In our previous installments of our "Getting ready for seeking investment" series, we have talked about having the right corporate form, proper incorporation and remaining in good standing, and holding and documenting board meetings. The next step in order to be ready for investors is knowing how you are going to keep track of your ownership.
Keeping track of its ownership is an essential activity for any company. At each stage of growth, your company records should keep pace as well. Importantly, your shareholders and investors have rights that you need to make certain are honored. This task can become more difficult if shares are issued without documentation covering the class of shares, purchase price, and exact number of shares (the company will also need to record the cost basis of all the securities sold).
When just starting out and receiving commitments from your friends and family, you may be just fine keeping your ownership records on the back of napkins — so long as those napkins are dated, with the class of shares, purchase price and par value of the shares, and the number of shares being issued to each investor. Bear in mind that your friends and family may think that they are getting a percentage of the company rather than a certain number of shares. That is something that must be made clear with any investment and is a topic for another post.
The next level of sophistication is typically nothing more than an Excel spreadsheet to keep track of the capitalization of the company. Again, these records must keep track of critical details of each transaction. These records will also be useful for later due diligence by larger investors interested in helping your company grow.
Prior to the next level of growth, most companies would want to think about using an outside service to keep track of ownership and capitalization. There are a growing number of software-as-a-service solutions, like OptionTrax and CapSchedule, that will enable entrepreneurs to keep more accurate records that are not as subject to the potential for human error that exists with an Excel file ("What happened to all my information? It was just here!").
Finally, when getting to the point of having freely tradable securities after registering the securities under Regulation A or in an IPO, a proper stock transfer agent like Computershare or Continental is essential. Remember, once securities are freely tradable, investors and shareholders will only require permission to trade the shares if there is a restriction on resale in a shareholders’ agreement.