Since the first dot com era, Silicon Valley institutionalized a scalable way to accelerate this progression through private or venture investments. In exchange for taking on early stage risks, investors will provide funding in exchange for a stake in your risky venture. With money provided in advance of profitability, founders were able to hire, spend and grow their business ahead of product / market fit and maturity.
The Virtuous Cycle
Running a startup is a bit of a virtuous cycle: you need to raise money in order to hire more people and build your business. And the more people you hire the more money you need to raise in order to appropriately compensate them – rinse and repeat.
As this virtuous cycle played out in America, we saw the rise of equity management software as a service (SaaS) which helped people figure out how to record, track and manage shareholdings and the corresponding compliance with the American tax and securities regulators. The core premise of this type of software is to manage the capitalization (“cap”) table, which is a snapshot of the ownership structure of your business. Cap tables show various detailed shareholders and the share classes like ordinary / common and preferred and pseudo-shares such as options, warrants and convertible notes.
Reality
Let’s be honest: today there are indeed a lot of choices for cap table management, especially coming out of America. Chances are, if someone offers equity management software, it was likely designed by American lawyers or corporate executives. They also will publish articles promoting why you should use cap table management software. This will not be one of those articles.
While we here at Sprout offer equity management, we know that it’s not all about the cap table. For the vast majority of young startups, managing the cap table is probably an annual event at most, perhaps after a fundraising event. We believe that as entrepreneurs you will be more concerned about other related matters where the cap table comes into play but is not the star of the show. We believe that the cap table is the glue and it’s all about what you do with it. By prioritizing cap table management ahead of the actual use cases, you are putting the proverbial cart in front of the horse.
People first
As most businesses are created, it starts with people. People are the core of your company and are the foundation and engine that powers your rocket ship. In turn, your focus, when not on how to improve your product or service, should be on how to attract and retain the best possible people that market and aid in the development of that product.
But you’re a cash-conscious company. You’re a company trying to attract the best and brightest and increasingly more companies are offering ownership as part of the total compensation.
Enter: Employee Stock Option Plan, or ESOP for short. The ESOP give you the benefit of future compensation for your employees, aligning interests in the long-term and increasing recruitment, employee retention, engagement and satisfaction. Without going into all the mechanics of stock options here (please see our other articles about that), the ESOP is a framework in which companies can enable economic empowerment by turning what some founders call “renters into owners”.
Then Cap Tables
If all goes according to design, and these team members that you attract and retain power your rocket and will be rewarded through ownership in your company. When it is time for them to be granted stock options to exercise (buy) shares in your company, that’s when you will need a cap table to analyze how many shares you have remaining in your stock option pool. And finally when it is time to record all your new shareholders and those details, that is when you need the cap table again. The cap table is the glue that holds this all together.
Conclusion
You can’t just manage ESOP and investors in a vacuum. It all (should) be connected to your cap table. And yes, when that time comes, a digital cap table is far more effective than a manual excel sheet for error reduction, version control, and scalability.
As entrepreneurs, ourselves, we recognize the importance of ESOPs and, as such, we offer more than just software for companies that are trying to figure out how to properly compensate their employees and start the growth cycle of their company off right. Not only that, but we also provide fundraising tools that gives you a direct insight into how ESOP and new investors affects the ownership of the company.
And yes, we do offer superior cap table management software as a bonus, too. Because, while you should care about employee compensation and fundraising as top priorities, you also need an efficient method of managing your cap table when your company reaches the point that the ownership structure becomes more complex through the influx of new security types and outside investors who are attracted to your rapid expansion.
So, when you believe that you’re ready to start taking employee attraction and retention, fundraising, and your company’s growth seriously, come talk to us as hello@getsprout.co and we’ll lay out a plan that puts your startup on the fastest possible path to scale, while keeping intact your ownership structure that fueled the creation of your business in the first place. Hope to hear from you soon!