Insight into Startup Equity with Tomas Milar of Eqvista
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Managing equity in a startup is a strategic cornerstone that can make or break a company’s future. Tomas Milar, founder and CEO of Eqvista, understands this better than most. With over $70 billion in assets under management and more than 19,000 companies on its platform, Eqvista is transforming how startups approach stock management. But Tomas’s vision goes deeper than building a successful business — he’s driven by a desire to solve key pain points for entrepreneurs. To learn more about his mission, keep reading this interview!
In this article
The beginning of Equivista
Joy Wallet: What inspired you to start Eqvista? What problem were you aiming to solve in the financial services sector?
Tomas: Well, before I founded Eqvista, I worked with various startups in the early 2010s. Back then, startups did not have much governance support beyond company secretaries. These are excellent professionals who can advise founders on corporate structures, handle documentation, and file crucial reports. However, I noticed a gap in equity management.
As founders, we would consider issuing various kinds of equity interests, such as convertible debt, SAFE notes, and preference shares, to secure funding. Equity compensation was not as prominent as it is now, but its popularity was on the rise.
With all these different kinds of equity interests, I felt the need for a comprehensive equity management solution. A lot of times, the responsibility to build the cap table and to share it with stakeholders fell on my shoulders. I remember spending hours updating the cap table spreadsheet every other week when I could have focused on a mission-critical task instead.
Every time I built a cap table, I had to verify numerous details and go through a heavy list of checks and balances to ensure that the information was accurate.
Also, since stock compensation was not predominant at the time, explaining their benefits to employees was a major part of our efforts to attract talent. We would eventually be successful in communicating the benefits, but I felt the need for a specialized tool for projections and visualizations.
A few years later, I founded Eqvista to address the challenges I had witnessed firsthand in the startup ecosystem. Our first product milestone was to build a platform where all stakeholders can keep track of their cap table with real-time data. Then, we wanted to streamline various employee stock ownership plans (ESOPs) and cap table management processes. Over the years, we expanded the type and quality of tools our platform provides to move closer to becoming a comprehensive equity management solution provider.
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Role of cap table management
Joy Wallet: Can you explain the importance of cap table management for startups and how it affects their growth?
Tomas: Cap table management affects the growth of startups in two ways — how effectively they secure funds and how effectively they attract and retain talent.
Firstly, a well-organized cap table helps incoming investors understand the power dynamics, dilution risks, and liquidation scenarios.
When investors survey a cap table, they first verify the voting rights afforded by each class of shares and then the voting rights held by each investor. This helps them find their place in the startup’s corporate governance structure. Then, investors check if any investors have anti-dilution rights and liquidation preferences that could significantly affect the value of the equity offered to them. Investors may also want to look at the startup’s option pool size to check for dilution risks from equity compensation.
Secondly, your cap table demonstrates the effectiveness of your employee option plan. A well-structured cap table shows that there is a fair distribution of ownership and employee incentives are aligned with company goals. This can motivate existing employees to contribute more and help attract talent.
409A valuation service
Joy Wallet: What are the key features of your 409A valuation service, and why should companies choose Eqvista for this? How does a 409A valuation protect a company from potential tax penalties?
Tomas: You will find that Eqvista’s 409A valuations are a lot more cost-efficient than others. Instead of offering singular 409A valuations, we offer annual subscription plans with unlimited 409A valuations. When we value a company in the same year, even if a major material event has occurred since the last valuation, it is not like we are looking at a completely new company. This makes our research a lot easier. We try to pass on this benefit to our customers through annual subscriptions.
We also recognize that the quality of our valuations depends on our team. Therefore, we have carefully curated a team of NACVA-certified valuation experts. This ensures that we consistently produce accurate valuations that are compliant with Internal Revenue Code (IRC) guidelines.
We also invest a considerable amount of time familiarizing our team with the latest equity compensation tax regulations. Thus, we ensure cost-effective and accurate 409A valuations to help our clients with tax compliance.
