In a world where startups now fundraise seemingly every six months, push back liquidity events for years, and give employees options weekly, keeping track of who owns what has become complicated, very complicated.
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For years, a startup has managed its cap table record – or capitalization table – on spreadsheets, usually with the help of a law firm and maybe even a stock management platform. stocks. But as the world of private enterprise has become faster and more complex – with different ways to raise funds, increased incentives for options to attract employees, and investors seeking to invest more and more often – those who help to manage these tables are looking for ways to find common ground.
“Now was the time for us to step up and change some practices,” said Craig Sherman, partner at Wilson Sonsini Goodrich & Rosati.
This summer, Wilson Sonsini participated in the launch, with other groups, of the Open Cap Table Coalition. The coalition, which just held its first summit last week, is an attempt to standardize an aspect of the startup landscape that can sometimes feel like the Wild West. Other members of the group are law firms Gunderson Dettmer, Latham & Watkins, Orrick Herrington & Sutcliffe, Cooley, Fenwick & West and Goodwin Procter, as well as software providers LTSE Software, Carta and Morgan Stanley’s Shareworks.
“The private markets ecosystem has just grown tremendously,” said Kevin Swan, co-head of global private markets at Morgan Stanley’s labor arm, which encompasses the Shareworks equity platform. “One of the biggest changes we saw was in efficient data management. … These markets have become large enough to become interesting.
become more important
To illustrate this growth, since the start of 2020, Shareworks has recorded more than $7 billion in company-sponsored transactions on its platform. The platform also handled almost twice as much private market secondary trading volume in the first half of this year, or almost $2.8 billion, than in all of last year.
With this growing interest and increasing transactions, it has become more difficult to manage who owns what in a business. The coalition is an attempt “to improve the interoperability, transparency and data portability of the startup capitalization table,” according to the group when funding it.
Simply put, the group aims to introduce substantive and technical standards, including how information is transferred, as well as the code and even the language used, said David Wang, director of innovation at Wilson Sonsini.
“We just want to set the rules of the road,” Wang said.
Technology replaces the towel
Once upon a time, a startup could keep ownership and options straight just by using the back of a napkin or a spreadsheet, or maybe even pay a law firm to help keep tabs. Eventually, new software vendors and marketplaces arrived to help keep up with these changes as companies grew.
However, with the explosion of the venture capital market and the increase in secondary offerings, debt financing, closing deals, etc., things have become much more complex. These platforms, law firms, and startups themselves need to talk and exchange data at a pace never seen before to ensure cap tables are up-to-date and consistent for all parties.
Sherman said when he started working with startups and venture capital firms three decades ago, a lawyer might work a few funding rounds a year because of all the manual labor involved in registration. of the transaction and the time it took. Now, deals are done at a breakneck pace.
“Venture capital has really taken off with technology,” he said. “There’s just a higher volume of transactions with more technology than we have.”
Secondary markets resume
Companies also tend to stay private longer and now generate the majority of their wealth before reaching the public markets.
This change has caused some employees to look for ways to unlock this wealth by selling their shares in secondary markets, where investors like hedge funds have been more than willing to buy them. This, in turn, has led to the growth of marketplaces such as EquityBee, Securitize and Forge.
“Someone has to reconcile these transactions that happen on platforms like Carta or other third-party platforms,” Wang said. “It can be a bit of a free-for-all right now.”
Although the coalition was not created solely to solve the problems created by secondary markets, the effort aims to bring transparency to the sometimes murky private market. And as more clarity is given to the space, secondary markets will likely attract more interest; making data portability and interoperability more important than ever.
The coalition plans to announce new members after wrapping up its first summit last week.
Wang said a few dozen cap table management companies and financial institutions joined the conversation at the summit to learn more and give feedback on the first version of the open-source cap table format.
More new members are likely to join the effort as businesses and corporations from the legal and financial spheres unite to solve the problems created by the burgeoning private markets.
“There are so many wall gardens in this process,” Wang said. “We would like to change that and have standards.”
Illustration: Li-Anne Dias.
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