person should periodically take time to review the entire cap table (including summary and details) for errors. This should be done at least quarterly or in advance of every board meeting (whichever comes first).

How to Prepare for an Equity Financing

We have covered in past FTTWs how to value your startup and how much capital to raise. Once your startup decides to pursue equity financing, you should start to prepare for the investor due diligence process. On the business side, you will need to prepare a business plan and should take steps such as obtaining management references, interviews and background reviews, customer/user references, technical/product reviews, financial statements and business model reviews.

What Every Startup Needs to Know

On Wednesday, June 26th, Perkins Coie’s Palo Alto office hosted the startupPerColator event, “What Every Startup Needs to Know.” Lowell Ness, a Perkins Coie partner in the Emerging Companies & Venture Capital (ECVC) practice, moderated a panel which included Herb Stephens of NueHealth, Thomas Huot of VantagePoint Capital, Jennifer Jones of Jennifer Jones and Partners, Yuri Rabinovich of Start-up Monthly, and Olga Rodstein of Shutterfly.