{"id":7468,"date":"2020-07-28T14:22:03","date_gmt":"2020-07-28T14:22:03","guid":{"rendered":"http:\/\/www-staging.carta.com\/sg\/?p=7468"},"modified":"2021-03-05T06:54:47","modified_gmt":"2021-03-05T06:54:47","slug":"what-is-equity-management","status":"publish","type":"post","link":"https:\/\/www-staging.carta.com\/sg\/blog\/what-is-equity-management\/","title":{"rendered":"What is equity management?"},"content":{"rendered":"

Updated on September 1, 2020<\/span><\/em><\/p>\n


\nGiving employees equity is more than a perk\u2014it\u2019s an investment in your company\u2019s success. At Carta, we believe <\/span>equity is a fundamental employee right<\/span><\/a>, but it\u2019s also a great way to attract and retain talent.\u00a0<\/span><\/p>\n

Managing your company\u2019s equity, however, can be challenging. There\u2019s a lot that goes into it, particularly as your company grows.\u00a0<\/span><\/p>\n

What is equity management?<\/span><\/h2>\n

Equity management is the process of creating and managing owners in your company. This may sound simple, but it involves everything from tracking and reporting changes in ownership to updating documents, <\/span>communicating with stakeholders, consulting your board of directors, <\/span>and<\/span><\/i> staying compliant.<\/span><\/p>\n

Equity management encompasses everyone\u2019s experience\u2014from equity admins and outside investors to employee stakeholders and board members. Let\u2019s take a look at the process for each party involved:\u00a0<\/span><\/p>\n

Equity admins<\/span><\/h3>\n

Equity administrators are responsible for overseeing your equity system and processes. They\u2019re in charge of the following three areas:\u00a0<\/span><\/p>\n

Cap table management<\/b><\/p>\n

A <\/span>cap table<\/span><\/a> is a record of all your company\u2019s securities\u2014including stock, convertible notes, warrants, and equity grants\u2014as well as who owns them. The more securities your company issues, the more complex your cap table tends to be.<\/span><\/p>\n

An equity admin is responsible for issuing board-approved equity to stakeholders, processing exercises and transfers, and updating your cap table after a round of financing, liquidity event, or other material event. They also send an updated version of the cap table to relevant stakeholders whenever a change is made.<\/span><\/p>\n

409A valuations<\/b><\/p>\n

If you want to offer equity in your company, you may want to get an appraisal called a 409A valuation to qualify for an IRS safe harbor. The purpose of a <\/span>409A valuation<\/span><\/a> is to determine <\/span>the <\/span>fair market value (FMV)<\/span><\/a> of your <\/span>common stock<\/span><\/a>. The valuation sets the price of a share.\u00a0<\/span><\/p>\n

You generally need a new appraisal every 12 months or whenever a material event occurs. A material event is anything that could change the FMV of your company\u2019s stock, such as a qualified financing round, merger, or acquisition.\u00a0<\/span><\/p>\n

Maintaining compliance<\/b><\/p>\n

A 409A valuation is one way to maintain compliance, but your equity admin also has to help enforce set rules when issuing and reporting equity, including abiding by Generally Accepted Accounting Principles (GAAP). In the U.S., part of that involves following <\/span>ASC 718<\/span><\/a>, a set of accounting standards that outline the steps your company has to take when reporting employee <\/span>stock-based compensation<\/span><\/a> on an income statement.\u00a0<\/span><\/p>\n

Accounting for expenses can be tricky, especially when you factor in new valuations, ever-evolving accounting rules, and scaling for growth. <\/span>If your company issues equity to international employees, you have to address International Financial Reporting Standards (IFRS) as well.<\/span>\u00a0<\/span><\/p>\n

Many equity admins also review issuances against securities laws and regulations, such as Rule 701 and the $100K ISO limit, and trace 83(b) elections to accurately withhold taxes.<\/span><\/p>\n

Stakeholders<\/span><\/h3>\n

Part of equity management involves updating your investors and employee stakeholders on your company\u2019s growth and finances. The more knowledge and support your stakeholders have, <\/span>the more likely they are to continue investing in your company<\/span><\/a>.\u00a0<\/span><\/p>\n

Keeping stakeholders in the loop requires time and technology. In addition to issuing electronic certificates to stakeholders, you may also want to send regular <\/span>investor updates<\/span><\/a>. Updates should include information about your company\u2019s trajectory, key metrics, hires, and customer wins. An update is also a good place to spell out investor asks, whether you need more funding or want help with an introduction.\u00a0<\/span><\/p>\n

Make sure you regularly update employee stakeholders as well. Keep in mind, however, that updates aren\u2019t the only step you should take. You also need to give employees access to basic <\/span>equity education<\/span><\/a>, plus information on their vesting schedule, <\/span>PTE window<\/span><\/a>, and the company\u2019s performance. It may be helpful to designate a point person employees can turn to to ask questions about their equity.\u00a0<\/span><\/p>\n

Providing employees with continual support and offering fair, flexible equity options can go a long way toward improving their experience at your company.\u00a0<\/span><\/p>\n

Board members<\/span><\/h3>\n

Another crucial component of equity management: <\/span>board management<\/span><\/a>. You typically need to <\/span>get your board\u2019s approval<\/span><\/a> to issue equity, accept new rounds of funding, and hire executives, all of which requires sharing sensitive documents and providing updated cap tables and valuation reports.<\/span><\/p>\n

Everyone<\/span><\/h3>\n

Managing equity also means managing <\/span>liquidity<\/span><\/a> options for everyone with equity. Historically, it\u2019s been difficult for employees to <\/span>sell their private shares<\/span><\/a>, but many private companies are now realizing the value of offering liquidity programs.\u00a0<\/span><\/p>\n

You can either hold a <\/span>tender offer<\/span><\/a>\u2014which gives employees the opportunity to sell their stock back to the company or to an investor\u2014or allow employees to sell their shares on a secondary transaction. Both transactions come with either heavy paperwork or administrative costs. Plus, you have to update your cap table each time there\u2019s a change in ownership.<\/span><\/p>\n

Fortunately, more options are becoming available to private companies. Later this year, pending regulatory approval, we\u2019ll be launching <\/span>CartaX<\/span><\/a>, our new liquidity platform that will make it easier for private company employees to sell shares and investors to buy them, while reducing the issuing company\u2019s administrative burden.\u00a0<\/span><\/p>\n

Why you should use one platform for equity management<\/span><\/h2>\n

Equity management isn\u2019t as simple as updating your cap table\u2014it encompasses a variety of different people, processes, and tasks. As your company grows and you continue to raise more money, equity management can become even more complicated.<\/span><\/p>\n

That\u2019s why using one streamlined <\/span>equity management platform<\/span><\/a> can help. With Carta, your cap table automatically updates after you issue grants. A single equity management platform simplifies tedious (yet time-consuming) tasks, like granting cap table access, getting approvals from board members, running liquidity events, and sending investor updates.<\/span><\/p>\n

Carta also provides scenario modeling, which includes breakpoint and sensitivity analysis as well as payout and dilution modeling. Modeling gives you a better idea of how your company will respond to various changes like investor exits, new rounds of fundraising, and shifting stock values.\u00a0<\/span><\/p>\n

When you use one equity management platform, you can:<\/span><\/p>\n