The Open Cap Table Coalition(techcrunch.com)
techcrunch.com
The Open Cap Table Coalition
https://techcrunch.com/2021/07/29/introducing-the-open-cap-table-coalition/
8 comments
I've worked for a few startups before in the US and have never seen a cap table. I feel like this is the norm. It seems like if you are asking employees to take options in lieu of cash then you show allow them to see what the pie looks like. Certainly at least once they start vesting. I'm curious what the reaction was when you asked? I'm imagining it was one of surprise?
The first startup failed and I had joined late anyway.
The second startup I joined when it was only 5 months old and stayed for 3 years. I asked how many shares there were in the company before I joined. I was told X amount and just 4 months later I learned it was 1.4X when one of the managers let it slip. From the one financial document they published I was able to determine that after 3 years the numbers of shares had grown by 2.5X Basically they were issuing new shares to new employees rather than giving them out from an existing pool of shares.
I didn't ask any questions as they were telling us someone wanted to buy the company. They gave employees the opportunity to buy more shares because they told us the sale of the company was going to happen. I asked how many shares there were now and they avoided the question 3 different times. I decided not to invest.
For various reasons I lost faith in the management and decided to look for another job. I only learned about liquidation preferences recently.
The second startup I joined when it was only 5 months old and stayed for 3 years. I asked how many shares there were in the company before I joined. I was told X amount and just 4 months later I learned it was 1.4X when one of the managers let it slip. From the one financial document they published I was able to determine that after 3 years the numbers of shares had grown by 2.5X Basically they were issuing new shares to new employees rather than giving them out from an existing pool of shares.
I didn't ask any questions as they were telling us someone wanted to buy the company. They gave employees the opportunity to buy more shares because they told us the sale of the company was going to happen. I asked how many shares there were now and they avoided the question 3 different times. I decided not to invest.
For various reasons I lost faith in the management and decided to look for another job. I only learned about liquidation preferences recently.
>"Basically they were issuing new shares to new employees rather than giving them out from an existing pool of shares."
Wow. Why would they do this? Is there an upside to that? I don't think that's common correct?
Wow. Why would they do this? Is there an upside to that? I don't think that's common correct?
I don't know what is normal.
I had wrongly assumed that some percent of the stock would be pre allocated for hiring future employees. As far as I know we never got any outside investment after our initial angel investor that we had from the beginning.
Because of how the company was registered we got one financial document per year that they were legally obligated to file. On that I could determine my ownership percentage by calculating how many of my shares had vested and then simple division told me the total number of shares. I correlated this with 3 other employees and we determined the number of shares each year and they had gone up 2.5X from the initial number I was told when I joined.
I had wrongly assumed that some percent of the stock would be pre allocated for hiring future employees. As far as I know we never got any outside investment after our initial angel investor that we had from the beginning.
Because of how the company was registered we got one financial document per year that they were legally obligated to file. On that I could determine my ownership percentage by calculating how many of my shares had vested and then simple division told me the total number of shares. I correlated this with 3 other employees and we determined the number of shares each year and they had gone up 2.5X from the initial number I was told when I joined.
What is the right way to ask about liquidation preferences? Asking about “shares outstanding” or “fully diluted shares” does not seem sufficient.
I don't think there is. I replied to someone else in this thread with a similar question.
I got very awkward responses from our management and it was clear they wanted to avoid all questions about where possible investments would come from and how much that would dilute the company. I didn't even know about liquidation preferences until I left that company.
It is definitely something I would ask about before I ever joined another startup.
I got very awkward responses from our management and it was clear they wanted to avoid all questions about where possible investments would come from and how much that would dilute the company. I didn't even know about liquidation preferences until I left that company.
It is definitely something I would ask about before I ever joined another startup.
I understand the hesitation to predict future funding or dilution, but would hope to get straight answers about liquidation preferences in the current cap table.
The startups I’ve received offers from were very upfront when I asked about shares outstanding and also willing to give order of magnitude estimates of where they were in terms of growth. I never thought to probe further about cap table and liquidation preferences. It turned out that the startup I’ve worked at the longest did have a sane cap table thanks to the founders finding good investors, but I didn’t learn those details until long after I joined.
The startups I’ve received offers from were very upfront when I asked about shares outstanding and also willing to give order of magnitude estimates of where they were in terms of growth. I never thought to probe further about cap table and liquidation preferences. It turned out that the startup I’ve worked at the longest did have a sane cap table thanks to the founders finding good investors, but I didn’t learn those details until long after I joined.
I had captable access at my last company. There was so much dilution (mainly due to a couple of nasty down rounds), after 5 years, even the founder's shares were barely worth anything. Investors owned 90% of the company, founder 8%, employee's maybe 2%.
It's unclear what technical specifications exist for Open Cap Table but it looks to be a common file format?
