As founders we all know that proper management of your cap table is extremely important. But is a complicated cap table management software solution really necessary? Especially as an early-stage company? More often than not, we find that cap table software provides early-stage companies little realizable value and often presents cumbersome implementation and maintenance issues as your cap structure evolves over time.
Based on over 20 years of experience, our primary recommendation is to leverage your legal counsel - we find that legal counsel is typically the best cap table manager out there and the only time you may need a dedicated software solution is when you reach a later stage in your company’s life. Additionally, with the recent changes at some of the larger cap table management providers we have observed that prices have risen significantly, even for early-stage startups. Additionally, a cap table is only as good as the person maintaining it to ensure it is accurate, and for the most part, cap table software itself does not do this. Maintaining accuracy falls on the CFO, outside counsel, or other advisors. Since you are already paying them for their time, at the early stages you can easily maintain the cap table with a well-built excel worksheet. Fundamentally, many CFOs and lawyers don’t believe companies need cap table software until Series B and beyond.
The most common reason we hear is that they get a “free” 409A as part of the package. Well, as we will discuss, this 409A is not “free”. We see time and again, early-stage startups allocate significant resources to implementing and maintaining a cap table in hopes of a better valuation process. Yet the “free” 409A valuation requires them to provide excessive information, have minimal communication with the provider, and receive a suboptimal outcome with little post-valuation support or recourse. So, if a startup is paying for a cap table system that is unneeded at their current stage, then, they are really paying quite a substantial fee for a subpar 409A. Your time is extremely valuable and is better directed toward building the business, its products, and sourcing new opportunities.
Now, if a time consuming and poorly executed 409A doesn’t sound like a good thing, that’s because it isn’t. A poor outcome on a 409A can lead to tens of thousands of dollars of additional expense for employees, an inability to remain competitive when trying to attract talent, and can lead to unwanted attention during an audit. And in the case of an audit, if you do not select a 409A provider that is willing to support their work, you will be solely tasked with defending a valuation that you likely have very little visibility into. In the end, a “free” 409A can end up costing you significantly more than the money you think you are saving on the engagement.
initio is a leading provider of 409A Valuations for early-stage startups. We’ve worked exclusively with early stage and venture backed companies throughout our collective 20 years. Fundamentally:
We know that you need an optimal outcome for your employees and that your time is your most valuable asset, so we’re here to provide you with the most optimal, defensible outcome, fast.
