I still remember the first cap table I built. It was in 2006, and it was for a company called Bug Labs (coincidentally, both a Spark and USV portfolio company). Brad Burnham sent me a ledger of stock certificates issued and asked me to turn it into a cap table in Excel. I had never heard of a cap table and had no idea what I was doing, but using some combination of an old cap table from an unrelated company, Googling around, and Brad Feld’s blog, I managed to muddle my way thorough. Today, it’s a task that would take me roughly a half hour. For my first one, it took me 10 hours and it was a mess.
As a recovering computer scientist at the time, I remember thinking that the process was remarkably mechanical. Why hadn’t someone built an automated process for taking a stock ledger as input and outputting a cap table? Cap tables are essential for understanding exactly what equity people own, and when “exactness” matters, there are no points for partial credit. The cap table is either perfect, or wrong. This level of exactness combined with a mechanical task is where an algorithm is preferable to a human.
Over the subsequent years, I built and/or audited a couple hundred more cap tables. I got pretty good at it. Often times, I was redoing work that a company had already done themselves as a double-check, and there too the CEO (often also a “post-technical” person themselves) would lament how mechanical (yet essential) the task was. Why isn’t this easier?
The problem lies in the digital/physical boundary. People often look at cap tables to figure out who owns what in a company. But, that’s not ground truth data; instead, it’s a summary of the ground truth, which is the collection of the physical stock certificates and options agreements. The summary (the cap table) is digital, but the certificates have historically always been physical, and that gap is the primary reason why keeping a clean digital cap table accurate and up-to-date is such a mechanical and tiresome process.
That’s why I was delighted when I met Henry Ward of eShares. He and Manu Kumar had this realization too; based on their direct experience with the inefficiencies of transferring and managing private company stock, and so they created eShares to solve the problem, which issues digital stock certificates as opposed to physical ones. To understand just how acute the problem of equity management is for most startups, read Henry’s recent summary of the issues. He has an incredible handle on the problem he’s tackling.
When considering solving the problem of stock certificate management for a company, the problem is clear, but the potential value of the solution is not obvious. Frankly, it feels small… and that’s why it’s often historically solved with a spreadsheet. When instead you think about solving the problem of stock certificate management for all private companies in existence, the possibilities for a network to emerge become very exciting, benefiting all companies more so than any one company individually. What if there were a central place where you could log in as an investor to see all your private company holdings, similar to people’s experience with brokerage accounts as public retail investors? What if there was a single source for clearing, settlement and custodianship of private securities, similar to how DTCC functions for public companies today?
That’s the long term vision for eShares and part of the reason why I’m delighted to announce that Spark is now an investor in the company alongside our friends at USV (led by John Buttrick) and the angels that have supported the company prior to their Series A. I’m excited to have the privilege of working with Henry and the team he’s built at eShares.
If you’re the CEO/CFO/COO of a startup (whether it’s two employees or twenty thousand), I strongly encourage you to give their solution your consideration. It will make life much better for you, your employees, and your investors.