How not to mess up your cap table?

Jason Atkins: Welcome, everyone, to today's startup equity matters. I'm excited about this one. I have Chris Hoffmann, Equity Admin guy here with us today. So here you have two of the biggest equity nerds in town. Anything to do with cap tables, if it can be done between us, we've probably done it. That's pretty cool. I met Chris in Utah, which was amazing. It was my birthday, and Chris made the effort to come all the way up and chat with me, and I was so grateful that he did that. Yeah, Chris has got wonderful energy and he absolutely loves helping startups with their cap tables, and that's what we're all about here on the pod. So the topic today is going to be ‘How to not mess up your cap table’. There are a lot of ways to make those mistakes. Unfortunately, through the first few rounds in the first few years, you found us out there. You've never seen this stuff before, and it's pretty technical. It's pretty complicated. And so we're here to try and unpack some of the lessons, talk about some of the biggest mistakes and then talk about how we can mitigate and avoid them and make sure your cap tables are sweet because when you get to Series A and you've got like a VC coming in, you want them to be like, “Bam, this is a great cap table.” Let's go. So welcome, Chris.

Chris Hoffmann: Thank you, Jason. Thanks for having me on. It's good to be here. And actually you're one of the first people I'd say I met in person, you know, partners, clients, anybody. There's only a handful because I started this business remotely and I've always been remote for a long time, and so it's so cool to actually meet you in person.

Jason Atkins: It was really cool. I was very impressed with Utah. I didn't know too much about it. I was out there for a ski with a VC day, which is one of the coolest days you can possibly have. And yeah, that was a really vibrant tech community out there in Utah, right?

Chris Hoffmann: Yeah, it's been growing like crazy. I've lived here almost my whole life since I was about seven, and it's amazing that the city I live in is called Lehigh. And so they coined it Silicon Slopes back when Adobe purchased this big lot on the mountain and they came into Utah and then all of a sudden, these tech companies started and there were a few before that and they called it Silicon Slopes and you didn't think too much of it. The city of Lehigh was a pioneer town, you could say, settled in a very farm country. And all of a sudden now it is, I mean, it's kind of the hub, this and Salt Lake are the two hubs of tech, of startups, of venture capital in Utah, I'd say. And it's still growing. There's so much room for growth here. So it's been cool to watch.

Jason Atkins: I'm definitely coming back next January for the Ski with a VC day. So anyone over there in the US, get it on your radar for early next year. It's a pretty cool tech event. There's a pretty cool tech event there. I think it's around the same time. Is that when you have it?

Chris Hoffmann: Yeah, I believe it's between January and February. It's called the Silicon…what is it? Silicon Slope Summit? Something like that. Don't remind me on that, but get amongst it. The Summit. They've had some very large speakers, very prominent CEOs,, and it's a big event. I mean, there's thousands of people that come, so I'd say it's probably one of the bigger events in Utah.

Jason Atkins: Really high quality salespeople are here in Utah. I noticed as I was flying in on a Monday morning, there were like a ton of people flying out, so it looked like they were off all around the U.S. just getting it done. Anyway, it was cool. So, look, we've known each other for a little while now. I think I first saw you, yeah, when I was just scoping out the U.S. and who's who in the zoo and who's helping, you know, people with these kinds of stable problems. And yeah, like you've been so helpful to us in our journey over there. We're very grateful. So I'm excited to be able to have you on today. Tell us a bit about what you're doing day-to-day at Equity Admin Co.

Chris Hoffmann: Yeah, the most vanilla bland name, but that's great for SEO, I would say.

Jason Atkins: We were originally called Smart Equity..

Chris Hoffmann: Oh, cool. Yeah, I'd love to share some more. So I've been doing this business for about four years. I've been in the world of equity for about seven or eight years now. And really, I didn't know anything about it before. I tried going through multiple degree programs in college and went to school for about seven years and I just had too many credits and I just couldn't fish. And I found this world of equity actually here in Utah and just fell in love with it. It was just such a cool thing. You don't hear that often and I kind of relate it to accountants when they're like, oh yeah, I love accounting. But a lot of people from the outside world are like, that sounds really boring. And funny enough, I actually had a sales call the other day where someone was like, sounds really boring, but very much what we need.

Jason Atkins: Oh, by the way, we are allowed to talk about Carta on this pod just in case you were concerned because I know you do a lot of work. So, I'm just going to get that out there early on.

