The cap table is the most critical element in an investment deal between a VC company and potential portfolio company. It defines equity ownership and investment stakes for a company and sets forth how holders are compensated. And yet, it might also be the most misunderstood – and frequently wrong – piece of the deal as well.
This week, we are offering a remedy for the confusing and error-prone capitalization table: A free application that will build tables for investment-backed companies. It will allow equity holders to see their ownership in common and preferred stocks and other securities, calculate how ownership changes under different scenarios, and analyze convertible interest rates. All of these features are available under the free model – a few more bells and whistles come with premium accounts. Click here for the full list of features.
The cap table, which details equity ownership and debt obligations at a company, spells out who owns what in a company, how they are compensated, and what happens to those ownership stakes under different events. A good cap table can provide more information than any marketing material or website. Many people first realized that the music sharing site Spotify had huge potential when TechCrunch found its cap table.
The new cap table is a logical extension and development of the applications we have worked on over the years. When DocDep started two years ago, our only offering was online software that would organize documents and make them easy to share. But as we’ve grown, we’ve learned that the true value of what we provide is not in the virtual file cabinet, but in the giving people the ability to make their information clear and accessible. In short: to make it useful. The cap table might not seem like the most pressing issue when you have fires to put out, but a good cap table utility that can prevent some of those fires from flaring up in the first place.
How to get funding faster is on the minds of many a start-up. VentureBeat posted an insightful blog last week for entrepreneurs on how to secure funding for each new round. What are VCs looking for from you during Round C that’s different than Round A? Jeanne Sullivan from StarVest Partners recently spoke at a FundingPost event, which DDC attended, in New York, and she also shared some valuable advice for the funding process.
Regardless of which funding series you are prepping for, due diligence is often slow and painful and, worst of all, pulls you away from the truly important part, growing your business. The typical VC deal takes about 9 months to complete. Here are Jeanne’s tips on how to expedite that process:
1. Get a referral
Approach investors through someone they trust who can vouch for the soundness and potential of your enterprise. If you are a completely unknown quantity, your potential investors will need to dig deeper into your background, scrutinize your ideas more thoroughly, and completely dissect the merits of your business model. This will slow the process. Work your network and speed things up.
2. Constant contact
VCs are busy, just like the rest of us. Don’t assume you are the only company they are working with. You aren’t. Keep momentum going by constantly staying in contact with them. Specifically, send product and business updates. The proactive approach will serve a two-fold purpose. It will keep your company top-of-mind with them and it will demonstrate that you are a go-getter likely to succeed in your endeavor.
3. Get a call from a co-investor
VCs have to assess their risk when deciding to invest. If you have existing investors, a well-timed endorsement from one of them can help mitigate some of the concern and speed along the due diligence process. They can address questions and issues that the VC may have, knowing the language and culture of the venture community.
4. Don’t argue the pre-money valuation
Remember, these are ways to keep the process moving along smoothly. If you want to argue your valuation, go ahead, but it will only bog down the process and probably not get you want you want. Ultimately, you are worth what the market will give you, and the VC firms are the market. Just because you got money from your friend who valued the company at $10 million doesn’t mean that’s what you are worth.
5. Store your due diligence materials online for quick, easy access
Due diligence is paperwork, paperwork, paperwork. You will be responsible for sharing everything about your business with your investors from financials to employment agreements to tax documents. Even seemingly little things like your lease and your customer lists are important and subject to disclosure. How are you going to get all these materials to your investors safely and make it easy for them to be read? According to Jeanne and other VCs, email file attachments are cumbersome to read, mange and file. They would rather access an online environment where all the pertinent information is at their fingertips.
Furthermore, once you’ve spent the time and energy to find all these materials where are you going to put them now? By using an online portal, such as Radar, you can keep all your critical corporate documents intelligently organized and secure, but even better you can speed along the funding process because your potential investors don’t have to waste time hunting for your information about your business. VCs love nothing more than having all the pertinent information easily accessible on-demand so that they can make decisions more quickly and get back to the business of helping you grow yours.
As a technology firm dedicated to helping companies manage their mounting responsibilities, many founders and owners tell us: “Oh, we’re a small company, so we don’t have to worry much about corporate governance.”
Actually, it’s precisely because you’re a small company that you do have to worry about corporate governance.
Part of the confusion is due to semantics. Corporate governance conjures up images of huge board rooms and teams of accountants ensuring the company’s compliance with Sarbanes-Oxley. But corporate governance is more than that. Corporate governance touches on any practice or law that dictates how a company is run. Paying employees? That’s corporate governance. Filing taxes? That’s corporate governance. Applying for an SBA grant or loan? That’s corporate governance.
It’s especially important, as the folks at the blog Business Intelligence wrote earlier this month, to figure out these practices early in your company’s life. After all, these efforts will help build a solid management for your business.
To that end, entrepreneurs at every stage in their business’s life should consider how they organize their paperwork, manage their finances, share information, and communicate with key players. This is where DDC might be of some assistance through BoardPortal and Investment Management Portal.
The sooner a company establishes a corporate governance regimen, the more organized and professional it will be. This not only makes the job easier and potentially more profitable, but it also makes a good impression on venture capital firms and other organizations that might become investors. If you can clearly account for how your business operates and how it manages its money, then a funding firm will be much more inclined to invest, knowing that the risks are lower than with a disorganized company.
SoCal entrepreneurs who want to learn more about corporate governance for small business might want to check out the seminar “The Start-up Structure You Cannot Do Without, Corporate Governance,” which is being put on by EvoNexus in San Diego on August 27. Details here.