The Open Cap Table Coalition has been created
Aron Solomon is the editor and head of strategy for Today's Esquire. He was the founder of LegalX and taught entrepreneurship at the University of Pennsylvania. The Open Cap Table Coalition was announced through a Medium post on Tuesday.
The goal of the project is to make the data more accessible, transparent and portable. A cap table is a list of who owns your company's securities, which include your company shares, options and more. A clear and simple cap table should show who owns what.
This is important for the small percentage of startup that survive in the long term as growth makes for more complicated cap tables. A clean and updated cap table is a crucial part of startup hygiene. Since there is no set format and cap tables are not open to the public, they are often siloed.
I have advised hundreds of startups over the past two decades as a founder, a venture partner, and a senior adviser at a government-funded startup launchpad. I have been on A clean and updated cap table is a crucial part of startup hygiene. The value proposition to the companies is clear, which is why I like the idea of a cap table being an open corporate record.
When a startup creates a cap table, it can be prone to inaccuracy. In practice, this means that startups can spend money on cap-table-related issues that they should be spending on other things. From a legal process perspective, the law firm that is brought in to help with these issues has to deal with tedious back-end work, so the legal time isn't high value for either the startup or the law firm There is a clear value proposition for equity holders.
Equity holders have a general interest in the company. They have the right to this information and may need it for a variety of reasons. Making this information easy to understand is a service to equity holders and can encourage more investment from less experienced investors.
When I think about what this project could become in the next couple of years, I think back to when Y Combinator announced the SAFE. The SAFE is an example of a nice-to-have rather than a must-have for a startup, as no one knew what it was and people wondered if this was a nice-to-have rather than a must-have for a startup. The improvement in the early-stage capital-raising process was dramatic.
Morgan Stanley, Shareworks, and LTSE Software are some of the founding members of the coalition, but it is also heavy on Big Law. What is the real motivation of seven law firms, which together saw revenue of over $10 billion in 2020, to collaborate on an open cap table product for startups? There is deal flow.
It makes no sense for a startup to be dealing with a massive and expensive law firm when they are in the early stages of their career. The efforts to build startup programs have fallen short. They have been too heavy on self-serve and too light on the "we're going to give you our regular Big Law level of services at a small fraction of the costs just in case you make it big and can one day pay our regular fees."
These firms are trying to seperate themselves from the rest of the pack by building this tech. The initial version of the open cap table has already been produced by the coalition. The real question is if this is going to be a big deal, as the SAFE was, or if it is going to be a meaningless solution in search of a real problem.
My best guess is that if this coalition gets all the relationships right, doesn't get greedy and understands that there is a social good component at play here, this could be, reasonably quickly, as impactful as the SAFE was. In order to exit, founders need to get their employment law ducks in a row.