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The Hidden Risks of Relying on Excel for Managing Your Cap Table

A newly founded company may find it hard to believe that creating a cap table would become a significant hassle. During the first stages of a business, the capitalization table is a basic Excel spreadsheet that includes share counts, percentages, names, and titles. Even if you’ve never used Excel before, this should be doable, particularly if you start with a premade spreadsheet.

If you’re tracking your capitalization using static spreadsheets, you’re missing out on a dynamic picture of your business. Manually sorting through spreadsheets and balancing disparate systems is tedious and time-consuming.

So, in this article, we will look at the risks that come with the use of spreadsheets for advanced cap table management.

Why do Companies Use Excel for Cap Table Management?

Excel is a widely used and straightforward program everyone uses, allowing for quick and simple model development and maintenance. It’s also possible to create a unique solution for one’s cap table by modifying an Excel spreadsheet using formulae and macros.

Let’s look at why businesses have traditionally relied on Excel.

  • Excel saves money and gives users full access to their data, guaranteeing precision and uniformity compared to alternative programs.
  • Regularly updating your cap table may be labor-intensive, but you can ease that burden using an Excel macro to do the heavy lifting. As a result, it now takes seconds, rather than hours, to do mundane administrative tasks. 
  • With Excel, you have complete control over your data, allowing you to quickly perform simulations on different scenarios and change your forecasts if necessary, a feature not accessible in many competing products.
  • The last benefit of traditional cap table management in Excel is the ease of distributing the document to interested parties. It speeds up presenting financial data and fosters more confidence in partnerships crucial to a business’s growth.

Risks Associated with Relying on Excel for Cap Table

Although Excel is a widely used and advantageous tool for businesses, it may not always be the most suitable option for data-driven systems. Relying on outdated tools for too long can potentially result in revenue and productivity losses for your business.

Excel is a Tool Made for Individual Use

In small businesses, you are often the sole one managing the firm’s financial records if you work as an accountant or bookkeeper. If all of your accounting happens in one place and you aren’t getting any reporting data from other places, you won’t have to combine your numbers or file any reports with the authorities. In such instances, Excel is a practical option for preparing financial reports and managing cap tables.

Larger businesses, on the other hand, have dedicated finance and accounting departments staffed by experts who oversee several operational units and budgets. Team members must communicate with one another, particularly as the term closes in on its finish. Here’s where Excel needs to catch up.

Excel is neither a database nor a corporate group work tool where people simultaneously enter and evaluate data.

Excel can be challenging to deal with conflicts

When reviewing a spreadsheet in Excel, have you ever questioned the veracity of the data? It’s probably not the case. Most cap tables created in spreadsheets have an issue.

How could it be true? It’s not hard to picture, to be honest. Consolidating financial data from Excel files for different locations might be a massive headache if your organization has numerous divisions or subsidiaries. While copying and pasting, you risk leaving out essential digits. Worse, you need to find out whether the information is accurate.

You May Like to Read: Top 5 Cap Table Management Software for Founders

Excel isn’t data governance-friendly

In addition to the risks mentioned above, utilizing Excel for traditional cap table management and reporting also has the additional issue of being unable to regulate.

Supposing Sarah works in accounting for a major international firm, she would be part of a huge team of professionals. Sarah arranges the financial data in a manner that makes sense to her as she builds a spreadsheet to monitor it for the marketing team. Sarah’s coworker Tim in Marketing doesn’t know what he’s looking at when he opens the Excel file, so he either modifies it or creates a new one.

Good data governance directly opposes making several spreadsheets in different formats. There needs to be more oversight from the CFO or head of department on the content and structure of spreadsheets. Who knows whose spreadsheet will be more accurate when closing the books—Sarah’s or Tim’s?

Backups aren’t available for Excel Files

When they know their data is up to date, those working in accounting and finance can rely on it. It’s impossible to tell from an Excel sheet whether that’s true.

To illustrate, let’s revisit Sarah’s situation. She utilizes her computer’s hard disk to store her spreadsheets. Due to her carelessness in backing up her information, Sarah loses all her data on her PC when her company gets attacked by ransomware just before closure. The IT team can recover data from the network disk but can’t access Sarah’s updated Excel files.

There is no doubting the usefulness of spreadsheets; as was previously said, doing things like keeping track of company ownership on a spreadsheet might make sense in the early phases of your business. Here are four scenarios when using a spreadsheet is a bad idea.

Your Company is Scaling

Yes, spreadsheets work OK initially, but they become problematic as your business grows. With increased input volume and possible human mistakes, spreadsheet formulae become more inflexible and less effective.

You must know this early to choose the right tool to handle your wealth as your business grows.

