The more important question is why do you want to issue electronic shares? Before we jump to an answer, let’s take a quick walk through the history of stock certificates.
The oldest known stock certificate dates back to 1606, they were originally required to allow transfers while still providing proof of ownership, and were often necessary to receive dividends. As times changed, proof of ownership was transferred to companies over the actual owner, or bearer, of the stock. And as technology has improved, the regulatory bodies have increasingly looked to streamline this process. In the public markets, paper certificates are all but extinct.
Private markets are much more decentralized, so the move to streamline any type of operation is much slower. Some companies still issue paper shares, and some investors still ask for them. These are being replaced by electronic shares, but that too is unnecessary.
You can use something as simple as a spreadsheet to track your shares but probably shouldn’t.
Before we talk about the pros and cons, we should first outline the types of shares. Paper shares fall within a category called certificated shares. These are the standard share issued and require that a certificate, whether it it paper or electronic, can be issued.
Uncertificated shares only require that a ledger is maintained, no actual certificates ever have to be issued. In order to do this, companies simply add a provision to their bylaws authorizing uncertificated shares. While the specifics vary by state, most businesses are incorporated in Delaware for its favorable business regulations. You can find more information here and here.
A spreadsheet is free and can be fairly simple when you’re getting started but it does have a number of limitations. First, there is no system of record, meaning that anyone with a copy of it can make changes and there is no formal way to track which one is the ultimate truth. Your attorney, your accountant, your investors and several employees will likely all have a copy. When there are discrepancies, how do you resolve them?
The cost of a spreadsheet is hidden in the risks.
At the end of the day, your ledger is just a record of transactions. Those transactions occurred for specific reasons, such as closing a round of investment. Future investment rounds, awarding employee options, or increasing the value of your company would trigger changes but they could also be connected to other systems and automated. In addition, the ideal system should provide transparency to all parties.
At Venture360, we’ve put a lot of thought into this process. We built our platform to simplify the investment life-cycle, helping manage the relationship from the initial introduction, to reporting after future rounds have been raised. Your Cap Table (capitalization table) is just a record of the process for all parties, so you can stop worrying about what you forgot to put in that spreadsheet and get back to building your business.