85. The Cap Table, Part 2 (John Buttrick & Sean Moran)

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Today we cover Part 2 of The Cap Table with John Buttrick of Union Square Ventures & Sean Moran of eshares. In this segment we address:

  • John, I’ve heard from many founders that get caught up in the Option Pool Shuffle. Can you describe what that is and if the eshares solution has an easy way to allocate the option pool to pre or post money?
  • I want to talk a little about employee equity. This has been a recent big topic of discussion on a number of different levels. Sean, how does eshares affect that cultural discussion.
  • John, some view the market for eshares as too small. What’s your response to them?
  • Sean, I had heard that eshares struggled to raise capital… was this the case and how have you found the process?
  • John, what was your thesis on investing and why is USV so positive on eshares?
  • Sean Moran cap tableSean, does eShares expand beyond Silicon Valley? If so, how? If not, what drives future growth?
  • Is there a data play here as well? It seems that there are many companies trying to understand and aggregate the very data that eshares will own? How are you thinking about the data angle?
  • John, any final thoughts or advice for very early-stage startups in light of today’s topic?
  • Sean, anything we didn’t touch on that you’d like to add to the cap table discussion?

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Key Takeaways:

1- The Basic Elements of a Cap Table
Cap Table or Capitalization Table is the record of ownership in a company.
-On the left you have the list of stakeholders including individuals or entitiies that hold securities in a company.
-Across the top you see the classes of stock. Common, Series A preferred, Series B, Options.
-You can see the outstanding ownership in a company. And aso on a fully diluted basis which takes into account preferred stock in an as converted to common basis.
-Options issued and those remaining in the pool
-Other convertible securities, such as Warrants
-Not on all cap tables but Sean thinks each should include price/share each round, which reveals the financing history and total amount of dollars invested
2- Why Ongoing Management of Equity is broken
Most often cap tables are tracked in an excel spreadsheet, which, as John mentioned, is really just a secondary source… meaning they attempting to display ownership, but are often innaccurate.Accuracy is a major issue w/ cap tables. We all have been in the situation where different revs of excel documents are emailed around and it’s anyone’s guess as to which, if any, are accurate. Eshares has changed this by acting as a primary source. It’s not just a ledger. It is a transfer agent that represents the true ownership of a company. COSTS
Clearly, it’s very expensive to have law firms manage this process… not to mention the frequent reconciliations. Plus, it seems that the savings potential on 409As can be significant.CONSISTENCY
Sean mentioned that many cap tables are organized differently and most don’t even include the price/share paid by investors. It can be very difficult to understand the funding history, total amount raised and true, fully-dilluted position of different shareholders with the standard, excel cap table. I think it goes without saying that a standardized approach with all the critical data elements can bring tremendous clarity to the equity stack.MANAGEMENT & REPORTINGIf one is an investor with multiple investments, it is very difficult to know the current value of one’s portfolio. A significant year-end process is required where one has to get all the most recent cap table, collect the documentation related to each investment and get audited finanical statements. With my current portfolio, as it stands, I can’t imagine pinging all of my founders for this information. While they may have much of it available, the communication chain alone would be difficult to manage. And this is often because all of this information is siloed. I can not view all of my positions in an aggregate manner, at once. At least, not without leveraging a tool like Eshares. And, because it’s cloud-based any investor can access the most current version at any time.And the most intriguing aspect of reporting is that Eshares allows for different scenario planning. An investor or founder can tweak assumptions like the next round’s valuation, participation, refresh of the option pool, liquidation preferece. This is where Sean talked about the tools including the waterfall analysis that allows one to create scenarios on top of an existing cap table.
3- Challenges with Employee Options

We discussed a number of issues with employee options, many of which are exacerabated by mismanagement of the cap table…

1. We discussed the option pool shuffle, which has to do w/ Options pools factored in at either the pre vs. post money valuation. A quick tip for founders… don’t let investors slip the option pool into the pre-money. It will lower the effective valuation.
2. John mentioned there are problems upon issuance of options, where board approvals are not signed at the right time
3. Paperwork is a huge hassle for those administering it at the company
4. The employees often don’t know how many options they have, how many have vested or when they vest. A very good friend of mine who is debating leaving a very well-known, Series B, company called me the other day about his options. He didn’t know how many he had and was afraid they’d know he was considering leaving if he asked for his full-diluted position and vesting status. Not good.
5. Exercising employee options can be a major process and is often delayed for months. This has been used in a predatory fasion to avoid paying out departing employees.
6. If employees know the numerator (ie. what they own in a company) they still rarely know the denominator (ie. the total shares outstanding in a company)… not to mention all the terms that impact option value.

Clearly, employees are in a difficult situation in the current environment. It’s nice to know that there are solutions that not only provide value to a company’s founders and investors but to the employees as well.


Tip of the Week:  A Simple Cap Table