Chris Hoffmann: Okay. I appreciate that. I actually started this journey at Carta. They were one company out of a hundred that I applied for and I had no idea what they did. And that's where I found this role of equity and just fell in love with cap tables. And it was so cool because I got to talk to founders and investors every day and started going to events where I met these people who were really starting these small companies that now some of them are changing the world. Some of them are series A, B, C, some are very profitable, and it's so cool to watch that life cycle of a company and get to be a part of it and kind of like see what happens in the background, watch the cap table and what happens when they raise funding.

And so I found this world and about three years into it, we were doing this service that I do now, which is equity administration as a service on top of the platform. And Carta decided to stop doing that service. They just felt it was a little bit of a liability having the platform and the service at the time. And so about a year after that, I said, “Can I just go do this on my own?” There's such a demand for it, people are asking for it all the time. And I'd love to start it. And they were very supportive in me leaving and starting that on my own. So it's been about four years now. Actually, I just passed the four year mark of starting the business and about three and a half years of being full time in it. And we started this company with the focus on enterprise companies. And it was more so for the work was a little bit more consistent, right? They have a lot more equity activity going on where you look at a startup and they raise around financing and that's their equity activity. Yeah, they hire a few here and there, but there's really not much. So we focused on this world of enterprise companies, and it was really awesome. But then, I started meeting these newer founders at events, and I started meeting venture capitalists and other investors who wanted their founders to understand this world of equity. And I thought, okay, that's a cool opportunity for us to bring what we know about the enterprise companies who are looking to go public, right? Or who would come to us with some kind of problem, just like we'll talk about today, and be able to bring that to the startup founders and say, these are things that we've seen that work later on. These are things that maybe 10 years down the road are not going to look the best. You know, all of your equity, for example, is just a very–very simple one. Yeah, a very common problem. Can be strategic, but not always. And so we brought that to the earlier stage and now we're working kind of a split model. It's kind of half with mid to late stage companies and helping them with the equity activity on a daily basis. And then half with newer startups and from brand newly incorporated startups. I've actually started working with a couple of programs. One is the Sandbox program, which is here in Utah universities. It's a kind of an incubator you could say, or an accelerator, you could say that. The students who are going through their school programs are able to then build a tech company within a year and get credit for it. Which is so cool. I'm like, I wish I would have had that. I probably would have graduated back then. Totally.

Jason Atkins: And instead of going to economics and hearing how the price of meat goes up, the demand for chicken will increase.

Chris Hoffmann: Exactly. I'd rather build a company so I can afford the meat in 10 years.

Jason Atkins: Yeah. I know what's going on. I need to make some money. Yeah.

Chris Hoffmann: And so it's been cool to, to start working with these earlier stage companies and really help them understand what they want to understand. Some founders really, you know, honestly just say, “You handle it.” You worry about that. Help me when I want to understand something or have a question, but you focus on that. There's other founders who, you know, they're, they're raising a funding round, and they really want to get in the weeds and really want to understand. Or there's things that we can kind of warn them off with different investor term sheets and just some things like that, so that's what we're doing these days is kind of a split model of helping earlier stage founders and then also helping later stage. We love cap tables.

Jason Atkins: Yeah, I love it. Someone's got to do it. It's super important. Yeah. You know, I think besides finding product-market fit and building a great team, managing your equity is probably the third most important thing because you have to use funding. If you get it wrong, you can kill your company. you know, it's the actual wealth creation engine of everything you're doing. And it's really up there with one of the most important elements of building a tech company. So, yeah, it's great that you're in there helping out. Maybe we start with the later stage. Well, first of all, I love that you, you know, one of the reasons I love being in the cap table space, the equity space is because of the people we get to help, right? Like the founders, the innovators, the energy they bring, the cool problems they're solving. That's a really interesting insight for anyone that's listening that might not be a founder, or if you want to bring cool people into the industry, make sure you highlight that because it gives you a lot of energy, doesn't it?

Chris Hoffmann: Yeah. Oh yeah. It's everything being around the people, working with these people every day, it makes me want to build a better company of my own. Right. It's like these people have so much high energy and sometimes I'm like, ”Ah, I wish I could, I wish I had that energy or had that drive to really just hustle.” Um, but it's cool. It's cool.

Jason Atkins: Cool. Let's start enterprise. Let's talk about, you know, because a lot of times almost every other guest we've had has been kind of pre-stage, series A-ish guests, like a little bit of series A, series B. We've had some, actually, we've had some people that have, like a Canva guy who participated in their recent secondary. So we've done a little bit of late stage stuff on the pod, but let's talk a little bit about enterprise cap tables. I think even if you're in an early stage, it's nice to look a bit into the future and learn a little bit about what works, what doesn't work, and some of the lessons that we can bring. And then, maybe we can come back to the beginning and how you work with companies in the beginning and how we can set it up correctly.

