The equity in a company often refers to the ownership, which can be expressed as the amount of shareholding or number of shares. Shareholders' equity shows how much the owners of a company have invested in the business—either by investing money in it, or by retaining earnings over time.
A company's shareholder equity is found on the balance sheet of the company’s financial records and is calculated by subtracting total liabilities from total assets. If equity is positive, the company has enough assets to cover its liabilities. If negative, the company's liabilities exceed its assets.
Equity management can be defined as the process of creating and maintaining details on the ownership of a company. For start-ups and small companies this may seem simple when there is only one or two owners, but the information and maintenance can get complex once a company raises capital and takes on more investors or shareholders.
This introduces requirements such as collecting information on new investors, managing changes in shareholdings, communicating and engaging with stakeholders, and keeping records and documents from board and meetings.
In addition, there are local regulatory requirements for companies which require detailed tracking and reporting of equity information. For example, a company share register is a legal requirement for Australian and New Zealand companies, and this must be maintained as an official record of all shares issued by a company and the shareholders or members who have received these shares.
The person or people in a company responsible for equity management have a number of areas to cover. In large companies there may be a dedicated Company Secretary or a similar equity manager role, but for small to medium sized companies it is often the CEO, CFO, or someone in the Finance or HR functions responsible for these activities:
Share register management: including tracking all shares issued by the company and all shareholder (or member) details including name and addresses, the dates and information of any repurchase or redemption of shares for each shareholder and any transfer of shares by each shareholder. Information about the class or classes of shares also needs to be kept along with any restrictions or limitations on the shares.
Tracking and updating these details gets more complicated as the company does capital raising rounds and issues more shares. Additionally if the company has an employee share ownership plan (ESOP), then the details for this including all participating staff information needs to be maintained along with any options and other securities which may convert into shares in the company.
Stakeholder management and engagement: regularly communicating with and updating stakeholders on the latest company information is critical for ongoing engagement and support. With more knowledge about your company and engagement, existing investors are more likely to keep investing. If the company has an ESOP, then regular communications to staff are important for engagement and motivation to help develop a sense of ownership in the business.
Updating regulatory bodies: if shareholding or shareholder details change, then a company is required to maintain their share register and then advise their regulatory body of the changes. Australian proprietary companies need to advise the Australian Securities & Investments Commission (ASIC) on many share register changes including changes affecting the top 20 members in each class of share. New Zealand companies need to advise the NZ Companies Office on key details including company name or address changes, updates to shareholders' personal details, and shareholding changes.
For companies, outdated equity details can cause major problems when undertaking key events such as shareholder communications and voting, raising capital, or distributing a dividend.
There are also wider implications as regulatory bodies can bring a range of penalties and actions against companies who do not meet their share register requirements. For example in Australia, ASIC can charge hefty late fees if a company has not updated details within the correct timeframes, and they may de-register a company if it has outstanding fees and penalties. New Zealand companies and directors can face prosecution for not meeting their obligations and a significant breach can carry fines up to NZ$200,000 or imprisonment for directors.
To avoid incorrect or outdated information, companies can utilise online equity management software to organise and track details on their stakeholders and the equity they hold.
Equity management software for private companies includes features such as:
Share registry management
Document storage for stakeholder access
ESOP set-up and management
An online equity management software platform like Orchestra offers an easy way to ensure equity management requirements are met, whilst also creating a single source of truth for the company and its stakeholders.
There are a number of reasons why companies of all sizes should use online equity management software.
Compared to using a spreadsheet for share registers and equity management, online software can reduce manual share register tracking for the company, and reduce errors compared to using spreadsheets. It can assist with compliance by making it easier to update the relevant regulatory bodies, particularly if there is an integration between the software and the regulator’s registry.
Importantly, online equity management software can help to streamline stakeholder management and improve valuable engagement. Investors receive increased visibility by being able to log-in to access their shareholding details and any relevant documents.
Any communications to investors can also be managed through the software- and because all the shareholder names and emails are up to date, this becomes a seamless process. Consequently, shareholders feel engaged and up-to-date with the direction of the company.
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DISCLAIMER: This article is for informational purposes only, and contains general information only. Orchestra is not, by means of this information, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This information is not intended as a recommendation, offer or solicitation for the purchase or sale of any options or shares.