No one starts a business to fail. But ‘success’ comes in many shapes and sizes. While some founders strive to build a business that serves their local community for generations to come, others dream of growing their start-up into a unicorn. Companies at different stages have different challenges and needs when it comes to investor record-keeping, communications and compliance requirements. It is crucial for management to adequately plan ahead in this regard in order to avoid headaches down the road.

EXPANSION POINTS
Start-ups and pre-seed investment companies
At this very early stage, a company is typically using founders’ equity or has raised some start-up capital from close friends or family. Records of who owns what are kept internally via spreadsheets or self-administration software, and investor communications are often handled directly by the CEO or founder. This type of arrangement works well at this stage, particularly if there are only a handful of investors that the founder knows well.

Seed-stage companies
At this point, the company has typically taken in outside capital from angel investors, venture capital or, increasingly, equity crowdfunding channels. These investors don’t necessarily know the CEO/founder personally, and the demand for transparency, accountability and accuracy in investor record-keeping increases. For seed-stage businesses, these duties are often still performed in-house but with the assistance of a law firm or CFO. As the business scales and internal attention is diverted to growth management, investor administration and accounting can fall by the wayside. This may result in incomplete records or non-compliant transfers. Forward-thinking firms are starting to engage a transfer agent for this work to avoid these issues.

Growth companies
Growth companies have typically raised funding, or have future funding committed by venture capital firms, private equity companies and other accredited investors. In some instances, this type of firm lists on a stock exchange via an IPO. In virtually any scenario at this stage, a company has the requirement to keep accurate books and records regarding its investors, be it done via a law firm, accounting firm or a transfer agent, and must meet high standards of corporate governance, transparency and investor communications. In-house attempts to manage this work often fail or become costly in terms of time, resources and potential regulatory lapses. In the case of a traditional IPO process, issuers often collaborate with issuer agents (formerly transfer secretaries) to exercise their governance, compliance and investor engagement obligations.

GETTING THERE
As a company moves from the start-up to the growth phase, it will engage with multiple investors – from angels to venture capital firms – for funding. They’ll need to provide potential investors with a summary of the company, business plan, key financials, products and technology. The narrative should be compelling enough to help prospective investors get excited about the business vision and feel confident about jumping on board. Yet potential investors are going to want more than just a solid pitch and there are a few questions they’ll want answered to fully understand what an investment in the company means for them, specifically looking at the current ownership, governance and control within the company.

Before they hand over any cash, investors will want to understand governance and control (for example, voting authority) by seeing how much ownership is concentrated into the largest holders. Potential investors may want at least as much voting influence as some existing investors, which could, in fact, help make the case for them to invest more and helping the business reach its fundraising goals. Additionally, investors will want visibility into the current ownership versus fully diluted ownership and you will need to clearly show how your ownership is structured and how ownership and control will change.

Clarity on the internal versus the external ownership structure will help potential investors understand how much ownership and influence any non-employee investors may already have; who has influence over important business decisions; and how much. Different share classes carry different rights and privileges so investors will want to see the composition of the share classes to understand these and the important governance implications that they carry. They may also look at any reserves set aside for future equity incentives. Some investors may even request the option pool be created or increased prior to their investment. Therefore, an investor should be able to easily see how much of the equity is set aside for future employee awards and grants.

It is important to develop a more balanced ownership structure between internal shareholders, namely founders and executives, versus external shareholders, such as investors, directors and strategic partners. This balance will ultimately shape who is on the board and influence critical strategic decisions such as partnerships, acquisitions and major capital expenditures. Having this organised in a professional manner will quickly enable both the business and its prospective investors to assess the current structure, to easily enable productive investment conversations.

Private companies have more opportunity than ever to raise capital. But before achieving ‘unicorn’ status, it’s important to consider how the company will grow and change, and how the communications and record-keeping processes will need to keep pace. Having investors adds an additional layer of administration when it comes to managing their ownership, tracking their holdings and communicating with them regularly. A business can’t become a unicorn with disorganised equity, and it needs to ensure that it’s prepared to answer to investors professionally.

Businesses need to seek out smart equity management with a reliable and established partner that has a track record of secure record-keeping and communication services for thousands of companies and investors to support its growing needs. No matter what the business’ goals are, a strong foundation gets it there. From startup to established, and everything in between, Computershare can help get company equity in order.

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