Chris Hoffmann: Yeah, yeah, definitely. I have many, many thoughts always going through cap tables.

Jason Atkins: What does it look like? You know, let's go like, what does a 3000 employee cap table look like on a monthly basis?

Chris Hoffmann: Dude, it's crazy. You have people exercising all the time. It really depends on what stage. So if we're looking at, let's just say series C to series D, a lot more companies these days I'd say are transitioning to RSUs from options. So when you're at an early stage, you're doing RSAs, options, very typical. People are exercising their options if they really believe in the company, if they choose to. Once you start getting usually at a point where the fair market value is getting a little bit too high that it's gonna be. Thousands of dollars to exercise some companies are moving out to RSUs and it's real. A big move to RSU is once you think about going public as a late stage enterprise company. So if you're a year, two years, three years away, a lot of times they're transitioning to that type of award. And RSU is a restricted stock unit. I'm sure many of the listeners know about that. But restricted stock units, it's essentially an award that you vest, same as options, same as other awards. You vest it over a four year period, usually quarterly. And there's a trigger on it, so none of those shares become yours, usually until a liquidity event happens, an IPO or a sale of some type. Some companies are moving into single trigger RSUs, as they call them, which means they can invest and then they settle, which means you can actually receive the shares and the company withholds the taxes for you. But most companies at that stage, they don't really have a lot of them, have a lot of cash, but they don't technically want to use that cash to withhold the taxes for you because that's a lot of cash.

Jason Atkins: I've heard of some companies having trouble with their balance sheet in that situation where you're just building up a liability over time and then you're like, well, we're going to raise capital just to cover this liability. Yeah.

Chris Hoffmann: That is one of the messages right there is that Sometimes companies do that and then they have to raise funding solely with the purpose to cover taxes, provide some type of liquidity to employees. That doesn't even help them as a company to grow, right? Which is usually what the raising is for.

Jason Atkins: I think even Stripe was like the super example of that. I'm sure I heard on the All In Talk, they had some dramas with that. I know it's a private company, but I think that that was a thing. And so the double trigger, I love this double trigger RSU, right? Because it creates a lot of flexibility and advantages.

Chris Hoffmann: Yeah. And it's really simple. Companies with a double trigger, they don't have any type of expense that they have to write off. So, they don't have to worry about calculating that. It's really just like a delayed settlement in the future, assuming that they go IPO, assuming that there's some type of sale. So, companies will do that to simplify. That means usually in the later stages when they transition to the RSUs, there's a lot less exercising because you have the earlier employees who received options who are exercising. But even then, if you take an employee for example, for me for example, I'll use some made up numbers, but when I was exercising some options from a previous company, I had a strike price of around a dollar. The FMV at the time or the fair market value was about $14. It had about 3,000 shares. That difference in $13, incentive stock options in the U.S. give the benefit of not having to pay taxes when you exercise them. But there is something called Alternative Minimum Tax or AMT, which is essentially a way for the government to say, we're not going to let you get away without paying some type of tax. And AMT usually is triggered when there's a big difference between what you're paying for the shares and what the shares are worth.

Jason Atkins: What's a big difference?

Chris Hoffmann: So big, I would say, five, $10 difference, depending on how many shares you have. It can be a lot. I personally, there was a good tax year for me, meaning I wrote off a lot, so I didn't have to pay any AMT or any extra, but I've heard of some friends of mine who had much larger, I think it was like a dollar versus $20 and they had 10,000 shares and they got hit with thousands of this tax because there was such a difference.

Jason Atkins: So AMT, so it's a tax on unrealized gains?

Chris Hoffmann: You could say that, yeah.

Jason Atkins: You don't have the cash to pay the tax because you haven't had liquidity. So that's tough as a holder of that stock.

Chris Hoffmann: It is. It's a really interesting thing, and I don't know all the details and I don't know all the history of it, but when you have non-qualified stock options in the US, you do have to pay, it's standard to withhold taxes. So if I am exercising at a dollar and my shares are worth $10, FMV is $10, then I will have to pay taxes on that $9 gain, incentive stock options, get rid of that. Unless you can say unless you're not paying enough as a taxpayer of the US, then they're going to hit you with some kind of bill. And that can really get people.