It is important to get a 409A valuation that complies with IRS regulations. Otherwise, your employees may face higher-than-normal interest on unpaid taxes, tax penalties, and immediate taxation of their vested equity income. Such adverse tax implications can drive employees to file lawsuits for employer negligence.
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Trends in equity management
Joy Wallet: Can you describe a recent trend in equity management that you believe will significantly impact startups in the next few years?
Tomas: From a technological point of view, I feel that over the next few years, tokenized equity, an application of blockchain technology, is going to be instrumental in equity management. Since blockchain ledgers are virtually immutable, they offer a high degree of security against fraud and scams.
Another benefit of tokenized equity is fractional ownership. When a company wants to onboard smaller investors, instead of revamping its equity structure, it can just issue fractions of tokenized equity.
However, in my opinion, the biggest benefit of tokenized equity is the liquidity it can bring to private equity. Most private company shares are not held in a digitized manner. This makes it incredibly difficult to verify all the key facts and execute transactions. However, since tokenized equity is immutable, investors can easily enter into transactions via digital ledgers.
Another recent trend that I have observed is the rising popularity of phantom stocks. Earlier, when founders wanted to attract talent without giving up control over their company, they would follow a multi-class share structure. Since this makes it difficult to understand which stakeholder holds how much influence, it can create governance issues.
However, now, founders are employing phantom stocks that give stakeholders all the benefits of owning a common stock without any of the voting power.
Common pitfalls in equity management
Joy Wallet: What common mistakes do you see companies make when managing their equity, and how can they avoid them?
Tomas: I’ll tell you what the most common root of equity mismanagement is — issuing equity without a plan and in a haphazard manner. The first time equity distribution comes up is when a startup is founded. Typically, all founders start with equal shares, and then equity is issued to onboard investors. However, in the scramble to secure funds, startup founders will often issue too much equity or maybe issue non-dilutable shares. This can create huge problems in future funding rounds.
Also, when startups need to recruit talent, they end up overpaying the equity compensation or setting a very short vesting period. When these employees leave and don’t sell back their shares, it creates governance issues.
All of these issues can be solved with detailed planning backed by sound market research. It’s essential to understand the typical equity stakes investors receive in your industry, as well as the standard types and amounts of equity compensation offered to employees across various roles. Once you nail that part, all you need to do is regularly update your cap table and stay on top of your 409A valuations.
Ensuring compliance
Joy Wallet: How does Eqvista support companies in ensuring compliance with financial regulations and reporting requirements?
Tomas: Our products are designed with understanding and care, which ensures that businesses can focus on their goals while we help them stay compliant. Our flagship product, the cap table software, enables companies to meet reporting obligations for their investors efficiently. Through 409A valuations, we help companies issue stock-based compensation in a manner that complies with the IRC. We also help companies comply with ASC 718 accounting guidelines, provide business valuations for SEC filings, and help companies file 83(b) Election forms, Form 8594, and Form 3921.
Our team of experienced valuation analysts and accredited tax experts provides comprehensive guidance on equity and tax-related matters. I am confident in our ability to assist with any tax issues related to equity.
Financial literacy
Joy Wallet: What role do you think financial literacy plays in helping entrepreneurs make better equity management decisions?
Tomas: A founder with financial acumen will be well-versed in valuation techniques and tax regulations. Chances are that such a person will also know how to analyze market trends and make strategic decisions related to employee stock ownership plans (ESOPs) and funding rounds. Such founders are also less likely to unnecessarily rely on complex securities to secure funding. This is why CFOs are priority hires for most startups.
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Complex valuations
Joy Wallet: How does your team handle complex valuations, especially for companies that are Series C or pre-IPO?
Tomas: In a complex valuation scenario, you might not find a methodology that perfectly fits the situation. Such scenarios demand a certain flexibility that only comes with years of experience, a deep understanding of financial analysis concepts, and knowledge of valuation guidelines described in the IRC.
A good valuation analyst will amalgamate the existing valuation techniques to form a new methodology whose strengths and weaknesses align with the scenario at hand. A simpler and sometimes more apt solution would be using a weighted average of valuations derived from multiple approaches.
