Power

Who owns that hot startup? These VC insiders want to make the answer clear.

Cap tables are fundamental to startups. So 10 law firms and startup software vendors are teaming up to standardize what they tell you about investors' stakes.

Cap table illustration

Cap tables describe the ownership of shares in a startup, but they aren't standardized.

Illustration: Protocol

Behind every startup, there's a cap table. Startups have to start keeping track of who owns what, from the moment they're created, to fundraising from venture capitalists, to an eventual IPO or acquisition.

"Everything that happens that is a sexy thing that's important to the tech world, it really is something having to do with the cap table," said David Wang, chief innovation officer at the Wilson Sonsini Goodrich & Rosati law firm.

It's a fundamental task for every company to keep their capitalization table records, or cap table for short. But there's been no standard of how to maintain one, with startups relying on a combination of spreadsheets, law firms and stock management companies to keep track of it all — at least, until now.

On Tuesday, 10 of Silicon Valley's leading law firms and startup software vendors are unveiling a new group seeking to create an open-data format for cap tables. The goal of the Open Cap Table Coalition is to make it easier for startups to manage their cap table by increasing data portability and interoperability between all of the stakeholders in the tech ecosystem, from the law firms to the software vendors to the startups themselves.

The coalition includes software providers LTSE Software, Carta and Morgan Stanley's Shareworks, alongside a who's-who list of tech law firms: Gunderson Dettmer, Latham & Watkins, Orrick Herrington & Sutcliffe, Cooley, Fenwick & West, Goodwin Procter and the aforementioned Wilson Sonsini.

"The friction is really huge, and the lack of standardization makes it even worse," said Tiho Bajic, CEO of LTSE Software. It was a problem that had been weighing on Bajic for a few years before he started to seriously recruit members around the end of 2020 to form the coalition, with a goal of creating an open format for cap-table data.

There's never been a standard way to track cap-table information, so startups have always managed their own cap tables in different ways. Smaller companies may just start with a spreadsheet or pay their lawyers to keep track of it. There's also been a surge of startup software vendors founded to address cap table management, including members of the coalition like Carta and Shareworks. Moving a company's data from, say, a law firm to a software provider only gets harder the larger a company grows.

"As a startup company moves through the life cycle, and as they get to the later stage, their cap table becomes a lot more complex. There are a lot of shareholders, a lot of options, potentially warrant holders, and frankly it can get just quite lengthy," said Joe Green of Gunderson Dettmer, an Open Cap Table Coalition member. "It can become a really heavy lift if they decide to switch cap table software vendors with, essentially, a lot of manual data entry, opportunities for mistakes and a lot of kind of tedious work that has to go into actually making that kind of transition happen."

The current pace of startup fundraising has only made the headache more profound. 2021 has been a record-breaking year in terms of funding, with firms like Tiger Global doing more than 120 deals in the first half alone. For each of those deals, the cap table needs to be updated.

The speed of deals and the disparate ways of tracking the information put an extra burden, too, on the legal firms, which have to track down all of the funding documents and legal contracts to understand who owns how much stock and whether they have special provisions. The inefficiency can be costly for startups who end up footing the legal bills — or could even delay a deal from closing.

"We've all had this problem of making sure that our clients are being served properly, but then you have these inconsistent approaches from different tech companies, and they're not necessarily wrong, they're just very different," said Wilson Sonsini's Wang. "So in a more digital world where all of this information needs to be ingested and move very quickly and potentially utilized for other applications, it just became more and more urgent to have a single, unified approach for everybody in the ecosystem."

Wilson Sonsini and Morgan Stanley struck a deal in February to exchange data between the law firm's proprietary cap-table tracking system and the bank's Shareworks software unit. But the coalition, in theory, makes such one-off data dealmaking unnecessary.

The rise of secondary rounds, where people are buying stock from existing shareholders rather than the company, has also contributed to the chaos. Morgan Stanley's Shareworks saw over $7 billion in secondary transactions on its platform since 2020, said Kevin Swan, co-head of global private markets for Shareworks. It's easy when it's done all inside an existing cap-table management system like Shareworks, but if it happens through a different vendor, there's a lot of additional friction to export the existing info, do the transaction, then input in the new cap-table information and make sure it's verified.

Then there's the unspoken secret that many of the cap tables end up with errors as a result in the back and forth.

"Whether your startup is using a spreadsheet or you're using a software vendor or platform, or you're relying on your law firm to do it, there's often errors in it, and reconciliations happen during every funding round, because ultimately the source of truth is in a legal document," Swan said.

The goal with the Open Cap Table Coalition is to avoid that extra friction and make the data portable, so that the cap table information can be transported easily between lawyers, startups, investors and software platforms and easily read by all of them. Swan sees a future where as part of the closing docs, a startup's lawyers would also attach an Open Cap Table data file so everyone has the same source of truth.

The coalition is still looking for input from the venture community in particular, and then it's going to have to figure out how to reach critical mass in the startup industry so that OCT becomes the standard for every new startup.

But it's achieved the first critical hurdle of getting everyone to agree it's a problem, and be united with the same goals on how to solve it. For Wilson Sonsini's Wang, getting 10 of the biggest law fims and competing software providers to agree on anything (even that the sky is blue) is a difficult thing, but he marvels that it's come together on this. After all, if it works, it's fewer billable hours for law firms and less vendor lock-in for the software providers. But all of the 10 firms and companies involved have agreed that there's greater value in improving efficiency and interoperability for their startup customers.

"I really think that this has the potential, and I'm going to do my work to make it happen, to be a generational change in terms of how this industry works," Wang said. "And I think that the impact is going to be significant."

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