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services: Equity Management

Co-authored by James Lichau and Amy Marley

Failing to manage equity properly can introduce future risk, especially for fast-growth fintech firms that may be eyeing a future initial public offering (IPO) or merger and acquisition (M&A) transaction. We explore how to proactively confront this challenge today, so you are prepared for what’s ahead tomorrow.

Navigating equity management challenges for growing fintech companies

Equity management encompasses accounting for stock ownership and a company’s capital structure. It can present significant challenges for rapidly growing fintech companies, from determining how to distribute equity fairly among founders, employees and investors, to using equity compensation to attract and retain top talent. Organizations also need to comply with a range of regulations in this area — spanning everything from U.S. Securities and Exchange Commission (SEC) rules to local tax laws.

“Equity management can be complicated,” said BPM Partner and Financial Services Co-leader James Lichau. “There are a lot of moving parts, and guidance is often changing. The are multiple legal and tax components to consider for the company, its employees and investors, which are important to get right for the company’s growth, potential IPO or exit. It tends to be an overwhelming area, especially for rapidly growing fintech companies.” Capitalization tables can be especially daunting for fintechs to maintain. They typically encompass all equity ownership capital, such as shares of common stock, preferred stock, warrants and stock options. Fintechs tend to have a more complex capitalization structure than organizations in other sectors because they often need to account for multiple rounds of financing, different types of equity and debt, and in some cases, a larger number of investors.

“Many companies have irregular cap tables that may not reflect the true picture of the company’s equity due to the complex nature of their capital structure,” said Amy Marley, Manager-Stock Plan Administrator at BPM. “This can be a problem down the line for an IPO or an M&A transaction and for performing proper accounting or navigating an external audit.”

Effective cap table management requires careful attention to detail, frequent updates and effective communication with stakeholders. “Equity management is a very niche specialty service. It takes a lot of experience and training to know what to look for and to be able to bring a company’s equity in line to where it needs to be to enter into fundraising agreements,” added Marley.

Fintech companies with well-managed cap tables can better navigate future transactions and keep stakeholders aligned with the company’s goals. Engaging a professional administrator to manage your cap table can offer several key benefits, assisting you with the following:

· Collaborating across your organization, since an equity plan doesn’t involve just one piece of the company — it also encompasses and impacts legal, HR, finance and accounting.

· Avoiding common pitfalls around cap table management so you can stay in compliance with regulations and avoid legal issues down the road.

· Navigating business decisions impacting equity as your organization grows and expands, such as repricings and plan amendments.

How BPM can help

Failing to proactively address equity management can introduce future risks, including delays in the IPO and M&A process, a negative audit opinion and/or legal fees related to misstated information. Engaging a team of professionals to manage this area can be a critical tool as you navigate your growth journey, especially if an IPO or an M&A transaction is on your long-term horizon.

Our experienced team can advise you across all your equity management needs, from managing the day-to-day administration of your stock plan and cap tables, to providing technical accounting support that meets your current and future requirements. Learn more about our Equity Management services, and contact us today to get started.

James Lichau

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