Setting A Standard: Law Firms And Software Companies Look At Ways To Help Startups Manage Their Cap Tables

In a world where startups now raise money seemingly every six months, push liquidity events back years, and give out options to employees weekly, keeping track of who owns what has gotten complicated—very complicated.

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For years, a startup managed its capitalization table record—or cap table—on spreadsheets, typically with the help of a law firm and maybe even a stock management platform. But as the world of private companies has become faster paced and more complex—with different ways to raise cash, increased option incentives to attract employees, and investors looking to invest more and more often—those who help manage those tables are looking for ways to find some common ground.

“The time was right for us to move forward and change some of the practices,” said Craig Sherman, a partner at Wilson Sonsini Goodrich & Rosati.

This summer, Wilson Sonsini helped launch, with other groups, the Open Cap Table Coalition. The coalition, which just held its first summit last week, is an attempt to standardize an aspect of the startup landscape that can at times resemble the Wild West. Others in the group are law firms Gunderson Dettmer, Latham & Watkins, Orrick Herrington & Sutcliffe, Cooley, Fenwick & West and Goodwin Procter, as well as software providers LTSE Software, Carta and Morgan Stanley’s Shareworks.

“The private market ecosystem has just grown tremendously,” said Kevin Swan, co-head of global private markets at Morgan Stanley’s workplace arm, which encompasses the equity platform Shareworks. “One of the biggest changes we saw was how to manage data effectively. … These markets have become large enough to become interesting.”

Getting bigger

To illustrate that growth, since the beginning of 2020, Shareworks saw more than $7 billion in company-sponsored transactions on its platform. The platform also managed nearly 2x as much private market secondary transaction volume in the first half of this year—almost $2.8 billion—than in all of last year.

With that increasing interest and those escalating transactions, managing who owns what at a company has become more difficult. The coalition is an attempt to “improve the interoperability, transparency and portability of startup cap table data,” according to the group when it was funded.

In layman’s terms, the group aims to introduce substantive and technical standards, including how the information is transferred, as well as what code and even language is used, said David Wang, chief innovation officer at Wilson Sonsini.

“We just want to set the rules of the road,” Wang said.

Tech replaces the napkin

Once upon a time, a startup could keep ownership and options straight just by using the back of a napkin or a spreadsheet—or maybe even pay a law firm to help keep tabs. Eventually, new software and marketplace vendors moved in to help keep track of such changes as companies got bigger.

However, with the venture capital market exploding and the rise in secondary offerings, debt financing, deal making and more, things have become much more complex. Those platforms, law firms and the startups themselves need to talk and exchange data at a never before seen rate to make sure cap tables are up to date and coherent for all parties.

Sherman said when he started working with startups and venture capital firms three decades ago, a lawyer may work on a few funding rounds a year due to all the manual work that went into recording the transaction and the time it took. Now deals get completed at break-neck pace.

“Venture capital really took off with technology,” he said. “There is just a higher volume of transactions with the more technology we have.”

Secondary markets pick up

Companies also tend to stay private longer and now generate the majority of their wealth before hitting the public markets.

That change has caused some employees to look for ways to unlock that wealth by selling their shares through the secondary markets—where investors like hedge funds have been more than willing to buy them. That, in turn, has led to a growth of marketplaces such as EquityBee, Securitize and Forge.

“Someone has to reconcile these transactions that occur on platforms like Carta or other third-party platforms,” Wang said. “It can be a little bit of a free-for-all right now.”

While the coalition was not started solely to solve issues created by secondary marketplaces, the effort does aim to bring transparency to the sometimes-murky private market. And as more clarity is given to the space, secondary markets likely will draw more interest; making data portability and interoperability more important than ever.

Next steps

The coalition anticipates announcing new members after completing its first summit last week.

Wang said a few dozen cap table management companies and financial institutions joined the conversation at the summit to learn about and give input on the first version of the open-sourced cap table format.

More new members will likely join the effort as firms and companies from the legal and financial arenas band together to solve problems created by burgeoning private markets.

“There are just so many wall gardens in this process,” Wang said. “We would like to change that and have standards.”

Illustration: Li-Anne Dias.