As you may have learned in our last post on cap table best practices, the cap table is a critically important element of any startup at all stages of the life cycle. Here we are digging into additional tips for smart management of your cap table with a focus on team expansion and hiring.
Helpful Tips For Sound Cap Table Management
Set Equity Grant Sizing Rules Up Front
Put an equity compensation plan in place early on so you have numbers to go back to when hiring new employees. Doing so makes it easy to have those conversations when you bring employees on.
For example, you might define that manager positions get 0.25% equity, director-level employees get 0.5%, and C-suite executives get 1-5%. You can refine these rules further by segmenting your equity allocations by the department. This Venture Hacks post gives a rough set of benchmarks for a Series A-stage startup, which you can tailor to your specific stage/situation.
Consider Your Hiring Plan When Sizing Your Options Pool
As mentioned earlier, monitoring your options pool on a quarterly basis helps prevent you from overdrawing and causing issues. Taking this a step further, frequently reviewing your 12-month hiring plan can help you keep your options pool at an appropriate size.
For example, your hiring plan may include hiring 2 new C-suite executives and 10 entry-level employees within the next year. Perhaps your grant sizing plan gives that C-suite executive, say, 1% equity in the company. Meanwhile, the entry-level employees might each get 0.2% equity. Additionally, you can expect that you’ll be topping up equity grants for several employees, which will require you to earmark an additional 2% worth of shares. Knowing all this, you can do some quick math to calculate that your options pool will need to consist of 6% of your total shares outstanding for the next 12 months.
Scale Your Cap Table as You Scale
When a company first forms, your cap table will likely only contain the founders’ ownership stakes. But founders have a lot on their plates and as your company scales, it’s easy for cap table management to fall through the cracks. Neglecting your cap table can be disastrous so don’t be afraid to ask for help or have an expert manage it for you.
So, there you have it. With a lot of preparation up front and a little bit of editing along the way, your cap table will be in good shape and you can scale your company painlessly. For more information about cap tables, check out this blog post.