Cap Table Management on the Blockchain
This week we are welcoming Michael Weber from BlockState, on a mission to:
“unlock inaccessible assets & make Cab Table Management more efficient”
Michael is sharing his knowledge with us on how Small and medium-sized enterprises (SMEs) will benefit from Security Token Offerings when raising capital. Furthermore, he explains how blockchain technology makes Cab Table Management more efficient by comparing the “traditional” with the “new” process.
Enjoy the Interview
Which problem does Blockstate solve?
In Europe, SMEs are the backbone of economic growth, they contribute to the majority of GDP and are also the biggest employer. Yet, they often struggle to access capital. This hinders growth and weakens our economy. In order to solve this, we offer an end-to-end solution to raise and manage capital, as well as debt, through the issuance of digitised securities. The issuance of financial products via a blockchain powered infrastructure improves access to these types of unbankable capital as well as facilitated lifecycle management. It removes traditional middle-men from the process and enables issuers direct communication, feedback and involvement of investors. In addition, issuers that use BlockState’s issuance platform automaised back- and middle office tasks. From an automated stock/bondholder register, dividend payments in 3 minutes to break-of-custody free shareholder voting under SRD II.
What is Cap Table Management and why is it important?
Cap table management is about organising corporate governance and investor relationships. It can be represented as a table with the overall equity of the company associated to the various shareholders and their basic details. However, it can also be quite complexified by actions such as options exercises, conversion of debt to equity, stock splits and share classes. It is a multidimensional process with legal, regulatory and communication aspects and is essential for a company at each growth stage.
Good table management can help you attract top talents by giving them transparent compensation packages with the updated real value of their equity share. Good cap table management is also required to raise funds or sell your business. Outdated information will lead to costly changes and could even become a red flag stopping your development.
How does Cap Table Management work in the “traditional process“?
Cap table management varies according to the stages of development. It is quite frequent that a poor initial design leads to problems when trying to scale the business. At the start, cap table management is usually kept on an excel spreadsheet, generated by a lawyer at hourly costs, with the names of the founders and their shares. However, as the business grows, cap table management requirements quickly intensify.
It is common to offer stock options to employees and advisors to align the interest (ESOP). So each time a new share is issued or transferred, the cap table needs to be updated to represent the current repartition of the firm’s equity. As early-stage founders tend to be very busy, they can fail to accurately update all the information leading to tensions and misunderstandings between stakeholders. At a later development stage, when the company will try to raise funds or go public, this becomes even more complicated through public trading. Maintenance is crucial for shareholder interaction.
These inefficiencies open vectors for attacking the company. The most costly fight for a simple question: “Who owned the share, who votes what?” did cost Procter&Gamble $60 million in 2017
Companies are constantly evolving and cap tables need to follow up the sales of securities, the issuance of shares, the new stock options. As a result, firms not taking cap table management seriously enough face a high cost and high waste of time.
How does this process change with the application of blockchain technology?
The great thing about blockchain technology, especially with regards to cap table management and the associated lifecycle management of financial products is that we can extract data and information directly from the smart contract that governs the issuance and send it to interfaces, auditors as well as other 3rd party for verification — while blockchain remains a single source of truth for disputes. That not only provides a live overview of your cap table, but allows you to execute certain actions without the need for manual, labor intensive processes, like proxy voting mentioned above.
Using smart contracts, we employ an infrastructure that does not change throughout the different business stages, but rather reduces complexity while boosting accuracy. Ownership of tokens, i.e. shares in an equity issuance case is recorded on-chain automatically, so that investor relations managers and the different intermediaries no longer need to manually update tables and keep separate records.
This is especially relevant when considering the increased liquidity and velocity that secondary digital asset exchanges are expected to bring about. Additionally, token-bound investor registries allow issuers to execute corporate actions like dividend payouts or votings digitally with the click of a button. This reduces complexity and eliminates the risk of non-consolidated registries — something that may sound very mundane, but can cause issues in the validity of votes, which in turn can brew up huge legal expenses.
At BlockState we include these compliant end-to-end lifecycle management tools that are based on on-chain investor registries from the initialisation of every issuance as we believe it is not only important to provide the bare functionality of blockchain powered issuance, but to create application interface that allow anyone to leverage the power of this functionality with ease.
What are your predictions for the next year looking at the Security Token ecosystem? Will other benefits (e.g. increased liquidity in secondary markets) become a benchmark of this new technology?
The ecosystem is rapidly growing, Security Tokens have been able to solve some problems associated with regulatory uncertainty around ICOs in the past few years. It has given more investor protection due to the classification and rights of a traditional security. However, most of its advantages in other asset classes are yet to materialise. Firms have already benefited from easier access to capital markets thanks to fractional ownership, low cost of issuance and the ability to execute token-based issuances faster than with traditional market infrastructure.
Regulatory certainty is a crucial element for our solution, and we see more regulatory certainty in the field of derivatives, debt as well as equity issuance on a pan-European regulatory level being initiated and implemented.
We are still waiting to see secondary markets for digital assets pop up and gain traction. Starting 2020, we expect to see the rise of digital asset exchanges such as SIX Digital Exchange and other exchanges in jurisdictions across the globe. With the rise of institutional players in the STO ecosystem and clearer regulatory design, we think that the interest in token based issuances will surge and gain mainstream traction. From there on we will see a plethora of financial product innovations and new types of assets becoming available.
We believe that STOs will be the preferred capital raising method for most assets down the line, as well as the background technology for lifecycle management for existing assets outside of blockchain. Complex financial products with multiple external triggers and inherent functions, like Contingency Convertibles, Structured products (certificates), OTC non-FX derivatives, and much more, are a natural fit for smart-contract languages and blockchain.
We are already seeing more and more non-blockchain assets being tokenized. We are happy to be ahead of the wave with our own issuance of tokenized equity. The idea is to showcase the technology and test-drive the platform before we support 5 further issuances in 2019 and start opening the market for mass adoption.
Thank you for the Interview!
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