
Broken cap tables - prostoalex
https://medium.com/@henrysward/broken-cap-tables-bbf84574a76a
======
austenallred
Reading this post I realized I literally have a stack of stock certificates
sitting in my desk. Mostly because I don't want to take the time to put them
in the mail (then I'd have to dig in emails for addresses, make a run to the
post office, etc.) I know I should, I just haven't.

Until my lawyers started asking me questions I didn't even know I was supposed
to do anything with them -- I just filed them away with all the other
paperwork I knew I'd probably need sometime but didn't know what it was for.
Honestly in my mind that goes under one of the bullshit administrative things
I wish I could pay someone to take care of. If someone created a Zenefits for
cap table management/investor relations, I'd be the first customer.

EDIT: I'm not just talking about cap table management (glorified
spreadsheets). I want something much more comprehensive.

~~~
jaredhobbs
Check out [https://www.esharesinc.com](https://www.esharesinc.com)

eShares is not just "glorified spreadsheets". They are an SEC registered
transfer agent. eShares offers fully electronic securities which feeds into
the realtime cap table. Here's the feature page:
[https://www.esharesinc.com/features](https://www.esharesinc.com/features)

Disclaimer: I work at eShares.

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andrewfong
>> Delaware corporate law requires companies to issue stock certificates but
most rarely do.

I don't think this is actually true. If I recall correctly, it's possible to
set your company up in a way in which stock certificates are actually not
required. Delaware corporate law explicitly recognizes this possibility
([http://delcode.delaware.gov/title8/c001/sc05/#158](http://delcode.delaware.gov/title8/c001/sc05/#158)).

And, as a recovering lawyer who billed far too much time printing out stock
certificates and attending to other inane cap table management issues, I'd
strongly recommend asking your lawyer to set your company up as uncertificated
if it isn't already. There's no real value to the company to issue actual
certificates (they don't provide any additional legal "truth" that doesn't
already exist in other legal agreements), but there are consequences to
screwing up or misplacing a stock certificate.

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choppaface
Could not agree more: "the practice of equity administration is systemically
biased against employees" (and to protect companies and investors). Equity
admin isn't just a mess for startups but can be a mess for mature companies,
too. If you have a chance to interview a manager before accepting an offer, I
highly recommend asking them how well Finance has their shit together. You
don't want to, say, get in a fight with the General Counsel over stock...

I had major stock admin issues at a fairly mature (then 6-year-old) company
that is now public. Soon after I started, my boss promised me a follow-on
stock award for good performance but failed to do any of the paperwork. I only
discovered this issue when I later requested HR to audit my paperwork, and I
ended up having to fight our General Council (who was also on the board) for
an ENTIRE QUARTER over this mess. The GC not only badgered me but completely
mislead me and had the board change my grant without my signature on the final
agreement in order save his face (and likely the company from running into
trouble with pre-IPO auditors). It took a ton of painful arguments with my
boss (and revelations that he had other 'broken' stock promises) to finally
get that stock re-awarded. To save HIS face he ended up giving a bunch of my
colleagues pre-IPO stock bonuses too (though some had that 'fuck-off' back-
weighted 10/20/30/40 vesting). The whole process unfortunately obliterated the
trust in the relationship and made /vesting/ the (mostly) restored stock very,
very painful.

If the law, regulations, and administration were a lot more straightforward, I
doubt any of this would have ever happened. (Well, if my boss and the General
Council would have owned up to their mistakes, that would have helped, too :)
. Something like eShares might have also enabled my company to let non-
management employees do 83(b)s leading up to what turned out to be a highly
successful IPO.

eShares is nice, but some sort of basic, open-source and free baby gate would
be a huge help, too. When managers have so much control over employee
compensation, it's really easy for them to fuck things up (intentionally or
not).

~~~
caseyf7
Founders need to hire one really good finance person early on who can stay on
top of this and all the other legal/financial issues. Most of this BS comes
from the cover-up because it is hard to fix these issues after the fact. Hire
your own person who is bought into the team. Rent-a-cfo's usually don't care
enough or want to get their hands dirty getting it right the first time.

~~~
choppaface
Agreed. Our CFO tried to help me but was transitioning out to spend more time
with his family. Would have loved to have worked with the CFO instead of the
GC. (This was also a time when the company had no real HR department and the
GC was effectively head of HR).

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chrdlu
The 90 day exercise window for stock options really catches some non-finance
employees off guard. They don't realize the high amount of tax and investment
that has to be made for illiquid shares (which are still pretty risky for most
start ups). That being said, there are a few options that I feel more people
should know about including the Employee Stock Option Fund
([http://esofund.com/](http://esofund.com/)). If you fall within the 90 day
period, I would highly suggest sending them an email. They are able to produce
the money very quickly and will do their best to help you.

~~~
erichurkman
Sam Altman advocates for a longer exercise window [0] as part of his piece on
employee equity. More early-stage companies are adopting it, but it's not
without complications. For example, 90 days after termination ISO shares
convert to NSO shares, which are a different beast for taxation purposes --
employers/employees rarely understand ISO shares, let alone ISO+NSO.

