In a world where startups are now fundraising seemingly every six months, pushing liquidity events back years and offering options to employees every week, keeping track of who owns what has gotten complicated, very complicated.
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For years, a startup has managed its capitalization table – or capitalization table – record on spreadsheets, usually with the help of a law firm and maybe even a platform. inventory management. But as the world of private business has grown faster and more complex – with different ways of raising funds, increased option incentives to attract employees, and investors looking to invest more and more often – those who help fund managing these tables are looking for ways to find common ground.
This summer, Wilson Sonsini participated in the launch, along 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. The other members of the group are law firms Gunderson Dettmer, Latham and Watkins, Orrick Herrington & Sutcliffe, Cooley, Fenwick and West and Goodwin procter, as well as software vendors LTSE software, Menu and Morgan stanley Shareworks.
“The private market ecosystem has just grown considerably,” said Kevin swan, Co-Head of Global Private Markets in Morgan Stanley’s Workplace Branch, which encompasses the Equity Platform Shareworks. “One of the biggest changes we’ve seen has been how to effectively manage data. … These markets have grown 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 nearly twice the volume of secondary transactions in the private market in the first half of this year, nearly $ 2.8 billion, than during 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 portability of the data of the startup capitalization table”, according to the group during its funding.
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, chief innovation officer 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 just using the back of a briefcase or spreadsheet, or maybe even pay a law firm to help keep an eye on it. Eventually, new software and market vendors arrived to help keep up with these changes as businesses grew.
However, with the explosion of the venture capital market and the increase in secondary offerings, debt financing, transactions, etc., things have become much more complex. These platforms, law firms and the startups themselves need to talk and exchange data at a rate never seen before to ensure that capitalization tables are up to date and consistent for all parties.
Sherman said that when he started working with startups and venture capitalists three decades ago, a lawyer might work a few rounds a year because of all the manual labor involved in registering. of the transaction and the time it took. Now transactions are being concluded at a breakneck pace.
“Venture capital has really taken off with technology,” he said. “There is just a higher volume of transactions with more technology than we have. “
Secondary markets are recovering
Companies also tend to stay private longer and now generate the majority of their wealth before reaching public markets.
This shift has prompted some employees to look for ways to unlock that wealth by selling their stocks in secondary markets, where investors like hedge funds have been more than willing to buy them. This, in turn, has led to growth in markets such as EquityBee, Securitization and To 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. “
While the coalition was not created solely to solve the problems created by secondary markets, the effort is aimed at bringing transparency to the sometimes murky private market. And as more clarity is given to the space, secondary markets are likely to attract more interest; making data portability and interoperability more important than ever.
The coalition plans to announce new members after completing 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 provide feedback on the first release of the open-source cap-table format.
More new members are likely to join the effort as businesses and firms in the legal and financial arenas come together to solve the problems created by burgeoning private markets.
“There are so many wall gardens in this process,” Wang said. “We would like to change that and have standards. “
Drawing: Li-Anne Dias.
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