What is equity management?

What is equity management?

Equity management is the process of creating and managing company owners. That's typically founders, employees and investors. But there's a lot to it, including regulatory, compliance and governance obligations.

Make no mistake; equity management is admin. But essential, necessary admin. And there is a way to make it easier (which we'll come onto).

Get it right and you'll have total visibility of who owns shares in your company, how many and accurate records of all share movements.

But let it fall by the wayside, and you may find yourself in a spot of bother with shareholders, or worse, Companies House.

So we’ve identified the pillars of equity management - what you need to keep in mind even while you’re busy running your business, to help keep you out of trouble.

What does equity management entail? 

Let's look at the four key tasks that fall under equity management. The cornerstones, if you will!

1. Managing your cap table

A capitalisation table – or cap table – details company ownership. Specifically, who owns what stake.

A cap table should show what a company is worth and how much each shareholder owns of it at a glance. Therefore, it needs to record information like:

• The name of each company shareholder
• How many shares they own in the company (and what kind of shares)
• The percentage of the company each shareholder owns

Every limited company with more than one shareholder should have a cap table, whether or not fundraising or an employee share scheme is on the cards.

You could create your cap table in a simple spreadsheet using our free cap table template.

But you probably shouldn’t since it needs to be updated every time ownership in your company changes – which is every time you award equity to a new employee, raise a round of investment, or there are any significant changes to shareholders' details.

Managing your cap table in a spreadsheet isn't so bad at first. But as your business scales, it can get out of hand fast.

Nothing will stop a funding round or exit quicker than a broken cap table.

We won't do a deep dive into cap tables here as we cover everything you need to know, including what makes a good one, how to keep yours up-to-date, and how to use it to your advantage in the Ultimate Guide to Cap Table Management. 

2. CoSec duties

CoSec is short for 'company secretarial' and a nickname for a 'Company Secretary'.

Now, company admin isn’t the most exciting thing in the world, but somebody’s got to do it. Not every startup has a dedicated company secretary, so these tasks often fall to a company’s founder(s) or director(s).

Equity management-wise, there are key activities that must legally be taken care of. For example:

Under the Company’s Act, directors have a legal obligation to update Companies House with any material changes to company ownership. Those changes include but are not limited to:

• Any new shares issued (within the last 20 days)
• Any changes to your legal share register
• Any changes to directors’ details
• Any changes to People with Significant Control (PSCs)

Keeping an accurate record of shareholders and share movements is so important.

All UK limited companies are also required to file a confirmation statement to Companies House every year to verify the company’s address and all of the items above.

What’s more, to issue new shares in the first place, you’ll need written consent (a board/shareholder resolution) from shareholders and directors confirming that they’re happy with any dilution that will occur.

More items on a CoSec’s to-do list! From as little as £25 / month, you can access Vestd's suite of CoSec tools and whittle that list down.

3. Managing shareholders

Probably the most challenging aspect of equity management is shareholder management. 

Everyone who owns shares in your business with voting rights attached to them gets to have a say in whether certain things go ahead. This includes things like changing your company’s name, adopting new Articles, authorising a share scheme and potentially, key commercial decisions too.

Most changes you’ll want to make are “ordinary resolutions”, which just need over 50% of shareholder votes to pass. Someone who owns more than half a company’s shares can pass those resolutions alone.

But some changes require a 75% or 95% majority to get pushed through, which is something well worth keeping in mind when it comes to distributing your shares.

With Vestd, you can keep your shareholders in the loop at the click of a button.

But who are your shareholders? Here are the three kinds of shareholders you’ll likely have to manage at some point (if you don’t already):

1. Founders

Founders’ shares are shares held (or originally held) by the founders of a company. These shares are usually ordinary shares and may vest over time.

2. Investors

Selling shares in your company to investors is one way to raise the money you need to grow your company. As well as or instead of issuing ordinary shares you can also issue preferred shares.

3. Employees

Studies show that employees with skin in the game work harder and stick around for longer. For startups, that can make all the difference.

In the early days, it’s one way that startups can reward early hires for their vital contributions, without coughing up a load of cash they don’t have.