Jason Atkins: Let me run one of my theories by you that I've been advocating for. So, you know, with RSUs and ISOs and NSOs, they've each got their strengths and weaknesses. And so the two best methods, in my opinion, RSUs I think are actually quite good. And I have heard them even used in early stage companies when there's a double trigger. And I think it's really balanced. The tax is balanced with the cashflow event. And, like largely the issuance of the equity and the tax event is balanced with the cash flow. And similarly, I feel like with NSOs, if you have a long exercise period, you can do the same thing. So in some countries, including Australia, we have 10 years or even unlimited exercise periods, which means that with the Alice tax law here, you only have to pay tax when you sell them, and so it's perfect because you really only exercise when you're at an exit event and you pay the tax and everything is nice and balanced, and I feel like with NSOs in the US, you can do the same thing if you have a long exercise period, because then you're only exercising at the exit event or when there's a dividend, and in both instances, you're happy to make a payment because you got cash flow. I don't know. What do you think?

Chris Hoffmann: Yeah. I'd say it's kind of safer, more conservative to look at it that way. I think the issue comes when employees leave companies, but they still believe the company is going to do well. Some companies these days are extending that exercise period to one year, two years.

Jason Atkins: It's really short. It's really short in the US. I'm advocating for like, let's make it long. If the employees, they've earned them, so there's no need to make them make a payment. I mean, most employees only have like, they don't have money for a share portfolio. Like I hope they do, but they don't. And so then they have like this chunk of their wealth, like held up in an exercise payment. Anyway, I'd like to see it longer, but it hasn't quite settled in over there yet.

Chris Hoffmann: Yeah. I feel like the 90 days to exercise after you leave a company is still very standard, which like you said, is not enough time.

Jason Atkins: ISO has to be 90 days, right? With ISO?

Chris Hoffmann: Yeah. And that's where it came from. And that's why it's 90 days. But like you said, it's kind of outdated. And the companies that are moving toward like one year or two years, or even they give them the length of the term. So like if it's a 10 year term, they give them, they say, ”Hey, even if you leave, you have that time to exercise.”

Jason Atkins: I think in the interest of valuing it and fairness, and I know the US is very… I love this about the US, very capitalistic, even if you're like, we're trying to attack the best talent, right? So we've got the best plan, and I see some ridiculously employee-friendly plans, and I don't think you need to give them everything, it needs to be balanced. So I think one way you can make it balanced is just to say, well, You definitely have to earn them. And we're going to have the best thing. But once you vested it, we're going to give you a really long time to exercise because we don't want you to have this punitive exercise payment. I may or may not make progress with this, but I'm going to keep talking about it until someone tells me I'm crazy.

Chris Hoffmann: I love that mission, honestly.

Jason Atkins: And of course, I'm totally open to people who can do anything they want. I'm not here to tell people what to do. Just sort of like chatting about ideas. All right, so we've talked a bit about RSUs and I imagine when you've got like, you know, Series C, Series D, you've got people coming and going all the time. So you're granting, you're hitting cliffs, you're vesting and it's just so much going on. You're exercising, like there's a lot of admin, like it's almost a daily or monthly, at least it's got to be a weekly occurrence. You're just constantly working with the companies to help them manage all these transactions.

Chris Hoffmann: Yeah, yeah. Some companies we work with daily. I mean, every single day. Because oftentimes, there's three to five to ten terminations, and that's not the company terminating the employee, just employees leaving. And then like you're saying, people are being hired every week. And if companies are giving them option grants or RSUs every single quarter, then some of our clients have 200, 300 or more grants, new grants every single quarter, it's a lot of work when the board consent happens. But then also, it's a daily thing. Because if we think about keeping the cap table always up to date, and that's where software like Cake comes into place, right? It's so important to, in my opinion, to have software because you can't manage this in Excel. And I've seen companies who try series C, managing this in Excel, and it's just–there's no way.

Jason Atkins: And I just highly- As an accountant and a full-blown CFO, it gives me a rash to think about managing that in a spreadsheet. That would be gnarly.

Chris Hoffmann: Yeah, no, it's insane to see. So using software is so important. But then the other thing is, even if you have software, you have to make sure that you're staying up to date. So whether that's your HRIS can integrate with the software and automatically take care of the terminations, or whether if it's a manual process, you going in and terminating, because if you and this happens so often, especially with later stage companies, when the company or the employee leaves, They do the termination in their HRIS. They forget to do it in their equity management software. 30 days go by, 90 days go by, they audit it maybe six months later. Maybe this employee had exercised, after 60 days manually, you know, they handed them a check and handed them an exercise form and the company never recorded it and then they never recorded the termination. That's going to mess with your expense accounting, that's going to mess with your cap table, that's going to mess with any due diligence that you're going through if you're doing a funding round. It's really like it needs to be kept up to date and that's where we see a lot of mess ups.

