Investment round or exit ahead? Clean up your cap table

Last updated: 13 August 2024. 

We spend a lot of time talking to founders, investors, lawyers and accountants who have been involved in numerous major investment rounds and exits. We keep on hearing the same thing.

One of the biggest (if not the biggest) reasons that there are serious issues (and therefore costs) for the company involved is that what they believe to be their current equity structure and future option liabilities proves not to be the case when formal due diligence gets underway.

Our complete guide to setting up a company share scheme goes into detail on how you can avoid some of these issues before starting out.

If it can be sorted, then the time and costs involved at this point are likely to be very high. Or, even worse, this has often been the cause of deals falling apart.

Finally, if things haven’t been done right, to then retrospectively provide equivalent value to the employees of the firm, many years after you thought it was all sorted, can be extremely difficult, maybe even impossible.

So, a few pointers from our experience to ensure you do not fall foul of a broken cap table.

Three things to keep your cap table clean

1. When you issue shares, do it right.

This may sound unbelievably obvious, but it often doesn’t happen...

• Unless otherwise authorised in your Articles of Association, you need to get formal Board and Shareholder approval ahead of issuing ordinary shares.
• You need to ensure pre-emption waivers are received from any existing shareholders.
• You need to inform Companies House within a month via the submission of an SH01 form which states what you have issued that is new, and what your up-to-date complete capital structure is.
• You have a legal obligation to provide new shareholders with share certificates within two months of their issue.

2. If you have any outstanding equity liabilities or promises, make sure that they have been done properly.

(Usually options of some sort).

• Before awarding any options, make certain that you do not have any covenants in any existing Shareholder Agreement that might prohibit them (either in terms of their number or their exercise price and conditions).
• Ensure their award (and subsequent exercise) has been approved by Board and Shareholder resolution, and all initial and ongoing notifications to HMRC are carried out.
• Make sure that they have been properly signed and final versions have been kept both by the company and the recipient.

3. Store everything securely and in one place.

Keep all the authorisation documentation and final form agreements associated with your equity and future equity liabilities in one place, preferably online, to maximise ease of due diligence for anyone.

Getting all the above right can be a real headache, but it matters.

Tidy now, tidy always.

Check out our real-time digital cap table and discover how digital equity management could make your life a whole lot easier. 

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