Companies with more than one owner must keep a current and accurate record of who owns how many shares of company stock. Each entry in this journal should also be accompanied by the document that defines the agreement between the company and the individual. Even if a startup only has two founders who split the company's equity between them, the transactions should be recorded and accompanied by the founder' agreement. When founders wind up in court suing each other, it's usually because of a disagreement about how the company's stock was split between them. This is why having a founder' agreement early on in the company can be very important.

Most startups record equity and debt transactions in a capitalization table, or cap table. The cap table serves as the official record of who owns how many shares and stores other information about the shares, such as vesting schedules. It also contains information needed for government compliance reporting and it can be a valuable modeling tool for the company's owners when they evaluate offers from outside investors.

Many startups begin tracking their cap table using a spreadsheet. However, once a startup begins using stock grants or stock options that vest over time to attract, retain and reward employees, it quickly becomes apparent that a cap table with these complexities can't be maintained in a spreadsheet. A startup that has outgrown a spreadsheet to manage their cap table has two options:

  1. Insource: Use software specifically designed to maintain cap tables.
  2. Outsource: Hire a transfer agent.


INSOURCE CAP TABLE MANAGEMENT WITH SOFTWARE

While we sometimes think of software that helps maintain a cap table as cap table management software, most of the tools available today have broader functionality and are better described as equity management tools. Their most important feature, however, is the record keeping functionality that tracks who owns how many shares of company stock. These software packages were designed to automatically handle common events such as vesting schedules, and they include many built-in checks to help prevent data errors.

Beyond record keeping, most equity management software tools provide the ability to issue shares electronically, cancel shares and create a mailing list of shareholders to use when sending communications. They also typically provide the capability to give shareholders access to their accounts at anytime in the cloud.

Equity management software contains all the functionality that most startups need to perform all the administrative tasks required for stock transactions, and they are available for a reasonable price. The software packages have training and support available for users to help minimize the learning curve associated with a new software package.


OUTSOURCE CAP TABLE MANAGEMENT TO A TRANSFER AGENT

Transfer agents assume all responsibility and liability for the administrative work associated with stock. This includes issuing, cancelling and transferring shares, keeping records and communicating with shareholders. When you hire a transfer agent, you're effectively outsourcing equity management and shareholder communication to a third party.


WHAT THIS MEANS FOR PUBLIC COMPANIES

For a publicly-traded company with thousands of shareholders, hiring a transfer agent is often the right solution. Even with equity management software, tracking thousands of shareholders is a cumbersome task. With that many shareholders, the risk of making an error increases, and so do the consequences of making one.

Public companies don't need to personalize communications to the vast majority of its shareholders. Company executives typically only have a relationship with a handful of investors who own a significant percentage of equity. The bulk of the remaining shareholders are usually anonymous to the company because they are beneficial stakeholders whose shares are registered in the name of the bank or brokerage they were purchased through. For this reason, it's usually much more efficient and cost-effective for an experienced third party with the right staff, experience and equipment to manage the process of assembling and mailing communication materials and payments to thousands of shareholders. A mass assembly and mailing project that's not properly managed has an amazing ability to very quickly absorb an almost infinite number of resources at all levels.

Transfer agents also have legal and other staff who closely monitor changes to SEC and other government rules to help ensure that public companies comply with the most recent regulations and reporting requirements. A transfer agent can also enable the company to offer the Direct Registration System to shareholders who don't want to own shares through a bank or brokerage. Finally, a large, public company can usually afford to justify and pay the fees that transfer agents charge.


WHAT THIS MEANS FOR PRIVATE STARTUP COMPANIES

While hiring a transfer agent usually makes sense for a large, public company, it's not usually the right choice for a startup company for several reasons. Most startups have a limited number of shareholders, and each shareholder typically has some sort of personal relationship with the company's owners as an advisor, employee or investor. Owners usually want to be in control of all communication with shareholders so they can be customized and delivered in a personalized way. It wouldn't make sense to relinquish that responsibility to a third party that will communicate to these important individuals in a very professional but impersonal way.

Most startups can't afford or can't justify the cost of using a transfer agent. While the transfer agent's services are priced according to the value they are prepared to provide, many of the services don't apply private company, and a startup would likely be paying for services that it won't ever use. For example, most startups will have very limited risk of fraudulent transactions, won't pay dividends, won't have proxy voting or a large annual meeting for shareholders and won't have any of the SEC reporting requirements that a public company has.

Nevertheless, while hiring a transfer agent is overkill for most startup companies, it might make sense for a company that:

  • Expects to go public within two years.
  • Is crowdfunded and/or has thousands of shareholders.
  • Has a complex equity structure that can't be configured in equity management software.
  • Wants to portray an image to shareholders that's more similar to a publicly-traded company.

A startup that falls into this category should perform a cost/benefit analysis that compares the insourcing and outsourcing options to help make the right decision.