[0] [http://blog.samaltman.com/employee-
equity](http://blog.samaltman.com/employee-equity)

[1] I work @eShares.

~~~
chrdlu
I think thats a good move in the right direction, but the fact remains that
startups are risky in general. Taxes + the exercise price of a slightly less
risky startup (higher strike price) can unexpectedly add up to quite a bit of
money for employees less familiar with stock options. It would be cool to find
ways to diversify that risk or sell part of it to someone who is willing to
take it on.

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mcfunley
I find the idea that "less than 5% of employee option grants are exercised"
both very sad and unsurprising. From working in this industry I've gotten the
overwhelming impression that employees don't know how equity works. That leads
them to systematically overvalue it, and by doing so they accept lower wages
than they would otherwise. And companies that might have the best of
intentions don't help at all, because their staffers don't understand it
either.

~~~
mikeyouse
You can't discount that most companies fail though, you'd expect the majority
of options to go unexercised.

Edited to expand a bit:

Shares are ugly and annoying and cap tables are broken but it so rarely
matters. Things should obviously be better and cleaner and more organized but
since so few companies return anything to anyone besides the preferred
shareholders, I'm not sure the 'cost' of this disorganization is very high.
Seems like another case similar to the uncovered call option description of
'technical debt'. By avoiding the time and effort of energy associated with
cap table management, companies can focus on things that add value and count
on lawyers to sort it out when the work will provide value -- fundraising /
M&A. There's a point to be made about the lack of a signal here too, if all
companies are bad, then no company looks worse for meeting that expectation.

~~~
mcfunley
Totally true. It would be great to have some real stats about how often
options earn a profit. But keep in mind this is at best an upper bound on
that.

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dlgeek
Note that the author of this post is the CEO of a company offering a solution
to this problem. The whole post is an ad (albeit a compelling one). I just
wish he'd put a disclaimer up top to make that more clear.

~~~
patio11
You've got to appreciate the irony of accusing someone of commercializing _cap
table management_ , right?

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igonvalue
> Think of a cap table as a blockchain of a company’s liabilities.

Are crypto-currencies now so familiar that we are explaining other concepts in
terms of them, and not the other way around?

~~~
hueving
Think of finding metaphors like bitcoin mining. All it takes is finding a
value that works, even if there are better ones. :)

------
ryanobjc
It took me over a year to get the stock certificates for a well known, highly
funded (> $80m total) company. CFO kept blowing me off. I kept emailing every
few months. Finally got it.

A lot of "don't worry we recorded it", but when I give you a 5-figures check I
want physical proof! Based on this article, looks like I was well justified in
this.

~~~
timr
You might grow to wish you didn't have it. It's a pain to hold a physical
stock certificate with actual value.

Put that sucker in a safe deposit box, if you haven't already. If you lose it,
you'll be in for a bureaucratic nightmare of indemnity bonds (which are
expensive!) and notaries to get your money. And on the happy day you get to
exchange your piece of paper for cash, you get to live through the unique
experience of trusting a huge sum of money to the postal service.

It's a like backing up your computer on a local hard drive because you don't
trust cloud providers: the chance that a law firm will lose your certificate
is a lot lower than the chance that you will.

------
zaroth
I was just looking at eShares for their 409a valuation service, which I see as
a must-have, whereas the cap-table management I see more as a nice-to-have at
this stage. I can absolutely see the need for more rigorous controls,
auditing, paper trail, etc. in the future but for now Excel is enough.

The point about complex calculations in prose instead of just writing the
algorithm is also a good one. I find anti-dilution clauses in particular to be
nearly impossible to parse versus just stating the desired scale. IMO don't be
afraid to trample on tradition and actually write the formula in the docs
instead of the prose. Likewise, I email my stock certificates as digitally
signed PDFs.

I like choppaface's point about a basic, open-source starting point. Not
necessarily _free_ by the way! I just don't like the idea of the single point
of truth for sensitive company data like that sitting on someone else's
servers.

------
AndrewKemendo
_There is something paradoxical about funding companies building virtual
reality, autonomous drones, and Bitcoin markets, using Excel and paper
certificates._

Not if you understand that investors and the market are not optimizing for
founders with good management experience/understanding.

------
icedchai
In the early 2000's, I exercised some options and did receive the stock
certificate. Of course, they were worthless anyway (company was "acquired" for
well under the capital put in.)

~~~
dkirsch00
n.b. Your statement does not mean shares were worthless, only that they were
worth less than you paid. Salvage value for large investments is painful, but
still worth collecting.

~~~
icedchai
I received a letter saying essentially that the company had declared
bankruptcy and some assets (not the entire company itself) were acquired.
Nothing was available to pay common stockholders.

So, yes, it actually was worthless.

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mathattack
It does amaze me how much companies that are changing the future externally
have such awful systems internally.

A family member had many months of struggle getting stock certificates too.
It's a real issue.

~~~
retooled
I find it completely unamazing. Companies that are "changing the future
externally" are spending their resources in one place instead of another.

Human attention and willpower are limited resources, and assuming that when
someone or a company does one thing right they must be doing other things
right as well is one of the oldest fallacies in the book.

~~~
mathattack
Very true. I've seen software and consulting firms with the worst systems and
processes because anyone good at them was working externally not internally.

------
danbmil99
Just for fun, someone should start ranting about 83 (b) elections.

The system is surely broken.

