Over $159 Mn through ESOPS Buyback 2022: How Indian Startups can use technology to manage its Cap-table, Employees and Shareholders
Startups need to know that managing an organization, its cap table, employees, shareholders present opportunities and challenges, here is how founders can make it with a little help from technology.
- Automate your compliance tools.
- Manage your ESOP effectively.
- CFOs must not waste their time managing Excel sheets and reconciliation.
- Founders need to work with CFOs to manage their cap tables.
Every founder struggles to manage the cap-table if there are multiple investors and an ESOP pool to top it all off.
If the tax authorities don't get you, the lawyers of your early investors will.
To ensure that you are in control of things you must use technology, be compliant and have good advisors to make the promises of wealth creation and also realise that they can wind up without any trouble when the business idea does not take off.
First though, being optimistic is the way forward and in our series Finance: 2022 and Beyond we had leaders tell the importance of technology and compliance.
The Finance Story recently hosted a panel consisting of Lakshman Gupta Kanamarlapudi (LK), the co-founder and COO at Qapita.
He was joined by Amit Singal (AS), who is a general partner at Fluid Ventures, and the founder of Startup Buddy Services.
Joining Amit and Lakshman was Shalini Jain (SJ), Partner at People Advisory Services at E&Y India.
TFS: Amit, you started as a traditional CA, then you made a jump into the startup world. Why do you think finance as a function is changing? How important is the finance function to founders today?
AS: Startup is nothing but a business and no business can run without the finance function.
We have seen many cases in the past, where startups were not getting funding in the subsequent round because they failed in due diligence. They were not compliant and it continues to be an issue.
This was not intentional because lots of startup founders do not know compliance and there are so many in India that they have to keep pace with.
If you want to be a fully compliant company in India, then you have to have full control of the finances. As CEO of the company, it is very important that the finance function becomes strong.
In case you include 4-5 people in the finance team you would have to communicate your expectations to them. I believe it is always better to go for a virtual CFO in the early days.
Through technology, it is very much possible because lots of tools are available that include checklists, and that way the founder can be fully confident that compliances are in place.
TFS: Lakshman, you are automating ESOP management, transactions, you are ensuring that Cap-tables are managed. What is the role of the finance professional here?
LK: Qapita, is an ESOP and Cap table management platform. You can manage your capitalisation tables and ESOPs accurately on our software platform.
We are saving time for the CFO, and the finance professional and enabling them to focus on the core business function rather than taking care of unproductive work.
For example, if it is a Captable it is managed on an excel sheet.
I don’t think any finance professional really enjoys reconciling various formats in excel sheets and figuring out which one to share with the lead investor, and which one to share with the angel investor.
Essentially, the role of the CFO would become strategic and they would focus on due diligence and funding. We look at this as a CFO stack.
The CFO stack consists of ERP management, receivable management, payable management, compliance management, FP&A, and equity management. There are applications like CRM.
The expertise of the CFO will be very valuable if the person knows what application would be appropriate for a certain stage of the company and when it is the right time to migrate from one application to another to manage resources.
A startup is all about experimenting and scaling very fast. Whoever can bring the right application, saves time, and gives productivity immediately will be very valuable.
In 10 years managing these applications will be the critical function of the CFO.
TFS: CFO has to deal with ESOPs, but it becomes very difficult when you have a large organization, and it’s not automated. What is the role of ESOP; a way of attracting and retaining talent? Your thoughts Shalini.
SJ: I have been doing ESOP compliance for a living for almost 15 years.
We design ESOP schemes, documentation, and employee communication.
I have seen the shift in expectations from the management and employees with regard to ESOP.
Now, they want to automate the whole process. Employees have become more informed.
An employee would want to see, at any given point in time, if they have been granted equity and understand what the value of that equity is.
The employee wants to make decisions post listing, whether to exercise or not to exercise, what is the tax impact going to be, what is the valuation of the company, and what is the liquidity.
Now if all of this is automated, it becomes very easy both from an employee standpoint and also from a founder and a finance professional standpoint.
If you are a startup raising money, you would want to automate these processes and you must have dedicated teams to explain this whole process, and its implications to an employee.
TFS: Amit you worked with so many tech startups, you had been advising a lot of D2C companies too. Are founders aware of the merits in terms of automating the finance function?
AS: These days I have seen a lot of changes in founders as well. They are giving importance to the numbers.
Founders now understand that without numbers they will not be able to succeed. You must note that this was not the case earlier!
You cannot use Excel for all answers. That is not the right strategy. With automated tools, everyone can have the same information at the same time through cloud.
If founders are from a tech background, they understand the importance of technology. Most startups are adopting technology as a tool in the finance profession as well.
There has been an impactful change at scale thanks to technology.
There are a few common questions that Founders ask me as their Chartered Accountant.
Questions like - What if I have the option to convert the option to shares? How much tax will I have to pay the government? How much tax will be long or short-term? How much taxes do I have to bear? What is the final outcome in my hand?
When the employees are happy, the company will do well.
Now with an automated tool like say Qapita, they can see how their shares and tax are structured.
In the same way, investors are aware that in case they need an IRR of 10 percent on investment of 25 percent, the investors would want to know what is the potential valuation.
When you ask me to calculate an IRR on my investments, I would take at least one and a half days to calculate the IRR on my 7 investments, even then it is not very precise.
But if I use the automated tool, every morning I can see what the current IRR of my company is.
This saves various stakeholders in the company, and they can use this in productive activities such as finding great startups to invest in, rather than spending that time on calculations on the excel sheet.
TFS: Everybody is talking about blockchain and its impact on auditing. Lakshman what is the role of technology now?
LK: There is a lot of tech implementation to be done in the compliance aspect. It is clear that automation in a multitude of compliances is the future.
Coming to Web3 or blockchain, I think there is a huge opportunity because based on, cryptocurrencies & the distribution ledger, there will be complete transparency and a complete audit trail.
In less than three to four years there will be a breakthrough in this technology, which will make it more transparent, easier, and more auditable.
TFS: Amit, you yourself advise early-stage startups, and growth-stage startups. For somebody who’s setting up a startup, how do you advise a founder to evolve with compliance and regulation?
AS: Things like Shark Tank and initiatives from the government of India have led to the startup ecosystem mushroom. Now everybody understands what a startup is and why they want to be a part of its growth.
Now the trend is changing for an employee who wants an ESOP and wants to become a partner at the company.
The founder needs a lot of handholding, they need lots of advice and they need employees to work as family members of the company rather than thinking that they are just employees.
Finance professionals will also have to change their life rather than think that they are meant only for compliances or financials.
They should think like a decision-maker rather than doing a compliance job. They need technology to automate compliances.
From tax calculations to GST to managing the cap-table, today everything is available at a click of a button.
This concludes our series titled "Finance: 2022 and Beyond.
(Edited by Preeti Mondal and Videos by Subhankar Dutta)