What is equity management?
A company’s equity is the amount of money its owners would have if they dissolved it by selling all assets and paying liabilities. A company with positive equity can cover the entire amount of liabilities. It’s ideal to have equity as high as possible (a 50% equity of the total assets is optimal).
Equity management is the process by which a business manages and tracks the venture’s ownership with connection to stakeholders. It may sound simple, but it implies tracking and reporting data, communicating with stakeholders, updating documents, complying with the regulations, consulting the directors’ board regularly, and many other similar tasks.
Assets – the things that add economical value to a business. They’re not always monetary but often appear in the form of real estate, physical equipment, or investments. Companies list their assets on the balance sheet together with information on how they finance their operations. There are two primary types of assets: fixed and current.
Liabilities – the factors that decrease an organisation’s equity or the things that lower its profit (taxes, debt, expenses). There are two types of liabilities: current and non-current. Current liabilities include debts and operating expenses payable within one year, while non-current liabilities can be repaid over a more extended period.
Why equity management matters
One of the biggest pain points decision-makers, like business owners, deal with is the challenge to manage equity. Equity can be incredibly complex and even inaccessible to some employees, investors, or business founders. If they found a way to control it easier, they would have fewer things to worry about.
But why is equity portfolio management crucial for business success nowadays?
– Due to the pandemic, unemployment has once again reached a historic low, so companies have to use equity to stay competitive in retaining and hiring talent.
– Employers discount their equity because they don’t know if it’s worth something or because they don’t understand how to use it.
– Private businesses want to grow and expand while controlling their destiny and retaining control over operations.
– The present demands of an entrepreneur are increasing, rapidly making it more challenging to keep up with managing shareholders.
Equity has long-term implications for companies, so making the right decisions early in the process is crucial. By using an equity management tool, companies can benefit from help at all stages that make deciding challenging and managing their equity while progressing cost-effectively and securely. When they rely on a flexible solution built for their particular needs, they lock down long-term success, growth, and operations alignment.
Many businesses still rely on excel spreadsheets to keep track of ownership and equity, which can get complicated when the venture grows. Whether they issue equity after restricting stocks or raising capital, they need to keep the organisation cap table up-to-date. An equity management platform solves corporate concerns by keeping the information updated, housing the cap table, and managing access, all within one app.
Current flaws in equity management
As shown above, equity management is vital and requires plenty of effort, time, and resources to be handled appropriately. The first and most important task in the process is cap table management. The capitalization table is a table or spreadsheet that analyses the business’ equity capitalization. It can include information like
– The business’ percentage of ownership
– The value of equity in different rounds of investment (founders, investors)
– Equity dilution
In other words, the cap table includes details about all company’s securities and who owns them, and it’s essential to keep it simple and organised. However, the cap table’s format for a CEO may look different from a CFO’s. The cap table formats differ according to the evolution stage of the business. But even if its format changes concerning the use case, the underlying information should remain constant. The companies that fail to track data can face significant problems like outraged investors, fines, and issues with financing rounds.
It becomes a full-time and exhausting job if cap tables are managed manually. Also, manual work often leads to mistakes and therefore, capitalisation tables are most times wrong. When cap tables feature errors, companies need to hire legal firms to fix the issue, and it can cost them from $5000 to over $15,000, depending on the mistake’s extent.
Another important part of equity management implies updating employee stakeholders and investors of the business’s finances and growth. The more they know about the company and trust its transparency, the more likely they will continue investing in the company. But this task requires time and the use of technology like an equity management tool. Investor updates should include information about hires, key metrics, the organization’s trajectory, and client wins. Besides sending updates, companies also need to offer their employee stakeholders basic equity education and information about their performance to ensure it benefits from their continual support in the long run. Designating a point person among them can make it easier to update them on its evolution.
With everything said in this article, we hope you understand why equity management is essential and how you can incorporate it into your business.