Jason Atkins: Not to mention the individual nightmare for that employee who thinks they've exercised but they're not on the cap table and It may never get picked up. Those sorts of things can slip through the cracks.

Chris Hoffmann: And then they're freaking out because they see my options have expired. That's where we see a lot of, I would say a lot of mess ups is when those daily transactions happen, just making sure it's kept up to date always. And that's why I think auditing is so important. Even a monthly quick audit of Who are my people who have left? Who are my people who have come here? Who have, you know, have we modified any grants? Look at the board consents. Have we got all the board consents into our system? Have we made sure all the updates are done? I think it's really important, especially when you're getting to the later stage, but also when you're in the early stage.

Jason Atkins: And from an employer brand perspective, you want all this stuff to be tip top. So people want to work when people leave, they speak about you highly and then you're more likely to attract really good quality people. And I guess it is more about the employees at that stage, like the investor side of things. Is it still super complicated or is it just still it's a lot easier, I suppose, because the numbers are a lot smaller and the transactions aren't happening too often.

Chris Hoffmann: Yeah. Investors are usually a lot simpler. The case when that changes is if a lot of times with crowdfunding companies, of course, as you can imagine, if they have thousands, thousands of people on their cap table, Also, we have a couple of clients right now who allow transfers at the later stage. They're like series D, series E, and they allow their employees who are holders and their investors to go out and find new investors. The employees, investors, and the shareholders have to do their own checks, which is great and I think that's needed. But if they find an investor and the investor is willing to pay the current price for those, then they can sign some agreements and get with the company and the company allows that. And one of our clients allows that and has them happening twice a day–has transfers happening twice a day. And you can imagine, if those aren't entered or if one slips through the cracks, that can cause a big mess too when it comes to audits, when it comes to reporting your financial statements, all reporting shareholders. As you get older, there's some agencies that, sorry, as you get older, as a company grows and gets bigger and they're looking maybe to go public or looking to just be audited once a year maybe, they need these things to be right and that can get really messy. But for the most part, I'd say investors, like you're saying, it's not as, not as frequent for investors at the later stages to have that activity.

Jason Atkins: I love that you brought up, you know, those secondary transactions and, and liquidity. It's super important. I guess, of course we've got IPOs in great cases and M&A in great cases, and sometimes, not so great cases, but at least we have liquidity. But there are these smaller liquidity opportunities whereby only investors and employees are able to create full or partial exits for themselves, managed in part by the company, but in part by the equity holder as well. It's a pretty important mechanism. What percentage of your companies would you say allow that? Are most late stage companies allowing something like that? Or is it few?

Chris Hoffmann: Yeah, I would say taking our later stage ones who could allow that, I'd say more than the earlier stage ones, it's still a very small percentage. Maybe 10 to 15% are actually allowing that to go through, and I get it. I see the company side of it too. I see both sides because the company, in a way, a lot of them want to control their cap table. They want to know who's investing. They want to know who is on it. They don't want a lot of random people who they don't–no. And even when they kind of facilitate those secondary transactions in a way, they don't know the investors like they do when they're going through a fundraising round or that of their employees at the company. So I can understand why it's still few, but I do think it's important to offer some type of liquidity. Because as I mean, everybody knows private companies are staying private longer. The IPO market is not there right now. You know, maybe some time, it'll bounce back, but it's not there. And so the options really allow that, do a tender offer, which if you don't know what a tender offer, if anybody doesn't know what a tender offer is, it's a company-facilitated secondary transaction where usually, they allow their employees and other shareholders to sell 10, 20, 30% of their holdings at a single time, and then they usually cap it. Sometimes, that comes with a funding round. Like an investor is saying, I wanna put in 100 million, we're gonna give you 50 million for the company itself, but we wanna buy an additional 50 million from your shareholders to offer them liquidity. Companies like that because they can provide liquidity for their employees. And I think that's another great option.

Jason Atkins: It's an absolutely fantastic way to do it because as a company, you're doing a lot of the work already, right? You're getting everything ready. You're pricing, you're lining up the investors, the whole cap table operational function is enabled and you can create liquidity in a reasonably organized way that isn't costly and messy. So yeah, I think having primary and secondary is probably the premier way to do it these days.

