We’re all familiar with the Seven Deadly Sins that date back to early Christian times: wrath, greed, sloth, pride, lust, envy and gluttony. And, no doubt, we’ve all been guilty of a few in our personal lives. But what about in our professional lives? What about when it comes to delivering a capitalization table to your board of directors or a potential investor? There’s no absolution if you get it wrong. It’s either 100% right – or it’s going to generate a lot of skepticism, even when it’s eventually corrected. And how difficult should it be to get it right, really? Having worked with thousands of companies who needed to report their capitalization to investors, board members, acquirers, attorneys and auditors, I’ve come to recognize a number of common errors (what we refer to at Corporate Focus as “cap table sins”) that can be easily avoided.
If you can build an equity management and reporting process that steers clear of these pitfalls, you’ll generate a 100% accurate capitalization table in much less time. But fall into any of these traps, and you’ll be working overtime trying to get it right.
The Seven Deadly Sins of Cap Table Management
1. Failure to Centralize the Data: It’s risky to track your equity data in more than one location, different spreadsheets, or by two different groups. This makes it impossible to ensure you have consistent data, such as an option exercise for 100 shares and a corresponding new stock certificate for 100 shares.
2. Not Connecting to the Live Data: Creating a capitalization table that is not integrated with your live data can spell big trouble. This means you have spreadsheets not connected to the actual equity records.
3. Manual Calculations: Failing to automate formulas and calculations is another opportunity to introduce errors and inconsistencies. A calculation can be right in one column or row, but not in another. Or, the cell reference in one place could be copied and adjusted by your spreadsheet incorrectly.
4. No Flexibility in Reporting: A lack of flexibility in your spreadsheets means time will be wasted whenever you need to look at the data in a different way. Imagine if you need to see it by stockholder name, then by stockholder group. By number issued and then fully-diluted. As of today’s date and then as of Dec. 31st last year compared to the year before.
5. Reports That Are Not Integrated: Using static reports is inefficient and a waste of time. Like your cap tables, your stockholder and stock option reports, period-to-period changes, employee status reports, and period-end disclosure reports should all be connected dynamically to your live data.
6. No Document Support: If you have accurate data, but are unable to support the data with the historical legal documents, you can’t have confidence in the information. When you’re unsure, you may rely on guesswork rather than taking the time to find the original charter amendment that was filed, the minutes of the board meeting, or the transfer notice. Documents that support the information should be organized and linked directly to the data records.
7. Sharing by Email: Sharing cap table spreadsheets by email is a recipe for disaster. You end up with multiple copies of the cap table stored by different people, different files are updated at different times, and you no longer know which is the most up-to-date version. And let’s not even get into the security issues.
Fortunately, there is a solution to all these issues – and it’s easier than you might think. The answer is to centralize your data in an automated, cloud-based equity management solution that already includes cap tables, reports, equity accounting, and external user access, all dynamically linked to the live data.
Why not just worry about entering accurate data – and let the system take care of the rest? After all, it’s not sinful to make it easy on yourself.