Have you ever wondered what lies behind the meticulous management of your startup’s equity and the unseen challenges of maintaining a clean cap table? In this episode of The Angel Next Door Podcast, host Marcia Dawood dives deep into the essential but often overlooked facets of cap table management with industry expert and guest, Colin McCrea. Together, they unravel the complexities that every founder should be aware of and how to navigate the turbulent waters of startup finance. Colin McCrea, a seasoned professional in accounting and finance, shares his journey from working at a CPA firm to becoming a pivotal player at Eqvista, a company specializing in cap table management solutions. With a portfolio boasting roughly 16,000 companies, ranging from startups to pre-IPO giants, Colin brings a wealth of knowledge and firsthand experience. As the leader of Eqvista’s valuation team, he's uniquely positioned to offer insights into the intricacies of 409A valuations and the vital importance of maintaining a well-organized cap table. Throughout this episode, listeners will gain a comprehensive understanding of cap table management's role in a startup's success, the pitfalls of equity mismanagement, and the critical need for compliance. Colin and Marcia discuss the essential steps founders must take to protect their equity, maintain investor trust, and enable smooth funding rounds. They also explore the nuances of 409A valuations and essential compliance filings like the 83B election. This is a must-listen episode for any entrepreneur aspiring to build a solid financial foundation for their business, as well as the investors, featuring actionable advice and expert insights that can save both time and money.
Have you ever wondered what lies behind the meticulous management of your startup’s equity and the unseen challenges of maintaining a clean cap table? In this episode of The Angel Next Door Podcast, host Marcia Dawood dives deep into the essential but often overlooked facets of cap table management with industry expert and guest, Colin McCrea. Together, they unravel the complexities that every founder should be aware of and how to navigate the turbulent waters of startup finance.
Colin McCrea, a seasoned professional in accounting and finance, shares his journey from working at a CPA firm to becoming a pivotal player at Eqvista, a company specializing in cap table management solutions. With a portfolio boasting roughly 16,000 companies, ranging from startups to pre-IPO giants, Colin brings a wealth of knowledge and firsthand experience. As the leader of Eqvista’s valuation team, he's uniquely positioned to offer insights into the intricacies of 409A valuations and the vital importance of maintaining a well-organized cap table.
Throughout this episode, listeners will gain a comprehensive understanding of cap table management's role in a startup's success, the pitfalls of equity mismanagement, and the critical need for compliance. Colin and Marcia discuss the essential steps founders must take to protect their equity, maintain investor trust, and enable smooth funding rounds. They also explore the nuances of 409A valuations and essential compliance filings like the 83B election. This is a must-listen episode for any entrepreneur aspiring to build a solid financial foundation for their business, as well as the investors, featuring actionable advice and expert insights that can save both time and money.
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Marcia Dawood
Well, hi, Colin. Welcome to the show.
Colin McCrea
Hi, Marcia.
Marcia Dawood
Well, it's nice to have you here today. I know we met recently. I was just fascinated by what you're doing at Eqvista, because I hear from companies a lot that they want something that has to do with cap table management, but they're not really sure how to do it. They're a little bit worried about going to some of the bigger providers because they're a little more expensive, they're a little more upstream. So why don't we start out, tell us a little bit about your background first, and then we'll get into how you got to working with Eqvista.
Colin McCrea
Yeah, yeah. Thank you so much for the instruction. So I went to school for accounting and finance, and then I actually, I was doing work at a CPA firm, and then I stumbled upon Eqvista when we started back in 2018. So that was like six years ago, and that was when the market was more wide open for captable providers. And it was more like the Wild west back then. Like people didn't really know where to go to and everything was probably overpriced and what it is now. And we just thought there should be a better way to do it, a more affordable way for founders and just something more accessible. So we just started off building it gradually, and then now we've got a user base of around 15 or 16,000 companies in the platform.
Colin McCrea
And they kind of range from startups to pre IPO companies and everywhere in between. But, yeah, I mean, it's really nice to have a solution that caters to both startups, even like one man bands, to ones that can accommodate several hundred shareholders. And then I naturally also right now I'm leading our evaluation team for foreign NA evaluations, which kind of goes hand in hand with cap table management because you want to know what the strike price is, what the fair market value of the common, of your common stock are. I'm helping a little bit on both sides of cap table and foreign Nasda.
Marcia Dawood
Okay, great. So one thing that we haven't talked a lot on the podcast about before is cap table management. We haven't really done that, and we definitely have not talked about 409 a. So let's back up a little bit. Tell our listeners a little bit about what cap table management is. If you're a founder and you're thinking, okay, I have to start this. I've heard about this cap table management, but I'm not really sure even where to start. Tell us about that.
