Effective and accurate cap table organisation is crucial for businesses across New Zealand. It is not only essential for tracking ownership but also plays a critical role in facilitating investment rounds. Additionally, it ensures compliance with regulations and transparency between stakeholders. This article will outline six of the best practices for organising your cap table.
1. Understand Cap Tables
The first step to organising your cap table is ensuring you have a comprehensive understanding of your company’s capital structure.
In New Zealand, like many other regions, companies may issue different classes of shares. These can include:
- ordinary shares;
- preference shares;
- non-voting shares; and
- share options (often targeted at employees under an employee share scheme).
Each class of shares will have distinct rights, and influence the overall ownership structure and control of the company (via decision-making). Cap tables, or capitalisation tables, categorise and track ownership classes for a transparent and accurate representation of company control and ownership.
2. Establish a Clear Ownership Structure
Clarity in ownership is critical for an accurate and well-organised cap table. This involves clearly defining the exact equity stake of each shareholder.
As part of this, founder vesting schedules are often implemented in New Zealand startups. This involves founder shares vesting (or “being earned”) over a specified period. This incentivises founders to remain committed to the company whilst aligning their interests with the long-term success of the business. You may want to include a vesting schedule in your cap table, which tracks the vesting of any such shares.
Equally, Employee Share Option Plans (ESOPs) are common in New Zealand businesses aiming to attract and retain staff. Again, the idea is that options are granted, which vest over time before being exercised into shares. Including these option allocations and tracking vesting schedules is vital for your cap table.
Continue reading this article below the form3. Efficient Record-Keeping
Maintaining a cap table that is up-to-date and accurate requires excellent record-keeping practices. When undergoing multiple fundraising rounds and implementing comprehensive employee share schemes, it can often be challenging to keep this updated. Therefore, you may wish to consider automating such record-keeping practices.
There are various cap table management software options available on the market. These tools often offer updates in real-time. Implementing such mechanisms in your New Zealand startup can help simplify the management of cap table structures.
It is also essential to conduct regular cap table audits. This ensures that your cap table accurately reflects the current ownership structure of your startup.
4. Compliance with New Zealand Regulations
It is also essential to adhere to New Zealand’s laws and regulations relating to cap tables. For example, the Companies Act outlines requirements for maintaining certain company records, including a company’s share register. While this only includes actual shares on issue in the company, it does need to record the class of shares on issue. Additionally, it should note the number of shares held by shareholders and previous shareholders. Ideally, your cap table should be prepared to function as both your share register and be compliant with relevant obligations.
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5. Communication and Transparency
Transparency is a core principle in cap table organisation, leading to stakeholder trust.
For example, you should provide regular updates on the cap table to:
- founders;
- investors; and
- employees.
This information should be detailed in clear and concise reports. This information ensures stakeholders remain engaged in the growth of your startup.
6. Plan for Future Funding Rounds and Exits
Finally, preparing for new rounds of funding and potential exits is essential for cap table organisation. For example, mergers or public offerings can significantly alter ownership equity and the cap table structure. Therefore, startups, such as yourself, should have a plan to ensure a smooth transition after such events.
Further, you should consider the potential dilution impact on existing shareholders when planning for investment rounds. Thorough understanding and communication with investors can help manage expectations and prevent future conflict.
Key Takeaways
Cap table organisation is important for several reasons, including compliance with regulations and transparency between stakeholders to help them make informed decisions. Some best practices for cap table organisation for your New Zealand business include:
- understanding cap tables;
- establishing a clear ownership structure;
- efficient record keeping;
- compliance with New Zealand regulations;
- communication and transparency; and
- planning for future funding rounds and exits.
If you need assistance to review your cap table or implement effective cap table organisational practices for your New Zealand start up, you can contact our experienced business lawyers to assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today at 0800 005 570or visit our membership page.
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