Chris Hoffmann: I think so too. I love when companies can offer that to their employees because as an employee, I absolutely love it.

Jason Atkins: I'm all about it. I think it's just so critical. The wealth creation in startups is, I mean, aside from the family home, which we hope is a thing. It's so hard to build equity assets as a regular member of society, but in startups, you absolutely can, but then you need to be able to get some cash in the bank.

Chris Hoffmann: Yes. Too many founders are going and paying themselves minimum wage for too long.

Jason Atkins: The founders need it too. Then they can be more powerful and go on and do bigger and better things. So I think it's just important for investors like early angels, if they never get liquidity, they can't back the next company. Like they're just sitting there on their 10 or 20 holdings going, “Oh, great.” You know, like this isn't just the one way street. I need to get some cash back to back for the next gen. So it's critical. So I really love hearing when companies advocate and execute these things. So thanks for sharing about that. Hey, um, I'm going to just, let's get into the whole like cap table war stories. Let's talk a little bit about what can go wrong, the worst things you've seen. Like, let's just dig into a little bit of that. And then we can pivot into how we actually get this thing humming from pre-seed and seed, and we can really make it a real asset for the company.

Chris Hoffmann: Yeah, I've got three specific stories that I'd love to share, and I will be brief and vague enough, but also specific enough.

Jason Atkins: No names, no names, no, don't.

Chris Hoffmann: All right, so Bob, listen, Bob, I'm just kidding. So there's the first, the person I wanted to share was actually one of our first clients. And this happens quite a bit. The company came to me initially and they said, “We don't know if our cap table is right.” It's a very common thing that happens. As you know, we don't know if it's right.

Jason Atkins: If you're not getting help 99% of the time, it's probably not right.

Chris Hoffmann: Yeah. And they said, “Our lawyers have been in it”, and it is very common to have attorneys managing this for certain companies if they have the cash to do so. Attorneys are very good at words.

Jason Atkins: Just so everybody knows, attorneys are very good at words. A cap table is full of numbers, so just bear that in mind.

Chris Hoffmann: Okay, real quick, before I jump into this, that's the funny part. When I thought of starting this business, I thought I'd be competing against attorneys. When I started talking to attorneys, they said, we don't want to do this work. They said, we would love you to do it and take it off our hands. Even the paralegals, it just wasn't. They could bill for it, but it just wasn't their forte. They didn't want to do it.

Jason Atkins: I've learned that they're very good at reading and writing and negotiating. And then, but the numbers bit, they're like, look, just help us out. Yeah.

Chris Hoffmann: So that's, that's, that was a fun one to learn. Um, which is great. I don't want to compete against attorneys, so it's helpful to partner with them instead. Yeah. So this company comes and they're like, “Our attorneys have been in it, our finance people have been in it, our general counsel has been in it, but we've had two general counsels and we really just don't know if it's right.” We need a full audit, a full cap table audit. And this is one of the things we do usually for later stage companies when they're thinking about a transaction or an IPO. But this one I want to transition into what we can do from the beginning because this was a series D company. And they came to us and said, go through everything. So we said, OK, give us every single board consent you have. Give us every agreement you have. Give us everything from the beginning. This company specifically had been around for 10 years. So I mean, there was a lot of activity. I'd say we could have spent even longer on this, but we spent about four to five months going through all of this. And you can imagine, this was before AI was super cool yet. It existed, and I'm sure there's a lot of tools that we're actually thinking about that can help with this stuff. But we went through four or five months of reading every single legal document they had that pertained to equity. Found millionaires, right? We started working with the legal counsel to do it. And for them, the company, it costs somewhere between 30 and $40,000. They get our help with that. But I didn't think of it, and they were probably grateful for that, that it wasn't gonna be $100,000. But on top of that, we were also talking to attorneys, past attorneys. We were talking to their general counsel all the time. We were talking to their finance people. All of those people's time. Everything that they get paid, whether it's an hourly or a salary rate, was going into this project. And they were so grateful when it finished, right? But I could imagine to the company that it was at least $100,000 to $150,000 worth of time and cost in total for doing that. And that can be mitigated if you do it right from the beginning by getting help from a trusted source. And I'm not saying you have to hire me because there's plenty of other people who are trusted. You can find attorneys who specialize in this. You can find flat rate attorneys, right? You can find CFOs, fractional CFOs, people who understand this. Make sure it's right from the beginning. and make sure it's right as you go along.

