How to Save Legal Costs for Equity Management on Carta
Managing equity is a pivotal part of a startup's development, ensuring that ownership and financial stakes are correctly allocated and maintained. Collaborating with a legal team is essential to navigate the complexities of equity management, but it can also be costly. In this blog post, we will explore the importance of equity management, the best time to onboard equity management platforms such as Carta, the role of your legal team, and some cost-saving tips to help you manage your equity more effectively. While this article focuses on Carta and uses "Carta" and "equity management platform" interchangeably, there are other alternatives like Pulley that also offer robust solutions. Most of the cost saving tips discussed in this article can also be applied to other equity management platforms. I'd love to see more players come out in this space so that startups can have more leverage in negotiating the best offer for them. (Yes, negotiation is possible.)
Understanding Equity Management
Equity management involves the process of managing a company's shares, options, and other securities. For startups, it is crucial as it determines ownership structure, helps attract talent, and secures funding. There are different types of equity, including common stock, preferred stock, and stock options, each with its own features and benefits. Understanding the legal and regulatory requirements is also essential to ensure compliance and avoid potential legal issues. I often get questions from founders such as when is the best time to onboard Carta. My general recommendation is that if the Company is actively giving out equity to people, including employees, advisors, service providers, and investors, you should consider getting on Carta. In particular, if the company has raised significant outside funding, whether through convertible instruments or priced rounds, you should definitely discuss equity management expectations with your investors and most of them would require electronic stock certificates from Carta nowadays.
Carta's Free Plan: Carta Launch is a free plan available for companies with up to 25 stakeholders and up to $1 million raised. You can sign up here.
Cost Saving Tips for Working with Lawyers
Your legal team can be instrumental in managing equity, offering advice on security compliance, structuring equity plans, and handling financing transactions. However, most lawyers charge by the hour, so working effectively with your legal team can save time and cut costs. There are certain areas where companies with first time founders tend to rely more on legal teams, and other areas where they can manage in-house or at least try to learn how to handle internally.
Here are the areas where companies tend to rely more on outside legal advisors to ensure accuracy:
Onboarding and making sure your current cap table is imported into Carta correctly.
Setting up the different classes of stock and their respective rights under the company's certificate of incorporation.
Setting up the stock plan, including uploading the form stock/option issuance agreement.
The first time the company does something, such as issuing options and convertibles.
Issuing stock certificates to investors.
Generally speaking, for tasks that involve the initial setup and corporate structure of the company, you want to make sure you get it right on the get go as any mistake there can be amplified later on after you start issuing securities to people. Any of the tasks outlined above can be done by the company in-house with help from Carta but having attorneys to take a final look could be beneficial. Once your legal team has done something for you for the first time, it's relatively easy for companies to repeat the same action on Carta. For example, after your lawyer has set up the company's equity plan and issued options to certain optionees, you can repeat the action by looking at the existing entries your lawyers have made.
DIY Equity Management on Carta:
Carta has published a number of helpful guides and blog posts with step-by-step instructions to help companies DIY equity management. Below are direct links to some of the most commonly viewed instructions:
Contact Carta (Hotline for Private Companies is +1 650 669 8381)
One thing to keep in mind is that although Carta has been out since 2012 and is constantly pushing out new updates, it still has its limitations in terms of things it can record. For example, milestone vesting is something that Carta can't track perfectly and there are a few other limitations that I have discovered in the day-to-day management of client accounts. Therefore, if you run into some issues and could not find an answer online, it is most likely that there is a technical limitation that Carta has not resolved or it is a desirable feature that Carta should consider. This is another reason that I hope to see more robust players in this space.
Other Cost-Saving Tips
Train in-house talents for equity management. The could be helpful if you have a large number of stakeholders to manage.
Do things in batches. For example, if you have a number of option grants to make, do them in batches so you only need one Board Consent and you can issue everything at once on Carta.
Understand who is managing your Carta account at the external law firm. While this person does not need to be the most senior attorney, please make sure he or she is familiar with the equity management platform you chose to use and have a good understanding of the corporate history of your company. Some law firms offer experienced paralegals with lower rates for equity management, which could be an excellent option.
Just like assigning any legal project, be up front with your lawyers about any budget constrains and cost expectations.
In conclusion, effective equity management is crucial for the success of any startup. Partnering with a legal team that understands your chosen equity management platform can lead to significant cost savings. By collaborating closely with your legal advisors and utilizing tools like Carta and Pulley, you can streamline processes, ensure compliance, and reduce expenses. Should you need further guidance, don't hesitate to reach out. We're here to support you in navigating the complexities of equity management and achieving your business goals.