At a technical level, in addition to a common file format, I actually think that blockchain technology is a really good means of validating edits to the cap table data itself.
The current mechanism for managing a cap table - particularly for pre-seed entrepreneurs - are probably something like Carta.com as a paid cloud managed offering or worse - some Word doc or Google Cloud doc which gets passed around by founders and legal. Think Mark Zuckerberg, Eduardo Saverin and Dustin Moskovitz in a dorm stage type companies.
What I think would be useful is something more akin to Microsoft Excel Spreadsheet maintained with a non-forkable git repo that's shared among partners and requires consensus on PRs before merge.
For the record I'm skeptical of cryptocurrencies but bullish on blockchain technology (which I see as basically git with trust/consensus features built in). Particularly for maintaining consensus on documents among semi-trusted partners who need to track modifications to the document and who made them.
Also for the record I just finished binge watching Git as Blockchain by Michael Perry. So now every nail needs the blockchain hammer :) .
https://www.youtube.com/watch?v=k7U-V4EwoP8
At a technical level, in addition to a common file format, I actually think that blockchain technology is a really good means of validating edits to the cap table data itself.
The current mechanism for managing a cap table - particularly for pre-seed entrepreneurs - are probably something like Carta.com as a paid cloud managed offering or worse - some Word doc or Google Cloud doc which gets passed around by founders and legal. Think Mark Zuckerberg, Eduardo Saverin and Dustin Moskovitz in a dorm stage type companies.
What I think would be useful is something more akin to Microsoft Excel Spreadsheet maintained with a non-forkable git repo that's shared among partners and requires consensus on PRs before merge.
For the record I'm skeptical of cryptocurrencies but bullish on blockchain technology (which I see as basically git with trust/consensus features built in). Particularly for maintaining consensus on documents among semi-trusted partners who need to track modifications to the document and who made them.
Also for the record I just finished binge watching Git as Blockchain by Michael Perry. So now every nail needs the blockchain hammer :) .
https://www.youtube.com/watch?v=k7U-V4EwoP8
>bullish on blockchain technology (which I see as basically git with trust/consensus features built in)
Blockchain and smart contracts are the perfect technology for managing a company's assets and voting rights, especially for startups. Imagine how much lower the risk for investors would be if the terms of share creation and dilution where completely spelled out in code. Option grants and lockup periods could be completely visible. Trading/hedging/derivatives could be available for even the smallest companies. Very tiny minimum investments could be taken with almost no overhead.
ICOs have the right idea, but they are just 99% scam illegal security offerings. An SEC sanctioned version of an ICO that is tied to real shares in a company would be a game changer.
Blockchain and smart contracts are the perfect technology for managing a company's assets and voting rights, especially for startups. Imagine how much lower the risk for investors would be if the terms of share creation and dilution where completely spelled out in code. Option grants and lockup periods could be completely visible. Trading/hedging/derivatives could be available for even the smallest companies. Very tiny minimum investments could be taken with almost no overhead.
ICOs have the right idea, but they are just 99% scam illegal security offerings. An SEC sanctioned version of an ICO that is tied to real shares in a company would be a game changer.
I don't understand why a distributed solution is necessary here. Couldn't you just use a database and a git repo of stored procedures for share creation/dilution?
A database might be susceptible to tampering, etc. It might be simpler to just use the OCF file itself and put it under source control/ledger tracking via git.
I think the base level solution could just be an OCF file and git with some sort of consensus requirement among all partners before a merge to master is allowed.
The key thought is that the OCF file format standard is a great start but for sure other features/tooling around the format could be interesting to drive adoption.
I think the base level solution could just be an OCF file and git with some sort of consensus requirement among all partners before a merge to master is allowed.
The key thought is that the OCF file format standard is a great start but for sure other features/tooling around the format could be interesting to drive adoption.
Git is not sensitive to tampering
The cap table is not an official record, merely a presentation of data. The stock certificates themselves and the purchase agreements (or notes/safes) are the official record. So, edits or errors in cap tables (which happen a lot) are not such a big issue as to merit the use of a complicated blockchain solution.
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Agreed - perhaps blockchain is too buzzwordy.
I'm not thinking something super complicated. Basically envisioning a tool that is a fork of git itself with two features disabled/tweaked (i.e. disable forking, require consensus before PR merge to master).
Probably the hardest part is creating a UX that lawyers can understand and trust.
I'm not thinking something super complicated. Basically envisioning a tool that is a fork of git itself with two features disabled/tweaked (i.e. disable forking, require consensus before PR merge to master).
Probably the hardest part is creating a UX that lawyers can understand and trust.
I am one of the organizers of this Coalition. We expect to publish technical specification in Q1 2022. It will be a github repo and include the specs behind the common file format called OCF (Open Cap Table Format).
That is great that the format itself will be open sourced.
