How do I issue electronic shares?

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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.

LP Sidecars – Not just a third wheel

Opportunities for co-investment are on the rise as limited partners (LP’s) are increasingly drawn to firms that provide direct access to deals for co-investment. These firms are reaping the benefits through additional revenue from sidecar management fees. Since there are benefits on both sides, this type of investment structure is seeing quite the uptick lately.

A sidecar is a co-investment opportunity that is made by an LP alongside a venture fund’s investment. This investment is typically organized and managed by the fund manager. All legal, accounting and due diligence are also performed by the sponsoring fund. Investors have control over which investments to make and how much they commit but without the work typically involved in making direct investments.

Benefits for LP’s

Opportunities for sidecar investments allow LP’s to take a more active role in their portfolio. They can increase their position in deals they view as more attractive and impact the balance in their portfolio in ways that differ from the fund itself. It also gives them the opportunity to be more involved without taking on the full burden of due diligence.

Benefits for Fund Managers

As new funds and investment opportunities pop up all the time, most fund managers are looking for ways to continue to add value to their services. LP Sidecars allow the fund manager to extend additional offerings to investors as they see fit. This could be a new investor, who has only committed a small portion of their capital, or a seasoned investor, who would be well served by the extra attention. The very act of shopping deals to LP’s allows for a more personalized level of interaction and attention.

This can also open up additional revenue sources. Each additional investment brings the opportunity for additional management fees and carried interest, and if done correctly, without any additional work. Hello, win/win!

So what’s holding back fund managers? It all comes down to the administration. The additional complexity quickly breaks their current workflow. Shopping deals through endless email threads is less than ideal. Capital calls now have an additional layer and that excel spreadsheet will need a whole new dimension to provide the right reporting to your LP’s. The additional workload threatens to wipe out any of the benefits.

At Venture360, we’ve been tracking this trend for some time. We built a feature set that allows you to have your own white-labeled LP Portal, where you manage your relationships from shopping deals to reporting metrics. The ease of setting up and managing sidecar investments is just one of the many ways we can simplify your administration duties so you can get out there making money. Want to know more? Visit our website or book a call today.