Cap Table and 409A Management Basics for Founders

Having spent many years in finance and operating roles within early-stage startups, I’ve learned the importance of keeping clean company records, as have many of the incredible founders I get to work with every day here at True. 

We get a lot of questions in particular around how to best manage capitalization (or “cap”) tables and who to trust with 409A valuation work. To get down to brass tacks, cap tables clearly define all the people and entities who own portions of your company.

Having clean records on shareholders and shares issued is critical to both your company records and to future capital fundraises. These details are among the most important documents you’ll have as a founder as your company and team grow since ownership details will become increasingly complex as you continue to scale and attract new investors. 

A strong approach to this work also ensures you will be equipped to make the best decisions with respect to compensation, stock plan administration, and future financings. Here’s what else our team encourages you to keep in mind during that process. 

Working with a software vendor versus managing in-house

As an investor, our team does not have a requirement that founders work with any specific software vendor. In fact, many companies in the True Portfolio whom we’ve supported through follow-on financings have cap tables prepared by company counsel who have the best grasp of all equity transaction details. 

As you take your own situation into account, make a decision on the need for a vendor for cap table and equity management based on cost, efficiency, and simplicity in terms of your or your team’s management of these tasks.

And if you do choose to work with a software vendor, know that these tools are only as effective as the data that is input. Keep a firm grasp on and understanding of the data that informs these models; the idea being that others on your team can enable the process but you, as the founder, should own and understand your final cap table. 

If you work with a vendor, work with two separate partners

Working with two separate partners for cap table management and 409As will help you avoid potential conflicts of interest that may arise from having the same partner provide both services. 

The conflicts of interest occur under the 409A “safe harbor” rules under U.S. tax laws and have to do with the “fair value” of option grants, which you won’t want subjected to criticism later. This can come up for you down the line when opportunities for mergers or acquisitions arise, or as part of your ultimate need to have audited financial statements. 

The best practice of a truly independent 409A valuation, done in accordance with the IRS “safe harbor” provisions, can be very important in later audits, as well as M&A discussions.

There are a handful of software vendors that can be useful partners to you in the management of: 1) your cap table, option grants, and stock certificate management; as well as 2) your 409A valuation work. 

Cadence of valuation work

From our perspective, 409A valuation work must be done at least once a year and any time there has been a meaningful change in the business and forecasted results. 

Examples of reasons you may need a “fresh” 409A before a one-year anniversary include, but are not limited to, a new equity financing, significant change in business operations, and landing large, new contracts. 

Our team is ready to help founders think through these important foundational documents to set companies up for success down the line.

Jim Stewart is True’s COO. Prior to joining the team, he filled various senior finance and operations roles at venture-backed companies, in addition to guiding four companies through their initial public offerings. Once you’re backed by True, Jim’s one of the many experts available to you.