Cap tables are not an exciting topic; however, they are critical when exiting your business.

A simple cap table may increase the value of your business because the simpler your cap table, the fewer people who are owners or have options to own a stake in your business, the easier it is for you to find a buyer.

Buyers and investors want clean cap tables so they don’t have to deal with a group of people—some shareholders may have different objectives than the business owner.

Having many small shareholders, such as friends, family, and other angel investors, employees, or vendors who are paid with equity, is a logistical and practical nightmare. The simple task of having documents signed by all shareholders can be a challenge. Also, every shareholder in a company has the potential to become a disgruntled, problem shareholder.

Deals with more people involved are more complicated and likely to fall apart. Buyers avoid these types of companies, restricting the number of buyers interested in your company. Fewer interested buyers means less demand for your business and could lower your valuation.

I’ve seen this happen in my corporate career working on the buy side. We would pass on a potential target company when the owner’s cap table was too complicated and would take too much effort to unwind.

No Standardized Ownership Tracking

There is no standardized means of tracking ownership for non-publicly traded companies. Reporting can be a significant challenge for companies that scale fast, like tech companies, who struggle to raise capital and employ creative financing to fund the company. Things can get complicated with liquidation preference structures – pay-to-play dynamic, preferred return, rachet, share/option bonus, option repricing, and carve-out. The complex structure will cause a big problem in the long run. It’s best to avoid complex and excessive liquidation preferences.

Keep Your Cap Table Simple From The Start

Ideally, equity should be held by the owner. For more complex organizations, equity should be held by full-time active management team members, financial investors at a market price, and an ESOP (Employee Stock Ownership Plan) or ESOS (Employee Stock Option Scheme). Any shareholders not in one of these categories would need to transfer their shares to shareholders who do fall into those categories.

It’s best to keep your cap table simple from the start. Otherwise, you will have to renegotiate ownership transactions that you previously agreed to.

It is up to the owner to negotiate these deals with their friends, family, former partners, and early investors. These negotiations are complicated and painful because (1) this group of people may see their equity stake shrink by a factor of 10X or more, (2) the full-time owner is responsible for paying the transferring shareholders, and (3) the full-time owner will not have the money to pay the transferring shareholders, meaning these shareholders will be paid zero for the equity stake in the company.

It’s up to the owner to clean up their mess. Unfortunately, the owner typically does not have the money to buy out the transferring shareholders when the terms of incoming investment have set the market price.

Complex and non-standard cap tables have caused much havoc, especially for under-capitalized, fast-scaling startup companies. The Open Cap Table Coalition was organized as a non-profit to address the problem.

The Open Cap Table Coalition is a group of over 31 law firms, equity management providers, and other startup ecosystem players that aims to improve the interoperability, transparency, and portability of startup cap table data.

The OCT released their Open Cap Table Excel Standard, standardizing practices for equity data based on the Open Cap Table Data Format.

The sample format presents information in an easy-to-understand format with Share Class, Total Shares Authorized and Reserved, Outstanding Shares, Fully Diluted Shares, Percent Fully Diluted, Liquidation Preference, Voting Multiplier, Voting Power, and Voting Percent. Share classes include Class A and Class B Common Stock, Founder Preferred Stock, Series Seed and Series A Preferred Stock, Class A and Class B Warrants & Non-Plan Awards, and Stock Plans.

Look at your company’s cap table to determine the best way to keep it simple.