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Equity as you grow: in conversation with Bain Capital Ventures' Sarah Hinkfuss

1/10/2023
Joe Brennan
Content and Communications Lead
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As your company scales, the way you manage your equity needs to change. Founders can get away with printing, signing and sharing every share option agreement in the early days – but not for long. Manual processes quickly become outdated as you hire more people and your organization becomes more complex.

We’ve put together an overview of how equity needs to evolve in your company over time. To help us along the way, we spoke to Sarah Hinkfuss, Partner at Bain Capital Ventures, who has experience on both sides of the table as a startup operator and now venture capital investor.

We’re going to focus on a few key areas where significant change takes place over time: who owns equity internally; how you handle and manage data; and investor expectations around equity and cap table management. We’re diving into the early stage in particular, as in this phase bigger changes happen more quickly. Strap in for your guide to equity expectations as you scale through seed, Series A and Series B!

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Your equity at seed stage

Data and documentation

Although Ledgy’s Launch plan lets founders get started managing equity with bespoke software for free, many companies opt to manage equity in spreadsheets at seed stage. Data management is not always perfect: you might find that some shareholder documents are floating around people’s desktops, but the company should already be pushing towards a single source of truth for equity data.

Investor expectations

In general, investors are happy to tolerate some ambiguity with how equity is managed at a very early stage. They understand the many demands on the Founders’ time, and therefore have more tolerance for such imperfections in the equity management process. Sarah Hinkfuss says, “At an early stage, what we’re really looking for is some consistency and parity. Does every employee receive a grant? Do share agreements have the same terms? You don’t need to be especially sophisticated, but making sure equity information is documented in one place is a start.”

Who’s responsible internally?

Early stage founders have to juggle many responsibilities, and this almost always includes owning the company’s equity plan. Equity agreements aren’t always made with proper formal processes: Ledgy customer Christian Facey, CEO at UK adtech startup Audiomob, described his equity processes in the early stages of the company as being “effectively agreed with handshakes and little else”!

But what changes when you’re a little further along, at Series A stage?

Your equity when you hit Series A

Preparing for a Series A funding round can signal a real step-change for your equity management. We regularly hear from companies that investor due diligence steps up. Firstly, to get audit-ready, companies need to undertake an annual 409a valuation. To support our customers with this process, Ledgy has partnered with Aranca.

Data and documentation

At Series A, businesses begin to really feel the effect if they are still reliant on spreadsheets. Spreadsheets can be highly error-prone – and these errors can put businesses and employees at risk. We researched the commercial impact of spreadsheets in our Spreading the Cost report, learning that almost a third of respondents had committed a data entry error on spreadsheets and that 60% of errors had cost the business money.

Aside from errors, managing information flow and properly structuring equity information gets unwieldy on spreadsheets. Equity plan administrators should have documents and contracts located alongside the grants themselves, making granular pieces of information easy to find at short notice.

Information management also extends to contracts and other official agreements. Properly signed and (where applicable) witnessed contracts is essential. (Psst! Did you know that Ledgy integrates with DocuSign to make your contract management a breeze?)

Investor expectations

Improved visibility on all equity data and documentation saves you time, and it’s critical to meet higher investor expectations. Investors are markedly less tolerant of ambiguity when working with Series A stage companies. “The stereotype of seeing many short-notice requests for cap table data or a particular contract is unfortunately sometimes true during a fundraising due diligence process,” says Sarah Hinkfuss. “It’s essential to have cap table and equity data available at the touch of a button, which makes investment conversations speedier and much easier.”

Who’s responsible internally?

It’s still pretty common at Series A stage for founders to retain overall accountability for equity management. But at and beyond the Series A, some of the day-to-day management may have been handed off to your CFO or CPO.

Depending on your broader talent strategy, you’re also likely to start thinking about standardizing equity awards. This includes establishing differentials for technical and non-technical hires, as well as levels for junior through to more senior hires.

Equity at – and beyond – Series B

By Series B, equity management has become an essential part of daily finance and HR operations. No ifs or buts – you have to have best-in-class equity management software in place. But what else evolves at Series B and beyond?

Data and documentation

A byproduct of increased hiring (and turnover) is a bigger administrative load on finance and HR teams. Without strong processes and automations, it’s easy for operations teams to get sucked into time-consuming manual data reconciliation. Ledgy has more HR system integrations than any other equity management platform, and our customers love the time saved as data is automatically shared and uploaded from one software to another.

As you grow, competencies in areas like information security and data privacy become even more important. Ledgy’s custom access controls allow customers to decide which internal stakeholders see which pieces of equity data, keeping people’s sensitive data secure.

Investor expectations

For investors, Series B is the stage where static snapshots of equity and cap table data are no longer enough. Sarah Hinkfuss says, “What’s really powerful is the ability to model out scenarios for two or three years down the line to predict what the impact of new fundraising will have on your capitalization, and on employee equity too. Managing your capital position is a central plank of your corporate development strategy, and modeling different scenarios is the best way to engage your investors.”

Hinkfuss adds, “Investors can also get insights into leadership and broader strategy from equity data. For instance, if there are very large discrepancies between the equity allocations for different members of the leadership team, that might prompt questions to the CEO on their attitude to talent management and how they’ve built out their leadership team.”

Who’s responsible internally?

While founders are still accountable for the overall strategy, it’s common for senior executives in the finance and people teams to assume responsibility for much of the day-to-day plan administration. The CFO might handle the financial components of the plan, and the Chief People Officer might take ownership of the internal communications and compensation planning.

Equity plan grants should be highly structured by this stage, with minimal deviations from existing levels and benchmarks. Using compensation benchmarking tools, you should have decided on the percentile that dictates your equity awards – do you aim high and grant at the 90th percentile? Or adjust somewhere towards the middle of the pack?

If you’re thinking about internationalization, you need to get on top of how equity awards differ from country to country. And then, you should think about how you handle equity for your existing team, not just new hires: how much do you allocate to refresher grants for your fully vested employees? What about milestones like promotions? Increasingly, growth-stage companies are laying the groundwork to run secondary share sales. (Ledgy has partnered with Semper to give our customers one simple way to execute secondaries.)

Summing up: your equity requirements change just as fast as the rest of your business

As your company grows, the early decisions you make on equity have significant ripple effects that impact talent strategy, retention, internal operations and many other critical areas. Getting equity right, and adapting processes as you scale, deliver stronger conversations with investors, an aligned team, and clear internal ownership.

Sarah Hinkfuss sums it up perfectly: “The value of equity software is that it gives every relevant stakeholder a single source of truth for real-time information: this includes employees seeking insight on their grant data and equity package size, and the founders and leaders who are managing the plan. It’s the best way to integrate the goals and ambitions of the whole company.”

Navigating these changes is always easier if you can rely on a single source of truth to guide decision-making. Ledgy’s equity management software sets you up for success at every stage of your journey. Talk to us about your equity ambition today.

Learn more about our equity management software here.

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Joe is Ledgy’s Content and Communications Lead. He has over a decade's experience working in marketing and communications for scaling tech companies and global professional services firms.

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