A Digital Source of Truth — for everyone’s sake
Barbara Corcoran, the former US Shark Tank celebrity and famous NYC real estate entrepreneur, often points out there are two types of people:
Containers and Expanders.
Containers are the people who fret the small stuff. They worry about details and like to have a plan.
Expanders are the opposite. They are more sales-oriented, big picture people.
Barbara argues it’s hard to be both, but that’s exactly what Founders of start-ups need to be, a lot of the time.
And that’s not easy.
You have to have vision or you wouldn’t have started anything in the first place.
But, if you are not all over the details, you can get yourself into serious trouble.
One of the most crucial parts of the start-up journey is at the beginning, when you set up your company.
All of a sudden, you have to make some very detailed and important decisions. You need to think about equity splits, shareholder agreements and company structures. You have to act with the end in mind, while being responsible about the near future.
These are things we are not taught well at school, but they can be very important for your financial success, especially in the age of high-growth venture.
Where things can go wrong
But even if you do take the time to understand everything and get the documents signed and stored safely, it’s still easy to lose track of the key details, as you build your business. And you are not to blame — you are focusing on the single most important thing — growth.
While you’re pitching to clients or developing key partnerships, you might need to be raising capital or incentivizing a key executive with a complicated options package along the way. And that’s when things can get messy.
Documents multiply. Spreadsheets end up having errors (and countless versions exist). Dilution from convertible notes and bridging rounds don’t get fully factored into your cap table.
Issuing and managing capital is complicated at any stage of a company. But when a business is more established, these issues tend to be outsourced to an experienced service provider. Start-ups tend to be cash poor, so this is not an option for them.
It’s especially difficult when there are multiple share classes and derivative instruments like convertible notes and options, common with early stage companies.
The capital raising process itself is also never easy, even if there has been some standardization of documents in recent years. There are always many things to consider, many decisions to make, and an ongoing sense of urgency to get the deal done.
The most problematic thing of all, however, tends to be the employee share scheme. Adding new employees, managing vesting and departures, and the exercise process is not stuff most people enjoy thinking about. The math involved is not calculus, but it’s not easy either.
When things go missing — in the millions
Perhaps it is because of all of these complexities that according to yesterday’s AFR, the Founder of a company that is about to do an IPO in Australia has seemingly lost AUD$110 million in options.
The figure is staggering.
Not getting compensated fairly never feels good but when you are the Founder and have turned an idea into a real business, it’s just plain awful. After reading the headlines, many Founders, I’m sure, have had another look at their paper documents to see if they’ve missed anything.
But paper docs are quickly becoming a thing of the past. The company in question was founded before the cloud became mainstream. And that might be another factor behind what allegedly happened.
Digitize the source of truth
Cloud based software solutions have been revolutionary. They have created the ability to have a single source of truth. Each stakeholder can access the single source of truth anywhere in the world at any time, and any changes made are clearly recorded.
E-shares in the US, which became Carta, realized there was a problem with the unlisted space in 2012. The Founder digitized paper stock certificates along with stock options, warrants and derivatives to create a real time picture of who owns what at a start-up.
Carta has since grown to be a USD3 billion company in less than 10 years. It now has its eyes on disrupting the public market in the US but it is still useful as a template of how the registry industry can be transformed. Its journey and product road map provide some insights into how the industry in Australia could unfold in the coming years.
Cake Equity (www.cakeequity.com) is Australia’s cloud-based share registry solution for start-ups and small unlisted companies. It acts as a single source of truth, improving transparency and saving each stakeholder’s time. It automates and streamlines raise and ESOP workflows.
Using Cake, a Founder will always have a single source of truth that can be relied on so there will be no nasty surprises later on. However, this peace of mind will not be limited to just the Founder — investors also get the same sense of assurance through the cloud based record.
It’s tough to be both all over the details and still be powering ahead. Cake Equity takes a huge burden off the Founder’s shoulders so he or she can concentrate on being the Expander that ultimately made Barbara Corcoran a multi-millionaire.