Broken cap tables | Hacker News Reader

Broken cap tables

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156 pointsprostoalex31 comments

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.

Check out 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

Disclaimer: I work at eShares.

Isn't that what this article is about? eShares? I'm not a founder so I'm not sure if that's what it is "exactly" what you are looking for.

Five seconds of googling brought up this tool https://www.capshare.com, along with a host of others. Seems like that one does a lot of what the article (and you) talk about.

>> 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).

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.

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).

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.

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).

While I'm aligned with the goal, it's burdensome for early-stage startups to hire FTEs to deal with what is essentially administrative paperwork. All startups have this problem, so it feels like one that should be solved by software. Hence eShares.

FD: I work at eShares.

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/). 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.

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

[1] I work @eShares.

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.

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.

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.

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.

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.

You've got to appreciate the irony of accusing someone of commercializing cap table management, right?

The first sentence of the post is "We see a lot of cap tables at eShares". This kind of implies that he at least works there.

> 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?

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

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.

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.

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.

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.

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.)

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.

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.

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.

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.

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.

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

The system is surely broken.

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