I’m often asked whether employees should have access to the company’s cap table. The cap table is one of the most sensitive and critical documents in any startup. At its most basic level, it lays out who owns what – founders, investors, employees, consultants. It typically contains information about outstanding shares, convertible instruments, pricing, valuation and ownership dilution. More complex cap tables may include formulas that model out various hypothetical transactions such as new funding rounds, sales of the company or public offerings, and may provide details on the holdings of each individual owner and each individual type of security. Traditionally, access to the cap table is tightly controlled, with only a select few in the company being privy to its contents. However, as demands are made for more transparency, the question arises as to whether employees should have access to the cap table.
The Case for Employee Cap Table Access
The arguments in favor of access focus on the advantages of transparency. First and foremost, transparency breeds trust. Lack of access to the cap table may lead to suspicions on the part of equity compensated employees about lack of fairness in compensation and value.
Sharing cap table information can help align the interests of employees with those of the founders, investors and the company in general. Employees who understand the equity structure are more likely to feel connected to the company’s long-term vision and their role in its success.
For employees holding restricted stock, stock options or other forms of equity-based compensation, access to the cap table also provides clarity. It enables those employees to evaluate the real value of their compensation packages and how their value might grow over time. This is particularly important in startups, where equity is often a significant component of total compensation.
Cap table transparency can help motivate employees. Seeing their stake in the company’s success can motivate employees to think and conduct themselves like owners, rather than merely employees, which in turn could encourage them to work harder and become more committed to the company’s long-term goals.
Finally, in a competitive job market, cap table transparency may be a differentiator. Companies that are open about their equity structure may attract top talent who value transparency and want to make informed decisions about the value of their equity-based compensation.
The Case Against Employee Cap Table Access
The main argument against cap table transparency for employees is confidentiality. The cap table contains sensitive information about fellow stock optionees, shareholders and outside investors. Disclosing equity information to optionees is the equivalent of publishing salary details, which can lead to workplace comparisons and tensions, and harm employee morale. Broad access could lead to potential leaks or misuse of the data, jeopardizing the privacy of equityholders and the company’s strategic interests. Startups would typically want to maintain the confidentiality of this information, particularly from competitors.
Second, cap tables can become fairly complex documents. Without proper context or financial literacy, employees might misinterpret the information, leading to confusion or misplaced concerns about equity distribution or company valuation.
Third, allowing employees to access the cap table may also create certain administrative or legal burdens. Maintaining and updating access for employees can be time consuming, especially for startups with limited resources. Companies might need to update the cap table frequently or provide education to help employees understand it. Additionally, there could be legal implications to a leak or misuse of the data, especially in regulated industries.
Striking a Balance
Instead of full access, companies should consider adopting a middle-ground approach of tiered limited access for equity compensated employees. For example, rather than sharing the full cap table, companies can create streamlined reports highlighting key metrics such as total shares outstanding, employee ownership percentages and vesting schedules, but without revealing individual ownership details. Each equity compensated employee could be given limited personal information consisting of only their own equity information, namely share ownership, vesting schedule and current value. Key employees and executives may be given more detailed information about the company’s capitalization but not full access to the entire cap table. Under this approach, full cap table access providing complete visibility into all equity ownership details could be reserved just for founders, board members and perhaps the CFO and counsel. Companies should also consider providing employees with resources to better understand equity compensation and cap table basics.