Colin McCrea
Yeah, I mean, cap table or capitalization table is basically a tool for tracking the equity in a company. And I know that for most first time founders, that's the last thing that they think about. It goes in the back burner. They think about how they grow their business and everything else. But then as the company grows and things get a little bit more real, then they realize that they need to take it more seriously. Not only for taxation purposes, but if you bring a lot of. Maybe you have co founders, if you have partners, if you have employees and investors, and slowly more and more parts of the pie is getting taken away, and then you might realize that you need to protect something or you need to make the equity as an incentive for shareholders. It's actually, I would say in the beginning, a lot of the companies, they use Excel, which is acceptable if you have a couple of shareholders.
Colin McCrea
But then when you're onboarding more and more people, and especially when you have like vesting schedules where it's like you're getting a little bit of the options every year, every month, and you're trying to juggle having 20 or 30 people in your cap table, it's really difficult to do it on Excel, especially to keep everybody updated all the time. So that's when we see a lot of clients that they shift to like a software solution.
Marcia Dawood
So take us back to I'm a founder and I now am like starting my company and I'm going to split a the shares between co founders. When you see that happen, tell us a little bit about how that starts. And then once you start to bring on, once you start to bring on investors, then it's a different game. So you almost have to have it separated a little bit, but then it all does have to come together because you're still splitting up equity in some ways either between common shares and preferred shares.
Colin McCrea
Yeah, I mean, let's just say you have two founders. The most common would be like a 50 50 split. There might be some where one person wants to take majority, but normally it's 50 50. And then when the company grows, you might have some key employees or advisors that you might give up a couple of percentage points to before you have the investors come in. But when you do start getting investors coming in and you have either like a friends and family round where you have some friends or family that want to invest and help the company, then you have to start thinking about how much of the company you want to give up to them. And some of the companies where they just want to get, they just want to grow and they don't really think about it. They might be giving up, I don't know, like 30, 40% of the company because they just want something to come in and make the company like a real thing. But then they realize after a while they're like, I gave up a lot of my company.
Colin McCrea
I shouldn't have done that. Typically it's 15% to 20% on a normal, like, round with VC's investors. So, yeah, I mean, you don't know. It's too late until it is. So it's good to educate yourself at the beginning. And we see a huge difference of how seriously founders treat equity. For like, first time founders and founders who have exited, like a couple of companies, like, their perspective on it is a lot different.
Marcia Dawood
I could totally see that. I mean, I worry because I've seen so many entrepreneurs where they have given up that equity at the beginning because they thought, oh, my gosh, I just need to get some money so I can get to the next milestone so that then I can go out and pitch to, to more investors. But then they give up too much and it ends up becoming a snowball effect. So then they get to a point where they can't continue to raise unless they recapitalize, which is always a difficult thing to do if you've already promised and already signed away parts of your company.
Colin McCrea
Yeah, and like, some of the extreme cases we've seen are, like, companies who've raised that raised in 2021, where the valuations are like, sky high and they had really high pre money valuations, and now it's kind of come back down to earth. And a lot of them actually might have, like, down rounds or they have extended rounds, and they're just giving a lot of equity to keep the company running because their burn rate is really high. They're losing a lot of money. So that's where they just keep losing these chunks of equity. And if some of them get acquired, they have such little ownership in the company left. It's surprisingly, even though they sell the company for $100 million, that they're left with close to nothing. It's really interesting to see.
Marcia Dawood
Yeah, it's so sad. That's a really good point about 2021, because the valuations were so crazy then. And then we started to see them really come down in 22, 23. Even here in 24, we're still seeing companies struggle to fundraise. They're really having a hard time. They're having to do down rounds or extended rounds, as you say. I've seen so many companies doing extended rounds and that just means they're hitting the. They could even be hitting milestones.
Marcia Dawood
They could be hitting those milestones and then they are not able to show it in the valuation because they just raised on too high a valuation before, gave too much of their company away. Wow. All right, so then let's talk a little bit about what a 409 a valuation is.
Colin McCrea
Yeah, I mean a 400 a valuation. It's strictly for stock options. So let's just say that you have an investment coming in, and normally the investors would recommend that you set aside about 1015, 20% of the company for new staff coming in. And that's called an employee stock option pool. And then in order to set the like, exercise price or strike price on those options, you need to get a third party evaluation done. So you make sure that you don't have it too low. So the IR's is a little bit too low for what you should be issuing them at the. So you have other firms, either valuation firms or cap table firms, or kind of combination of the two, where they help to conduct this for an NA evaluation for you to do that.
