One of the startup world’s best-kept secrets is that managing cap tables for private companies is fairly easy nowadays.
You might be rolling your eyes about now and thinking that the only easy cap table is one that’s run by somebody else. But with “live,” system-of-record cap tables like Shareworks Startup Edition that’s no longer the case.
You might even go so far as to say that the tables have turned…
Levels of “System-of-Record”
The term system-of-record comes from the data management world. It refers to a system that is authoritative.
Put another way, a perfect system-of-record will always be accurate and up-to-date. Accounting systems are often system-of-record because regulations require a high level of accuracy.
In most companies, there is conflict among multiple sources of data. The problem only gets worse when there are multiple parties entering the same data into different systems.
Here’s the kicker:
This is exactly what happens with most private companies’ equity information–especially the cap table. It’s not uncommon for HR, finance, in-house and outside legal teams to record conflicting information in disparate systems.
We created startup edition to solve this problem by introducing a web-based, single source of cap table truth. HR, legal, finance, investors, your board of directors and even employees can all work off the same information within our software.
Unfortunately, even using a system like ours doesn’t guarantee that the cap table stays perfectly up-to-date. And remember, the ideal, is for everyone to be working off the same up-to-date information.
This is because there are two levels of “system-of-record”:
- System of accounting. This is where you use our solution to accurately account for your shares no matter where or how they are issued.
- System of issuance and accounting. This is where you use it to both issue and account for your shares.
The reason information can become “stale” and out-of-date is because many companies have a different system for accounting than they do for issuance.
A quick example: Issuing stock on paper is different than recording it in a system of accounting. If paper stock is issued but nobody ever records it into the accounting system, the cap table becomes out-of-date.
With startup edition, it is easy to overcome this hurdle, but you have to use it as a system of issuance in addition to using it as a system of accounting.
To do this, you initiate all equity related transactions on our solution. You can do that with a really powerful tool we call Workflow.
When you use startup edition to issue securities, there is no gap whatsoever between the time the security is issued and when it is updated on the cap table.
This means that all the tracking, management, signing of legal documents, selling, buying, and vesting is both managed and executed online in one centralized place.
There are some legal requirements you should consider when you use a system like ours as an issuance system. For example, all shareholders must be aware that they have shares and that they can use the software to log-in and see those shares. This is required by US laws under shareholder notification rights.
“Live” versus “Dead” Securities and Cap Tables
Some people refer to these concepts with the idea of “dead” versus “live” cap tables.
A “dead” cap table is the one that hasn’t been updated with recent transactions.
Because it’s sometimes out-of-date, it’s harder to use as a system-of-record. That’s why you might call it dead.
You can say the same thing about securities.
The Ideal System-of-Record
In a perfect world, everything would be automated. Accounting systems like Quickbooks would integrate with a company’s bank accounts and automatically create ledger entries for accounts receivable, long-term debt, etc.
Basically every new transaction (or issuance) would automatically update any associated accounting system.
But even with the best accounting software, people still have to do a lot of manual accounting work. They categorize, reconcile, and adjust.
Cap table management software is similar. Some companies, like ours, can save you a lot of time by handling many more types of equity transactions than others.
Despite our company's broad product offering, there are currently some equity transactions we do not fully handle. In those cases, we can always handle at least the share accounting aspect. Be wary of companies that claim that they create a perfect system-of-record by handling every kind of issuance. No cap table management software on the market currently handles every equity transaction that a law firm could handle.
Using Shareworks Startup Edition for Accounting Only
Is it bad to use startup edition for accounting only?
Not at all.
Plenty of customers use our software primarily as an accounting solution. If you are thinking of only using it for accounting purposes only, know that you can still, very successfully manage your equity on it as well.
You’ll just have to be a little extra diligent to make sure you update your cap table in the software when a paper transaction occurs. If you don’t update your cap table regularly, it may take you extra work to make it “live” again.
For “accounting only” purposes, you’ll likely be much happier on our solution than with any other software on the market.
When we built startup edition, we wanted to move the market to digital shares (aka, electronically issued shares) but we knew that the transition would take time. So we architected our solution in such a way that any company could use it to receive as many benefits as possible. For example:
- all company departments are working off the same information
- automated calculations for vesting, dividends, and interest
- powerful waterfall and scenario analysis tools
- ASC 718 stock expensing reports & 409A valuation services
We support both “accounting only” and “accounting and issuance” usage. If you ask for our recommendation, we’ll tell you to talk with your legal team about “going digital,” but we aren’t going to force you to transition when you aren’t ready.
Benefits of Using Shareworks Startup Edition for Accounting and Issuance
The biggest benefits of using our solution for both accounting and issuance include:
- Reduction of work and fees associated with issuing new equity
- No need to manage equity in multiple systems
- No time spent reconciling different systems
- Fewer errors
- Ability to manage everything in one place
- Significantly better user experience for your shareholders
Our preference is for a company to issue uncertificated electronic shares. When you do this, you will use our software as a system of record at the highest level. But if using it as an accounting solution is better for you, that is also no problem and you’ll have a great experience!