Funding rounds and the importance of maintaining a clean cap table

As your company navigates its way through the funding rounds process, maintaining a clean record of ownership will be crucial – but it’s not always easy when growth can cause unexpected ripples for your cap table.

You may have left growing pains behind with your awkward teenage years, but with any luck your company never will. While there is a lot of understandable excitement around a funding round and many reasons to celebrate when funding is achieved, it can cause an increase in admin and have a potentially disruptive impact on your record of ownership if not prepared for ahead of time.

The slog of manual updates

When you grow, ownership grows in complexity – it’s the basic physics of business. Each round introduces new investors and alters existing ownership stakes, all requiring meticulous updates to your cap table. To keep trust with stakeholders and avoid potential problems down the line, your maintenance of that ownership log has to be tight today – and that means many people-hours and no small amount of headaches.

The risk of manual error

For many companies, their cap table lives in a spreadsheet, which seems like a good solution when your company is run from a kitchen table, but becomes less practical as you grow and mature, becoming a potential breeding ground for human error. Miscalculations or outdated information can result in inaccurate ownership percentages, potentially causing disputes or misunderstandings with investors. As the keeper of the cap table, the pressure is immense – one slip, and your company’s investor relations could be set back.

Equity dilution – what it is and what you can do about it

As alluded to above, each successive funding round will have the effect of altering the existing ownership stakes. That brings with it equity dilution – as more stocks are issued in connection with each funding round, the ownership percentage of existing stockholders will be reduced. This is inevitable up to a point, but startups still need to be clear on how a given funding round is likely to impact on the ownership status quo, partly for the purposes of updating the cap table, but also to keep current stockholders fully informed on how they will be impacted, and more broadly to be clear yourself on the implications for overall control.

When looking to keep equity dilution to a minimum, there are a number of strategies you could follow, including, for example:

• Don’t look to raise more funds than you need: Take the time to figure out what kind of cash injection you will likely need to take your company to the next level. Generally speaking, the more capital you accept from outside investors, the more that will translate into equity dilution.
• Be strategic when choosing investors: Ideally, investors will have more to offer than just capital. Important as the financial investment is, if these individuals also bring experience and contacts etc., then they can also help to grow the company, which in turn can increase its valuation. The more you grow between funding rounds the more ability you will have to negotiate terms that help to minimize additional dilution.
• Fiscal responsibility: It might seem like stating the obvious, but sometimes the obvious needs to be stated – be conscious of your cash flow. One of your challenges will likely be to find ways to grow while being as lean as is practical. Being conscious of cash burn without hindering your progress can help you avoid becoming over-reliant on outside investment over time.

Whatever strategies you employ, it is also important to never lose sight of the need to ensure that your cap table should always reflect the current state of play on equity distribution.

The admin ‘drag’ on HR

With each funding round, your appointed compensation and benefits team must not only update ownership records but also generate reports and ensure compliance with regulatory requirements. This added workload often diverts attention from other important HR functions, just when you’re likely hiring, communicating changes to your people and doing a hundred other things that come with a period of investment and growth.

Pain Point: Maintaining Real-Time Accuracy

In the fast-paced environment of funding rounds, maintaining real-time accuracy in the cap table is essential. Delays in updating ownership information can lead to discrepancies that affect decision-making and investor confidence. Without the right tech, this can be a challenging task, to say the least.

That’s where J.P. Morgan Workplace Solutions and our tech and service-based platform enter the picture. Effortlessly manage all of your equity from inception to IPO. Track your investors, manage your stock option plans and model future funding rounds, so you can have complete control of your company’s ownership.

What next?

At J.P. Morgan Workplace Solutions we can provide the tools to help you effortlessly manage all your equity, from inception to IPO and even beyond. Our cloud-based solution allows you to track investors, model future funding rounds, and so much more, freeing you up to concentrate on driving your business forward.

Talk to us today, and see what our cap table services can do for you and your business.