Entrepreneurs excel at many things: creating innovations and inventions, making investors rain, and building strong core teams that believe in the product or service. However, they are not always the best at tracking private equity or understanding your property.
There is a simple reason for this, of course. It is because entrepreneurs are busier than bees. Additionally, many startup owners are inexperienced in issuing employee stock options and do not understand how the next round of financing may affect their dilution. As a result, many don’t even think about the nitty-gritty until trouble hits them head-on, usually when there isn’t much time. Instead, they are concerned about keeping their “babies” afloat long enough to gain traction.
Of course, this cannot last forever. But sooner or later, CEOs and founders must face music when it comes to managing their capital. And the sooner they get a system up and running, the better. Like anything else, the best place to start is to gain a broader understanding of the modern model of corporate ownership.
How equity happened in the first place
Although corporate capital seems to have been around forever, it is a relatively new concept on a large scale. Investors have certainly always formed trade associations. But employee stock options and profit sharing plans are surprisingly contemporary ideas.
As explained in The New York Times, Sears launched the notion of employee profit sharing in 1916. Here’s how the process worked: Sears released five percent of its annual net profit. That five percent was divided among Sears workers who wanted to enter a profit-sharing plan. Then they added five percent of their winnings to the pot and got shares as a reward. Over time, Sears’ profit sharing plan became so popular that almost all Sears employees took advantage of it.
Over time, profit sharing and stock options got more sophisticated, of course. However, the basic premise of distributing capital stock remained the same. Now, many startups rely on giving up stocks in exchange for initial investments. Watch an episode of “Shark Tank” and you will quickly understand why it is so attractive. Simply exchange cash for stocks and voila! You have a business with some capital and the ability to get going.
It all sounds so simple. But alas, it is not. Sharing stocks is a long way from handing out candy. It can get complicated quickly, especially for unproven entrepreneurs. And that’s where problems can start to take on monumental proportions.
When equity tracking gets sticky
What are some of the biggest action tracking and management challenges business owners face? One of the most important is the lack of guarantee that all property rights are registered. All stakeholders should be on the same page when it comes to spreading shares and have access to review their holdings. Future funding rounds can affect everyone. Without access to the modeling tools that have been reviewed, decisions can be made recklessly.
Another problem involves managing equity in a growing business and not having a formal process to keep everything in order. Excel and Google spreadsheets can seem like a natural fit. They can certainly help keep everything organized in the clearing. However, they are not intended to be long-term stock tracking solutions. That is not its purpose. Also, as CEO Today reports, Google Spreadsheets are not as secure as they claim to be. Who wants a data breach of investor information?
Of course, there are other obstacles in managing capital besides diluting the property and keeping everything in order. Obstacles include not working with a financial advisor on a 409A valuation and improperly scheduling employee stock option issues. Oh, and it’s important to mention that not keeping up with adjudication schedules and laid-off employees can lead to serious headaches.
So does that mean you’re out of luck when it comes to offering stocks? Should you throw in the towel and not worry about profit sharing, stock options, or the like? Not at all. As a smart entrepreneur, you can avoid even the most overwhelming complexities. And you can do it faster than you think.
Tips to optimize property tracking
Remember that managing the capital stock of your company requires some effort. You can expect to spend a little time setting everything up. Here are some of the best practices to implement on your way to becoming an expert in stock tracking.
1. Find a solid software program
First things first: stop using hand-built spreadsheets to keep your capital in order. Something is likely to be missed, and it could be something essential. For example, can you be sure you’ve entered everything accurately? Are your calculations accurate? How simple is it to retrieve documents and reports when you need them?
Make being an executive a breeze by investing in a strong capital plan management system. Find a pre-built one, especially for businesses of your size. At the same time, find a system that can grow with you. The last thing you want is to buy software to manage your equity information, only to go through the process again next year. If you expect to scale in the coming months or years, look for a software program to go with it.
2. Consider the needs of remote workers
Are you planning to open your stock options to employees? Excellent. You’ll follow in the footsteps of companies like Sears, as mentioned above, and even Google. However, there is something to consider: you may have remote workers on your payroll. It is important to think about that, especially if you will be offering them capital. After all, they want to be able to effortlessly keep track of their options.
According to stock plan management company Astrella, providing unlimited accessibility for virtual workers is key. As noted in one of the brand’s published articles, “… it is important that employees can exercise their stock options from anywhere in the world. Employees must be able to access the software from whatever country they are in and exercise their share option using their native currency through whatever processor is available to them. ”Consequently, your job is not just to give them an opportunity for equity, but a simplified way to see how well your options are working.
3. Educate employees about their stock options
Transparency and fairness are important selling points right now for all businesses. Employees like to feel that they are receiving honesty from top management. They also want to be informed about what is happening to their equity investment dollars. However, many have never had a deep understanding of equity. Others may be confused about how they can make equity in your (your) business work for them.
The answer to filling this knowledge gap falls squarely on your shoulders: training – and heaps of training. Educating your employees about stock options and other stock options will not only help them, but it will help your company as well. You will be doing everyone on your team a great favor. Make sure your training includes a discussion about taxes. Employees may not realize how their profit sharing or stock options are taxed.
4. Assess equity monitoring needs regularly
As with many other systems, workflows, and processes, you can’t afford to adopt a “set it and forget it” attitude toward tracking fairness. This is something you must revisit regularly. Ideally, set aside time quarterly or at least semi-annually to evaluate your current tools and procedures. Are they still working for you? Do you notice a problem? What does your team say?
You may also want to seek advice from financial and investment advisers on a regular basis. If you end up merging with another company, be sure to note how your decisions affect the equity arrangements. Like a physical body, your company functions as if it were a system. Therefore, what happens in one area will surely affect others, such as your capital.
5. Continue to offer other benefits
The Great Resignation is upon us. As mentioned in Harvard Business Review, some industries are seeing employees flee at a rate of 30%. However, you can keep your best employees by continuing to offer benefits beyond equity in your company. After all, equity is a great benefit, but it can’t replace other benefits like health insurance and scheduling flexibility.
The bottom line is that stock options and other stock offerings should be viewed as one carrot among many. Some of your workers won’t benefit from the equity right away. They will wait a while, even after they are eligible to participate in profit sharing or buy stocks. As part of your capital management, you may want to include a list of workers who have not taken the plunge. Occasionally, you may remind them of your eligibility, as well as your eligibility to enjoy other benefits your brand provides.
Tracking equity doesn’t have to be an arduous experience. Even if you’ve never started a business before, you can master capital management. All it takes is a little practice, the right tech tools, and a plan.
The publication 5 Ways to Responsibly Manage Equity as Your Business Grows first appeared on maturity.