You frequently issue equity

Utilizing a spreadsheet to maintain your cap table is not the best option if you share ownership with your team, NEDs, and workers and if new team members are entering regularly (and obviously, some will depart).

Choosing a service designed specifically for this purpose is best to stay compliant as your workforce expands. 

You wish to model various scenarios accurately

Since there is so much unknown in the startup sector, many reasons exist to play around with scenario simulations.

Taking on investment illustrates this principle; business owners may learn how various funding rounds affect their stake in the firm using scenario modeling.

But it makes no sense to build complex models if you can’t trust the data for management.

You’re probably going to get funding

Using a spreadsheet to manage your cap tables is better if you want to raise capital in several rounds.

Equity management will face new obstacles in the face of outside investment, such as creating new share classes, diluting, and modifying current ownership arrangements.

Given the increasing complexity of your company’s ownership structure, it is time to move on from spreadsheets.

Top 5 Reasons to Use Cap Table Software

You wouldn’t use a sand wedge when going on a long drive. Ski goggles aren’t the best choice for a plunge under the ocean. The same logic applies to keeping tabs on your company’s funding: you wouldn’t use a generic spreadsheet that only “looks like” a cap table.

Here are some more concrete advantages of replacing manual spreadsheets with purpose-built cap table software.

1)Grow with your company’s success.

Software developed in today’s technological era is scalable to accommodate businesses of any size, wherever in the globe.Is there only one investor? You should keep tabs on his ownership stake as the firm expands and seeks further funding.

Do you have hundreds of investors who came in at different times, all lured in by various promises? If the business plans on paying dividends or going public, you want to avoid having to answer for poor record-keeping.

Smart software that can grow with your organization is essential for building a solid platform to expand. Cap table software simplifies maintaining your company’s equity rather than employing a legal professional.

2)Protect your data using blockchain.

One of the best things about blockchain technology—which tracks cryptocurrency—is that every transaction has an irreversible timestamp, meaning no one can secretly change it.

It protects your investment data from hackers who may otherwise alter your ownership statistics. It safeguards information by preventing unauthorized changes.

Using a secure cap table software system instead of a spreadsheet (even on a local disk) is analogous to placing stronger locks on a door when technical progress exceeds security. Simply said, it’s great.

3)Get the attention of possible investors.

Even if future investors don’t care about your cap table as much as your present ones, you may still leverage it to your advantage.

Investors may be reluctant to put money into a company with careless ownership practices, as seen in the cap table. Possible red flags include clerical mistakes, wrong calculations, and unattractive formatting.

A cap table may show prospective investors several problems, including sloppy record-keeping. Upon examining your cap table, vulnerabilities such as an investor who joined the firm early for a bit of payment or an investment made via a handshake transaction that needed to be accurately documented become apparent.

You need a solid capitalization table to attract investors and improve your business.

4)Easily manage your inventory.

You can’t just use a spreadsheet if you have a complicated payment or valuation model. Aside from entering your ownership details, Cap table management software has all the administration capabilities you’ll need.

Additionally, advanced cap table management may assist organizations in meeting financial reporting requirements. It means you can forget about tedious spreadsheets and save yourself a lot of trouble in the long run.

5)Predict where the firm goes from here.

Not even the most advanced computer programs can reliably foretell the future. But it can generate forecasts, illuminating your past and future for you as CEO.

Predictions and data provided by AI may aid CEOs in making informed choices on expansion, funding, and staffing.

Why Do Companies Need to Outgrow Excel for Cap Table Management?

By looking at its cap table management, you can learn much about a company’s capabilities, its shareholders, and the people with the most say in major decisions. So, from the time you start working for the company until you leave, it’s crucial to know what you’re responsible for and how your actions may affect the company. 

In the event of a new fundraising round or the impending issuance of additional stock options, it is vital to revise the cap table accordingly. Despite the document’s apparent simplicity, many people still need to correct it.

Many new business owners make the mistake of continuing to use spreadsheets to track their cap tables, which may lead to chaos and confusion. When a firm receives money and expands, it quickly outgrows the capabilities of the existing spreadsheets to properly maintain the cap table on behalf of several employees working in parallel.

The Path Forward: Modern Cap Table Management

High growth and investment rounds may make day-to-day operations so demanding that planning takes time. Excel makes it much more challenging to plan. A spreadsheet will only assist you in evaluating an investor’s offer if you are willing to put in a lot of time and effort. 

Rather than relying only on Excel for data verification, a cloud-based software solution, such as an equities management platform or a third-party service provider, may be preferable. Knowing what you need before purchasing a solution is crucial since the optimal tool will vary depending on your situation.

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