Marcia Dawood
And that way you can set a price on what the options will be. And would this be the case? Because when a company is actually raising money, so when the company is raising money, they can. They know the price because they're. And they're carving out the option pool. And if they were going to give out options at that point, they would just use the price of the last round. Correct. Or the last price that they had issued stock at. But if now time has passed and you want to issue options outside of a raise, then you have to get the 409 a, is that right?
Colin McCrea
Yeah, you usually have to get them done at both points, but, yeah, if it's been a long time and you don't know what kind of the share price is anymore, then you'd probably have to get a 488 to update that for the company.
Marcia Dawood
So there are times, though, that a company would have to get a 409 a valuation for the options, even at the same time that they were fundraising.
Colin McCrea
Yeah, let's just say you just closed around and the share price was like $10, but that's on preferred stock. Then you want to get the fair market value of the common options as low as possible for tax purposes. So you get a 488. We use a model to get it as low, acceptably low as possible, and then you can issue it at that price.
Marcia Dawood
Okay, good point. Because you're talking about two different types of shares. So even if they were raising, then you would need to, you would need to value the common shares because it's the preferred shares that have the price because that's the money that you just raised. Right?
Colin McCrea
Yeah. And like, one misconception is, like a lot of the companies, they think that you can use a foreign na to attract investors or you can use it for some other purpose. That's not for stock options, which you technically can, but if the purpose of the 490 is to have a very low price, then obviously the investors won't think very highly of it. I think the misconception is that evaluation can be anything but. Actually evaluation is for a specific purpose. It's for investors. As for stock options, it could be for a shareholder dispute. So there's different purposes for each type of valuation.
Marcia Dawood
Interesting. So if somebody does a 409 a then on the common shares and they issue options to an employee, tell us a little bit about the process of how that works. Does the employee have to pay for something then, and tell us, like, how that whole option thing works besting?
Colin McCrea
Yeah, yeah. So there's mainly, there's two types of options, which is incentive stock options or non qualified stock options. NSO and ISO. ISO, they're only for employees of the company and they get like special tax treatment. So even if you have options, you hold onto them and you exercise, you won't have to pay any tax. Maybe AMT, but usually not. And then once you sell those shares for a gain, then you'll pay tax at that time. But if you're giving options to advisors or contractors or people out of the country, non employees, then once they exercise, then they'd have to be paying tax on that.
Colin McCrea
But yeah, most options, they would have a vesting schedule because you don't want to give a bunch of options away to an employee, and then they get 1% of the company and then they quit the next day. So you want to protect the company that way. So you might give them options and they earn them over a period of like three years or four years, so they slow. So you know that they're committed to the company and they want to see it grow as well.
Marcia Dawood
Yeah, absolutely. That makes a lot of sense. Yes. So then with Eqvista, tell us a little bit about what happens when a founder comes onto the platform, how it works and all that kind of stuff.
Colin McCrea
Yeah, so I mean, for the smaller companies, we offer a free plan. It's up to 20 shareholders because it's there to support founders. And usually the cap table is not too complicated. So, yeah, you can onboard yourself. It only takes one or two minutes. You can create a company, you can start issuing shares to you and your shareholders, and then as you grow, and if and when you might need a foreign ma or you might need some more advanced features, a lot of it's kind of compliance features or tax features on the platform. Then it goes to a paid version. So you mix them two together, basically, when you grow to that point where you want to catch it more seriously.
Marcia Dawood
So there is a free program, which is awesome, because then that kind of incentivizes some of the smaller companies to get started, because sometimes what I've seen is, like you said, an Excel spreadsheet is okay at the beginning when you only have a couple people, but then as it gets more complicated, I feel like as the company's growing, then there's more things to do. The founders are running around with their hair on fire, practically, and they're trying to get all these things done, and then it turns out that they're like, oh, my gosh, I now have many investors, many shareholders, and now I have to go back and try to redo it. I feel like that makes it really challenging if you're trying to do it after the fact.
Colin McCrea
Yeah. And we also help with onboarding as well. So, like you've said, we've had some clients where they have, they use it, do it, excel, but it's really messy. And they just have all these, like, documents somewhere, and then we say to send it all to us, we can organize it and then put all those details on the platform so it's more organized and they can just start using it right away. So, yeah, we've had clients where they, they just, we basically help them a lot to get them started.
Marcia Dawood
Mm hmm. That makes so much sense. And then you said you already have much bigger companies on the platform, too. Pre IPO and everything too, right?
Colin McCrea
Yeah. And of course, like, their needs are different, so they have a lot of shareholders, so they need more features that you can track and manage, like a lot of people at one time, or you can send messages out to a lot of people or issue share certificates. So that's the needs a little bit different for the different companies. Yeah.
Marcia Dawood
So you have a free plan. I have heard from some other people that your pricing plan is actually quite reasonable, and so it's pretty easy. Even once a startup has to start with a paid plan that it's still accessible to them. Is that right?