But even after that, startups can use equity to attract new talent to the team. And that’s where an employee share scheme comes in.

As is the case with founders and investors, adding employees to your cap table will mean that they too (at one point or another) will become shareholders to manage.

That’s why a good equity management platform should also serve as a share scheme management platform.

4. Managing share schemes

The final pillar of equity management - share schemes. Not every company, nor everyone, will want to set up a share scheme, but there’s a strong case for doing so.

An employee share scheme can make your startup a very attractive proposition to top performers – and help keep them on your team for years to come.

Plus, studies have shown employees who are also shareholders are more driven since they feel directly responsible for increasing the value of their company.

However, the most tax-efficient share schemes require a certain amount of management and admin. Doing this manually can result in errors, or annual paperwork not being filed on time.

Miss a HMRC deadline or fail to put in place the required authorisation and you may find that your scheme is non-compliant. Shareholders could lose their tax benefits, or worse, their shares.

About half of the existing share schemes we digitise are broken in some way.

Traditionally, share scheme management is costly and time-consuming, as it often involves a lawyer's or accountant’s time and expertise to get it right.

Thankfully, it's now much, much easier (and cheaper) to set up and manage a share scheme. Vestd was the first to make the process simple for UK startups and SMEs.

Getting your company valued

Speaking of share schemes, before offering anyone equity it's a good idea to work out how much your business is worth.

Here are three reasons why a company valuation is beneficial:

1. For investment purposes
2. For short and long-term financial planning
3. For rewarding teams with equity

There are various ways to share equity with the people who make a difference, including those not on the payroll whom you feel make a valuable contribution, like an advisor or contractor.

For tax-advantaged share schemes like the Enterprise Management Incentive (EMI), an HMRC valuation is a pre-requisite, but that's not to say that a valuation isn't important when issuing something like growth shares, for example.

HMRC valuation

Before issuing EMI options to UK-based employees, you need to have your company’s shares valued by HMRC so everyone – from the taxman to your employees – is clear on how much they’re worth.

You can pay an accountant to prepare a valuation for you, but you can expect that to put you back around £1,000-£2,000 per valuation at the very least.

Alternatively, our specialists can provide an initial valuation for HMRC on your behalf when you sign up for Vestd as part of your subscription.

409A valuation

If you want to grant stock options to US taxpayers, your company will also need a 409A valuation.

If you grant stocks without this in place, your company and any US taxpayers whom you’ve granted stocks could get hit with a tax penalty.

So, while you can technically roll out a share scheme without a 409A valuation, it's wise to get one. We offer 409A valuations too.

Equity management made easy

Hopefully, this guide has helped you unravel the minefield that is equity management. As you can see, it involves a whole lot more than just issuing shares!

And we think you’ll agree that the most effective way to manage equity is digitally - somewhere you can take care of everything in one place.

That's where our equity management platform with Cosec tools and Companies House integration comes in.

Set up your share scheme on Vestd and you won’t have to worry about cap table headaches, as the first thing we do when you join is check that your cap table is accurate.

Then we transfer all that data into a digital cap table that automatically updates whenever you file documents with Companies House through our two-way integration.

In fact, Vestd is the only digital equity management platform with two-way Companies House integration (and we’re FCA-authorised and regulated too).

That means you never need to worry about there being any discrepancies between your internal records and what's been filed with Companies House. Plus Vestd automatically sends all the relevant documents and updates to Companies House on your behalf.

Pop-ups on the platform will also warn you whenever you need to double-check whether something you’re doing is compliant.

In short, Vestd helps you make informed equity management decisions every step of the way (without having to pay an arm and a leg in accountancy and legal fees!).

Take a tour of our platform today to see how Vestd can take all the stress out of managing your company's equity, shareholders and share schemes.

Compare equity management software

Not convinced? Our buyer’s guide will help you quickly compare what the UK’s top equity management platforms do and don’t do so you can find the right fit for your needs.

Further reading and resources

• Equity Fundamentals
• The Ultimate Guide to Cap Table Management
• A Business Case for Launching a Share Scheme
• The Complete Guide to Company Share Schemes
• A Buyer's Guide to Equity Management Platforms

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