Cap table audit: your key to a clean and healthy cap table

Anashe Barton

Every investor expects startup founders to have a clean, healthy cap table before starting funding talks. A clean cap table means the document contains comprehensive and up-to-date financial information for shareholder count, ownership tracking, employee options, transactions, and funding sources. It allows convenient access to crucial shareholder details and presents a precise depiction of your company's financial objectives. Fortunately, there are resources available to help founders through that complicated process. 

Take it from Anashe Barton, Senior Manager of Customer Success at LTSE. Anashe handles client-facing ops, from onboarding founders, to ensuring they have a fantastic experience with the firm, to guiding them toward the right resources and tools for their platform. 

We sat down with Anashe to dive deep into how LTSE's tools and expertise can guide startup founders to excellent cap table health. 

“All of these financial steps happen all at once, which is why founders can find themselves really overwhelmed. It’s also why we want to be as helpful as possible to usher them through the process.”

What is an annual cap table audit?

Companies change significantly over six months or a year; the cap table does not always capture that.

These changes may include hirings, firings, or fundraising discussions with potential investors. All of those movements have unique needs. 

LTSE likes to set up annual cap table audits, which often happen right before financing rounds, and they include practice with LTSE's scenario modeling tool as well.

Optimal time or frequency for cap table audit

If startup founders are conducting cap table checks on their own, Anashe recommends doing so every quarter so they can sync with quarterly board meetings and new hiring rounds. 

For reference, LTSE tends to conduct annual check-ins for their clients between Q3 and Q4.

They also recommend timing the check-ins for a quarter or two quarters before a raise so whomever you're negotiating with is confident in the cap table's accuracy. It also helps founders understand equity dilution for the next round, which is crucial because equity dilution can alter financial stakes in the company and also the degree of control that each stakeholder possesses.

For clients that raise consistently throughout the year, LTSE is proactive about maintaining a dialogue with them and lending support when needed. 

“We like to set up that annual cap table health check to make sure that everything is up to date on a client's cap table, so they're ready to go in prepared for conversations with their board or their investors.” 

Common cap table frustrations among startup founders

Initial cap tables can frustrate startup founders for the following reasons:

  1. Excel reliance
    Building on Excel can be tedious, especially when founders must write their own formulas for the round model and calculations.
  2. Dilution rounds outcome
    Founders are amazed by how diluted the rounds can get from their option pool. (LTSE's tools accommodate this within their modeling.)
  3. Continuous share pool allocation
    Company founders sometimes don't realize they have to allocate a certain number of shares to their pool, which must be refreshed from time to time, especially going into a new round. Investors expect this, so they don't get diluted. (LTSE built in these calculations as well.)

How to proactively address equity dilution

There are two main paths for founders to ensure they have equity dilution in hand:

  1. Have a handle on your cap table
    Know your allocation from day one. LTSE has models and suggestions for structuring dilution, but it ultimately comes down to the founder's comfort. Practice improves your understanding, so play around with your scenario.
  2. Ensure you're rewarding employees accurately
    They should be compensated correctly for their time with you. Everything given to employees should be through a long-term lens, rewarding them as they mature with you.

Resources to help startup founders with a cap table audit

Even if a founder isn't a client of LTSE, Anashe says LTSE will still happily jump on a call with them and talk through where they are in their cap table journey.

LTSE also has a significant number of resources on its website. 

They publish content for anyone to use; materials like interviews with law firms, founders, and VC firms on anything from raising to managing your equity pool. 

If a founder needs actual legal advice, LTSE partners with several law firms they can refer the founder to, depending on where the startup is with raising.

LTSE also has a tool called Startup Runway, which is a cash management app. It allows startup founders to plan their runways and calculate salaries, employee equity, and operational costs. This is key because calculating runway happens simultaneously with cap table check-ins. (This adds to how overwhelming cap table check-ins can feel for founders.)

Having an external partner is essential 

LTSE believes in having a third-party, objective view when performing cap table audits.

You should get multiple takes because your lead investor will have a specific vantage point when setting terms and pricing the round. The lead's perspective is undoubtedly important as they set the tone and are helpful for the rest of the raise, but they're also self-interested. 

In terms of mechanics, there are a million ways to raise a round. LTSE Equity accommodates for all these methods, with the ability to add and remove convertible instruments such as notes or SAFEs to our round modeling tool, but also adjusting pre and post-money valuations or the discounts toward each investment.

Startup founders often get sucked into a specific formula when trying to avoid equity dilution, which can be shared from our round modeling tool if founders choose to. That's why adding the legal component and running scenarios through LTSE's tool is even more critical. 

Just as there are many ways to raise a round, there are many ways to exit. As LTSE Equity’s companies grow, they may be interested in modeling liquidation to see proceeds for each of their valued stakeholders in the case of an exit. In collaboration with your legal team or advisors, LTSE Equity admins can save multiple exit scenarios and share with their team to see which liquidation terms leave them in the best place.

“We believe in the idea of having a third party, objective point of view when it comes to cap tables. That's why the legal component running scenarios through that LTSE tool is also important.”

Green flags: what your investors will prioritize

Here are three steps company founders can take to ensure investors will like what they see:

  1. Make sure everything on your to-do list is good to go
    This is huge from an admin perspective. LTSE has a built-in to-do list that asks about aspects of this, like the issuance method.
  2. Complete your 409A valuation
    Make sure you've done one so you can base your new valuation on it and for compliance with the IRS. A fast, easy solution is to get an audit-defensible 409a valuation from LTSE Equity. 
  3. Provide transparency to shareholders
    An essential and underrated part of the game. Ensure that anyone with a financial interest in the company can access your cap table and your employees' holdings. Make sure they can communicate with you about all of it. 

From a compliance standpoint, checking the above boxes is super important. Other forms deal with compliance as well, like 83b elections. 

At LTSE, we’re committed to helping anyone in need with surviving and keeping their cap table clean, and beyond that, we have a suite of services and partners available to clients. Get started today.

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The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. Information about the company is provided by the company, or comes from the companies’ public filings and is not independently verified by LTSE. Neither LTSE nor any of its affiliates makes any recommendation to buy or sell any security or any representation about the financial condition of any company. Statements regarding LTSE-listed companies are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. Investors should undertake their own due diligence and carefully evaluate companies before investing. Advice from a securities professional is strongly advised.
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