A cap table, short for “capitalization table”, defines who owns stock in a private company, and how much they own. This document also includes information on who has options to buy stock or warrants in the future.

Potential investors might analyze the cap table as part of the due diligence process during a fundraising event. Failing to keep an accurate record of company ownership can be a red flag — one that could potentially delay or even derail your next fundraising.

Let’s analyze six of the most common cap table mistakes made by leaders of private companies. For each, we’ll explain the mistake, why it’s potentially costly, and how to steer clear. We’ll also introduce Fidelity’s equity management platform, which is designed to help private companies as they grow and update their cap table.

And if you’ve got more questions on the venture capital fundraising and due diligence process, our free, lawyer-reviewed checklist can provide you with more insights.

But first, let’s discuss those common mishaps:

1. Using the wrong tools to record company ownership.

When your company is just starting, a spreadsheet might be a fine place for your cap table; you likely only have a few stakeholders with equity, and the ownership structure probably isn’t too complex.

But as you grow, the limitations of a spreadsheet might cause issues. For example, an incorrect formula or a simple typo could cause your cap table to display incorrect information. This could cause real problems when you set out for fundraising.

These problems can even arise with companies that are using a more robust option, such as cap table software. Not all equity management tools are created equal, and choosing one that doesn’t dynamically sync your documents and data could become problematic.

How To Avoid This Mistake: You may want to do a thorough examination of your company’s needs and consult colleagues/advisors on the tools that have worked for them. Don’t feel like you have to choose the easiest option (such as a free spreadsheet template) just to check the box.

2. Lacking a single source of truth (multiple versions of your cap table and documents).

Let’s say you have a master version of your cap table downloaded on your desktop. What happens when you need to make a new entry or update a figure? What if one of your partners makes a change and sends you an update via email – how are you keeping track of which version is the most up to date?

The same goes for cap table software users. If your tool isn’t updating your cap table in real-time each time a document is executed (and syncing that document in the data room), you likely risk having an outdated version of your cap table.

How To Avoid This Mistake: Consider an equity management platform that allows you to host a single version of your cap table online, with the ability to dynamically edit within the platform. Fidelity’s equity management solution could be a good option. Every time there is an equity event, your capitalization table automatically updates and dynamically links directly to all supporting documents. This helps create a single source of truth.

3. Dropping the ball on day-to-day cap table management.

Maintaining a clean cap table is a lot like cleaning your house. If you do a couple of chores a week, it’s not a difficult job. But if you wait to clean the entire house all at once, you’re going to be cleaning for a long time.

Procrastination is a part of life. But when it comes to managing your cap table, dropping the ball on day-to-day maintenance can be costly. Unfortunately, some leaders of private market companies wait to sort out their cap table when they’re on the eve of a fundraising round or acquisition. If any problems arise, this fundraising opportunity can be delayed — or even lost altogether.

How To Avoid This Mistake: Setting internal deadlines and routines — and sticking to them — is a great way to make sure you don’t save all of your work for the last minute. 

Each time a document or agreement is executed, make sure it’s immediately updated in your cap table. The automated equity financing functionality in Fidelity’s solution helps you stay financing ready. Our automated workflows help founders grant equity, create electronic stock certificates, manage multiple classes of stocks, obtain 409A valuations, and more. Every action is reflected in your automated data room, and your cap table stays up to date. 

4. Incorrectly tracking and recording stock option grants.

Granting stock options can be a great way to incentivize early employees of a growing private company. Without the right tool, however, this process can become complex.

Company leaders should ideally be able to track each employee’s stock grants, including vesting schedules and any attached restrictions, within their cap table. Losing track of any of this information could lead to disputes when an employee does decide to exercise their grants.

How To Avoid This Mistake: Fidelity’s equity management solution can help you fully automate the equity granting process. With just a few pieces of information – number of shares, recipient name, and your company’s fair market value (more on that in a second) – an automated workflow sets up your grant.

5. Neglecting a 409A valuation before issuing options.

A 409A valuation determines the fair market value of your company’s shares. It’s important because companies must calculate their FMV before granting equity to employees, board members, advisors, or consultants.

Failing to accurately determine your FMV before making an entry on your cap table can have serious tax implications for your company and shareholders.

How To Avoid This Mistake: Fidelity offers fast, accurate, and competitively priced 409A valuations from trusted third parties. Talk to our team to learn how to complete yours.

6. Failing to consult a professional (when needed).

Thankfully, equity management software provided by companies like Fidelity can make managing your cap table much easier for founders. However, this software doesn’t replace the need for legal expertise in certain scenarios.

Especially as your company grows, a cap table can get pretty complicated. It’s often better to ask for help than make a mistake with potentially damaging consequences.

How To Avoid This Mistake: Don’t be afraid to consult your attorney or a trusted advisor when you’re dealing with a complex issue related to your cap table.

Fidelity helps support cap table management for private companies.

The right equity management software can help you avoid these common hurdles and accelerate the pace of your fundraising efforts.

Fidelity’s equity management software helps private companies automatically update their cap table and dynamically link directly to all supporting documents in a secured data room.

Each time you grant equity, the award agreement will be tied to the corresponding board consent, subsequent exercise actions, stock certificates, and other future-related documentation.

Learn more about the platform to discover a single, reliable source of truth for your cap table.

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.

Fidelity provides cap table management and other administrative services to private companies and their equity compensation plans.

1129632.1.0