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SIX CAP TABLE MISTAKES YOU SHOULD AVOID

Six cap table mistakes you should avoid

In the start-up world, ownership in the company is one of the most important things. And a cap table is the bible that people swear by. Most investing decisions are taken based on shareholding on a fully diluted basis (FDB); hence it is important that we get this number right. One could end up having an inaccurate cap table on FDB due to several reasons – conversion ratios incorrectly applied, errors in tracking ESOPs, an anti-dilution event, and so on. Let’s discuss these in more detail

  1. Errors on converting a convertible instrument to equity: When convertible instruments are issued and the conversion ratios vary depending on certain events, it is easy to make mistakes. One could end up using an incorrect conversion ratio or miss out a trigger event that needs a recalculation.
  2. Version issues with Excel: Using Excel spreadsheets can cause version control issues, resulting in high risk of errors. Also, when complexity sets in, it is hard to keep a manual track.
  3. Misinterpretation of clauses: Reading through legal language in agreements is not everyone’s cup of tea. There could be misinterpretation of clauses due to lack of familiarity with legal jargon, resulting in inaccurate cap table.
    cap table dashboard
  4. Missing audit trail for employee plans: If ESOPs are granted, it is extremely important to track each employee plan independently and make sure that the entire trail of vesting and exercising is maintained. Any error in mixing up the plans can result in significant tax issues.
  5. Errors on exit of an employee: If employees exit the organization, the unvested ESOPs need to be expired and the cap table has to be updated. If this is not done, the company may end up paying an ex-employee more than what he is eligible for and also show an incorrect shareholding percentage.
  6. Lack of control on vesting schedule: Unless you have a robust vesting schedule across plans and a strong mechanism to track options that can be exercised, employees may exercise more options that what’s due to them.

To summarise, to avoid any cap table related issues, make sure you understand every instrument type and the attached covenants clearly; you have a systematic way to track your employee rewards; and a process in place to keep your cap table updated. It makes sense to seek professional help or use software applications to have a clean and accurate cap table right from the outset.

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Tracking Buy Back with TOPPEQ

Buyback is a commonly used instrument in both public and private markets for a variety of reasons. In simple terms, it refers to the repurchasing of own shares by a company. It is the opposite of raising funds, which results in the dilution of equity. Let’s now take a look at why companies chose to go in for a buyback and the impact it has on the company.

Purpose of buyback: A buyback is conducted essentially to either: consolidate stake in a company; provide an exit route to shareholders/founders/employees; increase shareholder wealth, or leverage available cash when there aren’t other attractive avenues to deploy it.

Outcome of buyback: Number of outstanding shares decreases; ownership of continuing shareholders increases; an increase in the Earnings Per Share results in an increase in shareholders’ wealth; and a reduction in cash balance.

The impact of the buyback of shares on the shareholding pattern can be significant. In the context of buyback by a private company, every shareholder is keen to know the effect of buyback on his ownership.

With Topper, founders and investors can track the entire cap table journey, including buybacks, through user-friendly dashboards.

Buyback on your dashboard

Buyback dashboard

1. In the above example, two entrepreneurs — let’s call them Anil Sharma and Rahul Naik — founded a company by shelling out Rs 5 lakh each in April 2015.

Stock Buyback1

2. They went on to raise Rs 2.43 crores in their angel round by raising additional equity. This diluted their share by 9.5% each.

Buyback

3. Later, in 2019, Anil Sharma decided to exit the company. The company repurchased its shares, which led to an increase in the ownership percentage of each shareholder.

Buyback

Buybacks are an important aspect of a company’s cap table and essential for analyzing future investment decisions in the company. Having the entire transaction on a dashboard helps founders and investors review the details of a buyback and ensure compliance.