The Open Cap Table Coalition launched its website Tuesday via an inaugural Medium post. This project aims to standardize startup capitalization data and make it more accessible, transparent, and portable.
A cap table is a list of the company's securities. It includes options, shares and other company securities. A simple and clear cap table will quickly show who has what and how much. Too many equity owners find company capitalization information difficult to access and opaque for a variety reasons, including inexperience and bad advice.
This is especially important for startups that do not survive for the long-term, since growth can lead to more complex cap tables.
Good startup hygiene includes a well-maintained cap table. Cap tables don't have a set format so they are often closed off and not open to the public.
As someone who has advised hundreds upon hundreds of startups in the past 20 years as a founder of an accelerator and venture partner, cap tables are very dear to my heart. I also served as a senior advisor at a government-funded startup startpad. As a shareholder, I can also confirm that poor communication is the biggest factor in destroying trust between startups and shareholders. This includes issues like the current status at the cap table.
Good startup hygiene includes ensuring that your cap table is always clean and up-to-date.
Because of the clear value proposition for companies, I like the idea that a captable is an open corporate record. A cap table is vulnerable to errors, friction, and inaccuracy from the moment a startup creates it. This means that startups might spend money on cap table-related issues when they could be spending their money on other things. The law firm brought in to assist with these issues must deal with the back-end work. This means that neither the startup nor the law firm have a high return on their legal time.
Equally clear is the value proposition for equity owners. Equity holders have a legal and general interest in the company's capitalization information. They have the right of access to this information for many reasons, including aggrieved shareholder actions. This information should be easily accessible and clear for equity holders. It can encourage more investment, particularly from less-experienced investors.
As I try to imagine the future of this project, I recall the announcement by Y Combinator in late 2013 regarding the SAFE (simple agreement with future equity). The SAFE is an excellent analogy because no one knew what it was, and people were unsure if this was a necessary feature for startups. The end result was a significant improvement in capital-raising processes at the beginning stages.
The coalition's founders are Morgan Stanleys Shareworks and LTSE Software, as well as Carta. However, it is heavy on Big Law with Cooley and Goodwin Procter, Wilson Sonsini Goodrich & Rodsati, Orrick and Gunderson Dettmer and Latham & Watkins rounding out the 10 founding members.
What is the motivation for seven law firms that together had revenue of more than $10 billion in 2020, to work together on a startup product with open cap tables? Deal flow.
Big Law has tried for decades to establish relationships with startups in a stage where it is not economically sensible for startups to deal with large and expensive law firms. They have received mixed reviews for their efforts to create startup programs. They have also been far too heavy on the self-serve and too light on the were going to give you our regular Big Law level of services at a small fraction of the costs just in case you make it big and can one day pay our regular fees. So these firms are trying to separate themselves from the rest of the Big Law pack by building this entrepreneur-friendly tech.
The initial version of the open-cap table has been produced by the coalition. It is not clear if this will be as big a deal as the SAFE, or if it is a vanity solution to a real problem. I think this coalition could have as much impact as the SAFE if it builds strong relationships, isn't greedy, and recognizes the importance of the social good.