That's why I was talking about the importance of audits, right? Monthly audits, making sure it's all right. And on top of monthly audits, do a biannual, a semi-annual audit, do an annual audit to make sure that it's all right from the past. Because it's going to cost you 10 times or 100 times more down the road to get it all fixed. It was either an IPO or acquisition. And it delayed it about six months after that to when they wanted it to be done. And so those transactions can really delay anything that you're trying to do. Fundraising rounds can also be delayed from this because the investors are wanting to do due diligence on all of this and make sure it's all right.

Jason Atkins: That's number one. And that happens often. Investors don't allow skeletons in the closet with the cap table. They want to see every document. They want to make sure there's nothing kooky in there because that can come back and bite them. And when you're doing these fixes as well, it's important to note that it's the most senior people that have to be involved because they've been involved. Like, where's this contract? Where's that contract? Where's this? Where's that? We're talking about the founders, the execs and the COO or whoever it is. They're all there being dragged away from other critical work. So you have to stay on top of it along the way. Otherwise, this is like a huge headache.

Chris Hoffmann: Yeah. And you never know when someone's going to leave a company. Founders can leave a company, you know, five, 10 years in or sooner. And if they're critical to that conversation that might take place later,it's important to have that. It's also important to have all the organization. And I feel like this company did not have that organization. They sent us paperwork from everywhere. If you have it all in a Google Drive folder, in a Dropbox folder, in some kind of like folder, right, that can be shared, and you have every piece there organized, it's a million times easier to audit that.

Jason Atkins: Getting in early with something like Cake, let's say that, because of course, there's multiple providers, but every single document signed in the system, it's automatically saved in the system, you know, and every little bit and piece is just so much more likely to be there when you need it, you build it up from the ground, and then you're having a tenth of the issue all the way along.

Chris Hoffmann: Yeah, exactly. This is so important. So story number two, this was a, I like to say fun one, but that's kind of sarcastic. We went through, so this was a company who came to us initially and said, we just want help managing our cap table moving forward. There was no audit work to talk about before, but as you know, and as many people know, things that happen in the future are affected by things that have already happened, right? Especially when it comes to equity. So as we were doing some equity work, some of our team members found, wait a second, this conversion looks weird. This investor had a SAFE. Other investors had other convertible notes and the conversions looked a little off. So we started doing some calculation. That's something we started doing a little bit of. It's like pro-forma calculations and modeling these things out. And he found, one of our team members found that there were two full rounds of financing that had been converted wrong. And he double checked, I mean he triple, quadruple checked himself to make sure that that was right because we don't want to come back to the company and say everything's wrong on your entire cap table. But double, triple, quadruple checked himself and then we brought it back to the company, presented to them. Their attorneys then started looking at it and looked over it for the next month. Came back to us, we started redoing it and kind of showing them what it should be. Took it back to their attorneys. It took a year and a half. of back and forth. And we weren't as involved for about a year that we did, right? We did a lot of work up front, and took it back to them. It took a year and a half of going through attorneys, going through other people to make sure that things were, you know, they knew that it was wrong to make sure that things were right. They had to go back to their investors. Can you imagine going to all 30 of your investors or a hundred if you had a hundred and saying, we messed up your calculations. Yeah, this was two years ago. And The number you got, you got a million shares. It's actually supposed to be 400,000. It's just a nightmare. And so it took about a year. Nobody ever wants to go through that.

Jason Atkins: If you're not experienced, there's lots of little tricks and trip-ups like that. Converting SAFEs is like one of the bigger traps for making errors.

Chris Hoffmann: It was such a mess. I mean, we're still working on it actually to this day. With that, I will say, this is not a bash on attorneys whatsoever. You got to find the right attorney. You got to find the one that understands and knows equity specifically because we've met a lot of people who are like, oh, my friend is actually an attorney and they're my attorney and they're handling every piece of legal thing for my company. But oh yeah, they were a litigation attorney. They know nothing about startups.

Jason Atkins: You're in big trouble.

Chris Hoffmann: That's my third story. So I'll get to that too. You got to find the right people for this. You got to find the right attorney to understand. You got to find the right help advisors, people who get it. And you know, sometimes you might need people to double check each other's work. Because honestly, when it comes, especially when it comes to modeling rounds, there are a lot of nuances. There's a lot of things when investors have preferred, participating preferred, or they have 2X, which means they get at least double their investment, or if the later exit is greater than that, then they can choose double their investment, or the greater amount, of course. There's a lot of nuances that come with that, that have to be put into place. And honestly, even a lot of modeling software's out there, can't take care of 100% of the cases. A lot of them can do like 90% of the cases or 80% of the cases. But that's something that I strongly advise to every company that I talk to is make sure you get someone who's gone through this exact thing before, even your industry. Get the right people in place who know what you're doing because, and I tell them this story, it's been taking a year and a half and we're finally getting the cap table right and we had to redo it all.