For Series C and pre-IPO companies, handling complex valuations becomes more straightforward due to the abundance of data. Such companies are expected to have a solid financial track record, including consistent revenue growth and profitability.
When one is valuing companies preparing for an IPO, understanding future growth potential is critical. Valuation teams can easily analyze historical data to assess trends and sustainability of earnings.
Then, based on market trends, customer acquisition strategies, and expansion plans, the valuation team projects future revenues. In such valuations, it is important to incorporate the expectations of investors who will expect not just potential but proven success and a clear path to profitability and market leadership.
Streamlining share issuance
Joy Wallet: Can you explain the process of issuing shares through Eqvista and how it simplifies the experience for founders?
Tomas: On Eqvista’s platform, you can issue shares within a few clicks. Any user with full access can simply log in to the platform and navigate to the equities page from the securities section. Then, you can choose to issue shares from an existing equity class or create a new equity class. After that, you need to choose between common and preferred shares. Once you have created the shares, you can grant them to the investor of your choice.
Our platform also allows you to streamline the process of obtaining board approval for share issuance. With just a few clicks, you can submit proposals, and your board members can easily review and approve or reject them.
Technology in equity management
Joy Wallet: How has technology transformed the way companies manage their equity and valuations over the past few years?
Tomas: In the last decade or so, technology has transformed equity management. Prior to 2016, companies relied mainly on spreadsheets to maintain cap tables. Every cap table change had to be incorporated manually and founders had to get hold of stakeholders and communicate the changes. If the cap table change was complex, founders had to manually prepare visualizations.
Now, founders simply enter updates directly into the cap table interface, and all changes are applied instantly. Once updates are made, all stakeholders are notified and can review the changes in real time.
As for valuations, I believe that in the past few years, we have successfully developed methodologies to value emerging, new-age technology startups. We could not effectively apply these methodologies earlier because of a lack of data storage and processing infrastructure. These technological advancements help us accurately capture the valuation impact of network effects, macroeconomic conditions, and industry dynamics.
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Overcoming record-keeping challenges
Joy Wallet: What challenges do startups typically face when trying to maintain accurate financial records, and how does Eqvista address these?
Tomas: A major challenge is not knowing which valuation methodologies comply with accounting guidelines and tax laws. When valuations are needed for equity compensation, startups must go through years of revenue rulings and tax law amendments to figure out which methodology suits their needs and keeps them tax-compliant.
Eqvista takes on this heavy lifting for you. We invest significant time in training our valuation team on the latest tax law amendments and revenue rulings. This enables us to deliver tax-compliant valuations for businesses, assets, and patents. In partnership with IncParadise, we also offer filing services to ensure that all compliance requirements are thoroughly met.
Education and empowerment
Joy Wallet: How can financial education initiatives help startups leverage services like Eqvista more effectively?
Tomas: Eqvista is like a Swiss knife for tax compliance and equity management. From valuation services to cap table software, we offer solutions for any possible roadblock that a startup could encounter in financial reporting, fundraising, and tax compliance. However, many believe that a tool is only as good as its wielder. Earlier, the emphasis was on clients to choose the right services at the right time.
However, we take an active interest in the success of our clients and educate them about their financial reporting, and tax compliance needs through our vast content library and equity and tax advisory services. We believe that financial literacy is necessary for someone to use our products, but we do not think of it as a barrier. It just takes some familiarization with key concepts, and you can fully leverage Eqvista’s benefits.
Guidance for entrepreneurs
Joy Wallet: What advice would you give to new entrepreneurs about understanding their company's valuation?
Tomas: I would advise new entrepreneurs to familiarize themselves with the different approaches to company valuations. There are numerous valuation methodologies out there. You need to know which ones are suitable for your company and what the current situation is.
Additionally, you must understand which factors are most instrumental in driving your company’s growth. These factors could be your monthly active users, paid subscribers, revenue growth, or even your patent portfolio. You must understand the relationship between your company’s valuation and these growth drivers. This can help you in valuation-related negotiations in funding rounds.
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