Open Cap Table Coalition - Revolutionizing Startup Equity
The Launch of the Open Cap Table Coalition
The Open Cap Table Coalition formally began operations on Tuesday, announcing its formation via an initial post on Medium. The central aim of this initiative is to establish a standardized format for startup capitalization table data, enhancing its accessibility, transparency, and portability.
Understanding Cap Tables
A capitalization table, or cap table, represents a record of ownership within a company, detailing its shares, options, and other securities. A well-structured cap table should readily demonstrate who holds equity and the extent of their ownership. Unfortunately, many equity stakeholders encounter difficulties accessing clear and straightforward capitalization information, often due to inexperience or inadequate guidance.
This issue becomes increasingly significant for the relatively few startups that achieve long-term success, as their cap tables naturally grow in complexity.
The Importance of Cap Table Maintenance
Maintaining a current and accurate cap table is a fundamental aspect of sound startup management. However, the absence of a universal format and the tendency to keep cap tables private often result in fragmented and non-collaborative data.
Having personally advised numerous startups over the past two decades – as an accelerator founder, venture partner, and advisor at a government-backed launchpad – I recognize the critical importance of cap tables. I’ve also experienced the shareholder perspective and can attest that a lack of clear communication regarding cap table details can rapidly erode trust between investors and the company.
The Benefits of an Open Cap Table
I strongly support the concept of an open cap table as a public corporate record, as the advantages for companies are evident. From the moment a cap table is created, it is susceptible to inaccuracies, disputes, and errors. This can lead startups to expend resources on cap table-related issues that could be better allocated elsewhere.
From a legal standpoint, law firms assisting with these issues must dedicate time to laborious data reconciliation, reducing the value of their services for both the startup and the firm.
Value for Equity Holders
The benefits for equity holders are equally compelling. All stakeholders have a legitimate and legal interest in a company’s capitalization structure. They are entitled to this information, potentially requiring it for various purposes, including, in adverse situations, legal recourse.
Providing clear and easy access to this data serves equity holders and can stimulate further investment, particularly from those with limited experience.
A Parallel to the SAFE Agreement
Considering the potential evolution of this project over the next few years, I am reminded of Y Combinator’s introduction of the SAFE (Simple Agreement for Future Equity) in late 2013. The SAFE serves as a useful comparison; initially, its value was questioned, but it ultimately revolutionized the early-stage fundraising landscape.
Founding Members of the Coalition
The coalition’s founding members include prominent entities such as Morgan Stanley’s Shareworks, LTSE Software, and Carta. It also boasts significant representation from leading law firms, including Cooley, Goodwin Procter, Wilson Sonsini Goodrich & Rosati, Orrick, Gunderson Dettmer, Latham & Watkins, and Fenwick & West, completing the group of ten founding organizations.
The Motivation Behind Big Law’s Involvement
What drives seven major law firms, collectively generating over $10 billion in revenue in 2020, to collaborate on an open cap table solution for startups? The answer lies in access to deal flow.
For two decades, large law firms have attempted to forge relationships with startups at a stage where their services are often unnecessary and cost-prohibitive. Their startup programs have frequently fallen short of expectations and received mixed feedback. They have often prioritized self-service options over providing high-quality legal support at reduced rates, hoping to capitalize on future success.
These firms are seeking to differentiate themselves by developing this entrepreneur-focused technology.
Initial Release and Future Impact
The coalition has already released its initial version of the open cap table. The key question now is whether it will achieve the same level of impact as the SAFE, or remain a solution in search of a problem.
My assessment is that, if the coalition cultivates the right relationships, avoids excessive commercialization, and recognizes the inherent social benefit, it has the potential to be as transformative as the SAFE agreement, and to do so relatively quickly.