Jason Atkins: It's crazy. No, I absolutely love that advice. I constantly advise founders to get a startup accountant and lawyer, get that team set up as early as possible, because it's nothing against the professionals. They're great people. But with law, particularly, you can't do all law in one person. Like, yes, that's just too much variability. And so startups are an extremely specific thing. So, yeah, really great advice. Save you so much time and money and pain and, you know, just getting the right person on your team there. Awesome. Oh, yeah. In the interest of time, I'm going to have to move us on to the final question. That's  OK. I think this has been cool. You know, it's been a little bit more heavy than some of our sessions, but it's great. You know, every few episodes we need to get right in there and dig in. you know, dig into the nuts and bolts of equity. So we've done, you know, RSUs and ISOs and NSOs. We've done exercise periods. We've done enterprise stuff. We've done some lessons and, you know, great pieces of advice. And so very grateful for all that. And as Many of you know, we like to finish with health, creative, healthy lifestyle questions. And when I was there, I don't know, like the lifestyle in Utah seems very healthy and a bit outdoorsy. How do you see health in relation to your success and ability to be a great human?

Chris Hoffmann: Yeah, I love that question. So you mean like physical health, physical, mental, all that good stuff?

Jason Atkins: All that stuff, yeah. Like just for a bit of background, we sort of see our health as the most important thing, you know, like if you're physically healthy and you're mentally healthy and you're coming at life with great energy, you're so much more able to, you know, just be a great person, achieve things, be creative and just come at life in a positive way, you know. And so I just like to learn a little bit about how other people see their health and how they manage it, maintain any tips or yeah, just get a bit of insight.

Chris Hoffmann: I love that question. And if anybody wants to talk to me about this more in depth, please let me know. I have a lot to say on this. My wife is actually a mental practitioner, mental performance person, you could say. Mental health is a big thing and also physical health. It's really interesting that I never thought I'd say this, I'm not as maybe muscular or fit as I was back in high school, but to be, I'm 31 right now for anybody who cares, to feel better physically and mentally right now than I did in high school or college is such an amazing thing. And I've found that through, I've gone very up and down with this and having children and having time commitments and going back and forth. It's amazing how much food, both food as a source of health can affect you if you're eating the right things. Exercise can affect both physical, of course, and mental, mental health. Getting outside, you know, I do love Utah because, um, especially in the summertime, it's just beautiful weather in the springtime and fall time. It's, you know, you can get outside. In the wintertime, there's skiing, there's snow sports that you can get outside. Most people don't get outside as much because it's cold. But it is very outdoorsy here and for me, I like to go on walks. Walks are a huge thing as well. We've got a two-month-old and so this morning, he woke up. Walking is so underrated.

Jason Atkins: It is. It is. It's a way to move and be in nature and it's not super stressful but you still get really great energy.

Chris Hoffmann: Yes, it is so underrated. So I've been taking walks almost daily. This morning we took a walk. Something new I also tried. Sorry, I'm going too far into this. I go really in depth to things. I'm sorry. My wife discovered the contrast therapy sauna and then cold plunging.

Jason Atkins: Oh yeah.

Chris Hoffmann: And that has been a wild experience. I've always loved the sauna. We go to this place called Plunge, and that's a Finnish sauna, so it's about 200 degrees and the water is about 40 to 45 degrees. I've never been in that hot of a sauna.

Jason Atkins: I did that this morning. Did you? Yeah.

Chris Hoffmann: That's awesome. It's amazing. It just feels so good. And so what I've been doing is also I take blocks and then about two times a week, I'll run two and a half miles to this place, do the sauna, do the cold plunge, do the sauna cold plunge about three times each, and then I'll run home about two and a half miles. And I feel amazing.

Jason Atkins: Thanks for sharing. Just about every successful person I have on here, he's committed to health in some way and mental health and has great habits. And I'd just like to take this little bit of time each time to reflect on that, remind everybody where it's at and how important it is, so thanks for sharing, and thanks for coming on. Thank you. You're an amazing guy. Great energy. So knowledgeable in this space. If anybody needs a hand, definitely reach out to Chris. Thanks for listening. Thanks for joining us, Chris.

Chris Hoffmann: Thank you so much, Jason. Good to be here, and thanks, everybody.