Aron Solomon, JD, is Esquire Digital’s Head of Strategy and Editor of Today’s Esquire. He taught entrepreneurship at McGill University and the University of Pennsylvania and was the founder of LegalX, a legal technology accelerator.
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On Tuesday, the Open Cap Table Coalition announced its start with a first medium contribution. The aim of this project is to standardize the data in the seed capitalization tables and make them far more accessible, transparent and portable.
For those unfamiliar with a cap table, this is a list of the owners of your company’s securities, including your company shares, options, and more. A clear and simple cap table should quickly show who owns what and how much of it. For a variety of reasons (sometimes inexperience or bad advice), too many shareholders often find companies’ capitalization information opaque and not easily accessible.
This is especially important for the small percentage of startups that survive long term, as growth brings with it much more complicated cap tables.
A critical part of good startup hygiene is always having a clean and updated cap table. Because there is no set format and cap tables are generally not open, they are often isolated rather than collaborative.
Cap Tables are very close to my heart, as I have advised hundreds of startups over the past two decades as the founder of an accelerator, venture partner and senior advisor on a government-funded startup launchpad. I was on the shareholder side of the equation too and can assure you that pretty much nothing breaks trust between shareholders and startups faster than poor communication, especially on issues like the current status of the cap table.
A critical part of good startup hygiene is always having a clean and updated cap table.
I like the idea that a cap table is an open business record because the value proposition for businesses is clear. Once a startup creates a cap table, it is prone to inaccuracies, friction and errors. In practice, this means that startups may be spending money on cap-table-related topics that they should be spending on other things. From a legal litigation perspective, the law firm employed on these issues has to deal with tedious back-end work so that legal time is not of great value to either the startup or the law firm.
The value proposition for shareholders is just as clear. All shareholders have a general and legal interest in a company’s capitalization information. They have the right to this information, which they may need for a variety of reasons (including, if things get really bad, shareholder action that is harmed). Making this information clear and easily accessible is therefore a service to shareholders and can also encourage more investment, especially from less experienced investors.
When I imagine what might become of this project in the next few years, I think back to the end of 2013 when Y Combinator announced SAFE (simple agreement for future equity). I think the SAFE is a good analogy here as nobody knew what it was and people were wondering if this was a nice-to-have rather than a must for startups. The end result, however, was a dramatic improvement in the early stage capital-raising process.
The coalition’s founders include Morgan Stanley’s Shareworks, LTSE Software and Carta, but Big Law is also strong with Cooley, Goodwin Procter, Wilson Sonsini Goodrich & Rosati, Orrick, Gunderson Dettmer, Latham & Watkins and Fenwick & West completed by 10 founding members.
So what is the real motivation of seven law firms with combined sales of over $ 10 billion in 2020 to work together on an open-cap table product for startups? Deal flow.
Big Law has been trying for several decades to build relationships with startups at a time when it doesn’t make sense for a startup to deal with a huge and expensive law firm. Their efforts to build startup programs have often fallen short and received mixed reviews. You’ve also been far too concerned with self-service and too little with the “We’ll offer you our regular Big Law services at a small fraction of the cost, just in case you and can one day make it.” pay our regular fees. ”So these companies are trying to break away from the rest of the big law pack by building this business-friendly technology.
The coalition has already created its first version of the open cap table. The real question is whether this is going to be a big deal like the SAFE was, or is it going to be a vanity solution in search of a real problem. My best guess is that if this coalition gets all relationships in order, doesn’t get greedy and understands that there is a social component at play here, it could be as effective as SAFE pretty quickly.