Colin McCrea
Yeah, if we plan up to 20 shareholders, and then once it's above 20, it's $2 per shareholder for the premium plan. So even if you have 50 shareholders, that's like $100 per month, which some people might think is too high or too low to try to manage 50 people at one time. The platform does save a lot of hours of manual work or emails back and forth, so it's saving you a lot of time to do other things for the company. And then we also offer one with four nine a. So depending on how big the company is, those prices can go up. But yeah, we're a lot more affordable, I think, than other companies in the market.
Marcia Dawood
So if I'm an investor, it's also helpful to me because now I have a third party that's keeping track of the equity. It's also a place that I can log into as an investor and I can see my shares, how many shares I own, and I can also see the documents I signed. Is that right?
Colin McCrea
Correct. Yep. Yep. So the investors have access to all of that. They can see it all again really quickly. Go to the cap table, see what's going on and go out.
Marcia Dawood
Yeah, I like that because I feel like trying to keep track of all the documentation is, is challenging. I mean, you have to be super organized in order to be able to do that as an investor. And sometimes things happen. All right, well, great. Well, Colin, where would people go to find about, find out about Eqvista and tell us more about where founders and investors who are helping founders should go.
Colin McCrea
Yeah, I mean, they can just go to our website or go to our contact page. But yeah, there's so many questions and so much information around cap table and equity management and a lot of it's overwhelming for founders. So if, I mean, we have a lot of like resources online, either about the platform or just in general. But if people have questions, they can just send us an email. We're usually responsible, we'll respond within 24 hours. But I would say that a lot of the clients or companies, they do appreciate us because we'll help them in other facets rather than just selling them a product. We'll help them with some of the compliance is a little bit complicated too. There's like a filing called 83 B, which is you're sending a form to the IR's about a fair market price.
Colin McCrea
There's also QSBs, which is qualified small business stock. If you hold on to stocks for longer than five years and you're technically a small business, almost like 100% of your capital gains can be exempt, which could be like millions of dollars. So a lot of the founders wants to hear about this. So, like, I never knew about this and this is great. I really want to take advantage of it once I get close to the five year mark. So a lot of these, these little kind of tricks or compliance things that people just don't know about, they might ask us about that and we can help them with that.
Marcia Dawood
That's great. In fact, that's so timely that you said that, Colin, because we just recorded an episode with Jeff Solomon and he walked us through all the details of QSBs, all the tax advantages. So if you are a listener, you didn't listen to that episode yet. Definitely go back and talk about that. But we did not talk about 83 B. So just go over that briefly. I know we're now getting into like Angel 501 at this point, getting into some more advanced stuff here, but it's still, it's very interesting. And I think that's one thing that I've seen, especially employees and other founders, that they didn't realize there was this 30 day window that they could, that they had to get in the information for the 83 b.
Marcia Dawood
So just explain that briefly, just so that people know, ooh, geez, I need to make sure I'm all over this.
Colin McCrea
Yeah, so 83 B form is basically, it's a form of the IR's telling them that you receive stock or if it's for options, if you have early exercise options and you're making a pre payment on your taxes. So you're basically setting the, I guess, the entry point or the fair market value at that point in time. And then if you have any investing later on, usually for restricted stock, all of that gain that you have is capital in nature. And you're basically telling the IR's beforehand, look, this gain will be capital in nature. So later on, when I do, when I sell it and I have taxes, it shouldn't be income taxed. Right. So you'll be gaining a lot of money that way. For some of the founders who just started a company, they'll be paying nothing because the company is not worth anything.
Colin McCrea
Or if it's more established, some, some shareholders might be paying something, but later on it could save you tens of thousands or $100,000 depending on how big the company is. But yeah, a lot of founders and a lot of people in the start world, they just don't really know about this.
Marcia Dawood
Yeah, I've seen a lot of times people are like, oh, well, let me send in the 83 b election now. And it's too late. You had to do it in the first 30 days that it was issued to you. Yeah. Yeah.
Colin McCrea
And it ties really well in with qsbs too, because if you file that and then later you're filing for exemption, you're saying, I already did this before. This is really good evidence for this one. So a lot of it is tied in together even with foreign na.
Marcia Dawood
Yes. It's almost like you're drawing a line in the sand with the IR's and you're saying, look, this is when I got the stock. This is what it was worth. And now later, if there's a gain, that gain is not ordinary income. Yeah. All right. Well, Colin, thank you so much for coming on the show today and telling us all this wealth of information. This is a lot of stuff we've never talked about before.
Marcia Dawood
And I love the idea of founders being able to have a free account at Eqvista so that they can get started on cap table management right away.
Colin McCrea
Thank you so much.