Long term I think there are some great opportunities for on boarding pre-seed technical founders onto the paid platforms which utilize Open CapTable Format files by providing some guidance on how to use open source tools (editors, git/ledger) to edit OCF files, store, distribute and ensure consensus among founders and early partners.
The founders can then share the OCF files and distributed ledger entries when they eventually need to work with established entities who are using the paid SaaS OCF offerings (VCs, Legal, Compliance organizations). They also would likely graduate to paid SaaS offerings as well.
Sort of the open source git versus GitHub/GitLabs model.
Long term I think there are some great opportunities for on boarding pre-seed technical founders onto the paid platforms which utilize Open CapTable Format files by providing some guidance on how to use open source tools (editors, git/ledger) to edit OCF files, store, distribute and ensure consensus among founders and early partners.
The founders can then share the OCF files and distributed ledger entries when they eventually need to work with established entities who are using the paid SaaS OCF offerings (VCs, Legal, Compliance organizations). They also would likely graduate to paid SaaS offerings as well.
Sort of the open source git versus GitHub/GitLabs model.
Why is there a culture of hiding cap tables in the first place? Seems like some incentive structures need to be fixed before a transparent cap table is adopted.
I think the article is overstating the scope of the coalition a bit. If I understand correctly, it's talking about the format and transportability of the cap table, but not doing anything to change how broadly a company will choose to make the cap table available. So not really transparent, but more importantly avoiding vendor lock-in.
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What is a cap table?
It sounds like a capitalization table... like a summary of existing investors, their terms, and the number of investors + shares of each type?
This seems kind of simple; why is it hard to make it standard? (I have no doubt there is a reason; just curious to understand it better)
It sounds like a capitalization table... like a summary of existing investors, their terms, and the number of investors + shares of each type?
This seems kind of simple; why is it hard to make it standard? (I have no doubt there is a reason; just curious to understand it better)
Yes, cap table is the same as capitalization table. They can get very messy as time goes on. You have new investments (from both new and existing investors), changes in terms, etc. Compound that with the fact that there are a lot of different ways you can present the information. So if you're looking at one company's cap table, it can take some time to work through it and understand exactly who owns what and make sure it's correct.
Think of it kind of like being able to access a website's information through an API vs having to scrape and parse data from HTML.
Think of it kind of like being able to access a website's information through an API vs having to scrape and parse data from HTML.
This. A summary spreadsheet isn't so complex, but the detailed ledger of past and present stakeholders, securities, transactions, etc. get very very long. Spreadsheets don't scale after hundreds of securities are issued > converted > transfer > repurchased.
From the article:
> For those unfamiliar with a cap table, it’s a list of who owns your company’s securities, which includes your company shares, options and more. A clear and simple cap table should quickly indicate who owns what and how much of it they own. For a variety of reasons (sometimes inexperience or bad advice) too many equity holders often find companies’ capitalization information to be opaque and not easily accessible.
> For those unfamiliar with a cap table, it’s a list of who owns your company’s securities, which includes your company shares, options and more. A clear and simple cap table should quickly indicate who owns what and how much of it they own. For a variety of reasons (sometimes inexperience or bad advice) too many equity holders often find companies’ capitalization information to be opaque and not easily accessible.
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Not sure if this is good or bad. The people involved are big law firms and investment companies and such.
The initial medium post has no detail whatsoever.
The initial medium post has no detail whatsoever.
Is this a US specific problem? In Germany companies need to maintain cap tables in a mandatory public registry (Handelsregister). You can request any company’s records against a small fee (which in fairness I consider very backwards, could be more open). There are some third party providers like NorthData making this data available publicly as well.
I am one of the organizers of this Coalition. for the first version of our open format we're focused on American Delaware Corp C's - most common entity that VCs invest into.
we announced a number of new Coalition members yesterday who also would like to see this sort of standardization outside of the US. we're focused on the US atm
we announced a number of new Coalition members yesterday who also would like to see this sort of standardization outside of the US. we're focused on the US atm
As an example for the non-Germans here, here's N26: https://www.northdata.com/N26+Bank+GmbH,+Berlin/Amtsgericht+...
note: it shows management not ownership
note: it shows management not ownership
Thank you for this! Very cool example of what can be built on top of OCF.
Hi - I’m the author of the TechCrunch piece and I’ve lived in Berlin. It’s very different in the US and Canada, are are most regulatory things (▰˘◡˘▰)
In the US only public companies need to provide this info (and I believe only for shareholders over a certain percentage).
Private companies' operations are, well, private.
Private companies' operations are, well, private.
Where is this open cap table standard published?
I am one of the organizers of this Coalition. We expect to publish the first version of the open standard in Q1 2022. It will be a github repo.
This post on reddit really opened my eyes about why all your stock could still be worthless even after your company gets bought for millions of dollars. I suggest that people read it before joining at startup in the US
https://www.reddit.com/r/startups/comments/a8f6xz/why_didnt_...