It is not always clear who owns startups. It is often difficult to determine who owns what startup because there is no public registry. The Delaware Division of Corporations is the most relevant source of information for startups. However, you might not be able access all of the information you require. It may be difficult to find the right information from the legal paperwork.
Access to a startup's capitalization table (also known as the cap table) is essential in order to understand its capital structure. Cap table contains information about shareholders, future ownership rights, vesting schedules, purchase prices, and economic rights. This information is easy to digest by investors and founders. It allows them to calculate exit payouts, analyze equity dilution due new hire equity grants, as well as understand the impact on additional funding rounds.
Although startups may initially collect the data using Excel spreadsheets for initial purposes, as the ownership structure becomes more complicated, it becomes more difficult and more costly to document and follow. This is what led to the creation of cap table management software.
The way that different cap table data items are organized, accounted for and accounted is dependent on the service provider. It is difficult to automatically sync data between different software platforms without a standard. This makes it difficult to switch vendors and ensure that everyone is on the same page.
A coalition of Silicon Valley lawyers and startups vendors has been formed to address the issue. The Open Cap Table Coalition announced its intent to improve interoperability and transparency of startup cap tables data in a Medium post on July 27. Some participants may find standardization less beneficial than fewer billable hours and less lock-in for platforms. The coalition reflects Silicon Valley's way of doing business. As AnnaLee Saxenian (Dean of the UC Berkeley School of Information) noted in her 1994 book Regional Advantage, Valley is a place where fierce competitors become partners and informal cooperation and exchange become institutionalized.
The founding members deserve to be praised for their efforts. Inefficiencies can be eliminated, which allows the ecosystem to move more quickly and allows players to focus on creating value. The open cap table coalition won't be able to reach its full potential if investors and founders don't have access to the data. To make the open cap table truly open, all equity holders must have access to the information that determines equity values, even employees of startups.
TechCrunch has published articles in the past on the abuse potential for startup equity compensation. This market is highly opaque and virtually unregulated. Many employees are lured by stock options, but they don't understand what they are or how they are valued. Stories of successful IPOs portray employees as millionaires and give the impression that startups offer a quick path to financial success. In the world of startups, however, success is not the norm. An employee could end up in debt if they make bad investment decisions. It can also be detrimental to the ecosystem and the startup in the long-term if employees' expectations are not aligned with the startups financial reality.
Poor communication is the number one reason startups and shareholders lose trust, particularly around issues like the status of cap tables, said Aaron Solomon, Esquire Digital's head of strategy, in support for the open captable initiative. This is also true for employee trust. Leadership miscommunications around equity issues can lead to a loss of trust. Travis Kalanick has seen firsthand how messing around with employee equity can lead to disaster.
Kalanick stated in June 2016 that we are going to IPO as soon as humanly possible. My employees and their significant others will be arriving at my office with pitchforks, torches and other tools one day from now. The day before, we will IPO. But, it is risky to wait for employees' tempers to get out of control. You may wake up a whole day later than you did the previous day. Transparency with both capital providers and employees is crucial in these times, where it's harder to find quality employees than it is to raise money.
I interviewed Silicon Valley startup founders and lawyers a few years back to find out why they don't share more information with their employees. The recurring fear of being sued and disagreements over disclosure formats were common. It is now possible for industry's most influential players to agree on a captable format. This agreement will also address how data should be shared with employees. The coalition could make a significant impact on the industry by setting a voluntary standard for everyone to follow.
In startups, capital/labor relationships are naturally imbalanced because employees contribute human capital, but are denied voting rights and information. This imbalance can be partially corrected by providing employees with information about their potential gains under different exit scenarios. Startups can attract talent and foster a positive culture by making information easily accessible.
The book by Saxenians on Silicon Valley's regional advantage also discusses how employee stock options played a role in the transformation of Silicon Valley since the 1970s. As capital markets and regulations have changed, investor, employee and entrepreneur relationships have been adversely affected, which has led to ongoing friction over liquidity allocation and risk allocation. Silicon Valley's competitive edge can be maintained today by creating equity transparency. The Open Capital Table Coalition cannot claim to foster an open community unless it takes on this challenge.
