Two Step's Private Company Equity Management Blog

I was at a law firm the other day listening to three attorneys debate whether their spreadsheets were a satisfactory tool for doing their transactional clients' capitalization tables. The first attorney (we'll call her Susan) said that her spreadsheets were fine. Her stock plan administration worksheets rolled up automatically into a few other worksheets for a client's capitalization tables and those worksheets could show the data by class, type, date, and fully-diluted.

It all sounded very complicated, but I was impressed. The next attorney (we'll call her Ann) said that her spreadsheets could track the stock and option data, but could not display it by date in the past or in the future. Also, her spreadsheets could not handle option vesting schedules. The third attorney (“Eric”) asked if Ann used the same spreadsheet templates as Susan. Ann said that her spreadsheets were similar to Susan's, but with some variations. Eric admitted that he’s basically a spreadsheet novice.

The reason we were discussing capitalization tables is that they are critical decision-making tools for CFOs, investors, board members, attorneys and clients – and they need to be 100% accurate. Anything less is bound to make someone look very bad. Sometimes the problem is as simple as two people with two different versions of the same stock issuance or option grant data.

As the innocent bystander in this rousing discussion, I commented that it sounded like everyone was doing the record tracking and corresponding capitalization tables slightly differently. Then I suggested they consider an online, consolidated system for ownership administration – for five pretty compelling reasons:

1. Centralize and Share Data: If data needed for capitalization tables is in one place – rather than in multiple copies of spreadsheets – there are fewer discrepancies. Centralized online data can also be shared more easily.
2. Simplify Data Entry: Data can be entered more accurately if all you have to think about is point-and-click. It means less typing and no tedious copying and pasting.
3. Automate Calculations and Reports: A computer-based system will never make a mistake, no matter how difficult the calculation.
4. Increase Standardization and Best Practices: If everyone is doing tasks the same way, you have the ability to set best practice standards and ensure consistency enterprise-wide.
5. Connect Data to Documents and Accounting: In a consolidated system, it is much easier to link related stock plan administration data and documents, such as Board minutes to option grants or grant data to complex FAS 123R reporting.

Susan objected only when I mentioned that a centralized system would reduce the risk of errors. She insisted that her capitalization tables were accurate. And while I had no reason to doubt that, I asked whether her spreadsheets could handle changes in the preferred stock conversion ratios, for instance, or a stock split. Susan replied with an emphatic “yes." She explained that she just copied and pasted the new ratio down the entire column and the next cell generated the updated calculation.

I told Susan that this was precisely where errors happen. In fact, I saw a reference recently to a KPMG report that suggested the vast majority of operating spreadsheets used in financial reporting contain material errors – which is consistent with what we hear from CFOs every day. Even when they have not yet encountered problems, these CFOs say that they are ever-fearful that their resident “spreadsheet guru” might leave (and take their ability to use complex and connected spreadsheets with them).

It's not that spreadsheets are bad or can't handle complex calculations. Of course they can. It's just that the standardization and simplification benefits of an online stock plan administration application are overwhelming. This is particularly true when you consider many different people, using many different spreadsheets, to track many different equity transactions, for many different companies that each have complex capital structures. The risk that an error may creep into the process and flow through the entire system is tremendously high. Another benefit of a web-based system is the opportunity to save money by redirecting routine tasks to a lesser-skilled and lower-cost person.

The next time you're working with complicated spreadsheets for your ownership administration and capitalization tables, consider this: What if you could simplify, standardize, and centralize the work while creating a process that costs less and increases accuracy? When you're ready to stop worrying about hidden errors or copying the right numbers into the right cell, take a look at Two Step's Corporate Focus system to find out what an online, consolidated equity management application could do for you. After all, you have far more important things to worry about these days.

Let me ask you a question: Do you brush your teeth every day? Or just the week before a dental check up? 

Imagine if the only time your teeth were brushed was twice a year at the dentist. It wouldn't be a very pleasant visit (not that they ever are, actually). Well, that's the situation too many law firm clients find themselves in when they’re ready for a corporate event or transaction. Right before a financing or annual meeting, everyone rushes around in a mad dash looking for documents and updating capitalization tables. Why? Because the records haven’t been updated or organized since the last mad dash. 

But if you're a corporate client at Pierce Atwood, LLP in Portland, Maine, the frenzied scene described above is a long-ago memory. I recently sat down with Chris Howard, the head of the firm’s business practice group. He explained to me that with the firm’s centralized client information management system (CIMS), Corporate Focus, the corporate records for all of their business clients are organized, minute book documents scanned, and capitalization tables up-to-date. 

As the largest New England law firm North of Boston, Pierce Atwood has over 1,000 corporate clients who can depend on having their information and documents just one click away when they call. In fact, Chris told me that some of their clients have direct online access to their own information in Corporate Focus on a read-only basis, which eliminates the need for these clients to even contact the firm. This saves the clients legal fees, offers them more flexibility in searching, and of course saves boatloads of time because they can get to their data around the clock. 

As Chris bluntly put it, clients don't usually choose a firm because they practice outstanding “corporate hygiene.” But when an important transaction is pending, these clients notice and appreciate the level of service and risk management that Pierce Atwood provides—whether they need it or not. It's just how the firm does business. And it's the right way to do business.

Chris also noted that it's not really a matter of what technology you have at a law firm, because many firms have implemented state-of-the-art systems and applications in recent years. What’s important is how you use this technology for your clients' benefit. Depending on which client you talk to, those benefits might involve faster turnaround times, lower legal costs, or 24/7 access to legal records. But any way you slice it, when clients see this kind of productivity in action, it doesn’t escape their attention.

In fact, Pierce Atwood’s efforts to help clients help themselves—through a firm-wide CIMS—have enhanced its reputation in the legal marketplace. As Chris explained to me, trust, reputation, and client service are what make a law firm successful—and it’s these qualities that lead to satisfied clients telling other companies about their positive experience. Corporate Focus also makes practicing law easier for Pierce Atwood attorneys, because they can spend more time and energy on legal advice and negotiation and less on administrative requirements. 

Do many law firms use Corporate Focus or have access to systems like Corporate Focus? Of course. Does it take unusual rigor and tenacity to implement a firm-wide client information management system as Pierce Atwood has done? Absolutely. Do their clients appreciate the benefit when they're ready for their next transaction? You bet. Just ask any of them.  

Then ask your corporate practice group: Do you practice corporate hygiene for your clients on a regular basis—or just the week before a major transaction? Ask them which their clients would prefer. Then ask their Board or investors.

A few days before his inauguration, Barack Obama told John King on CNN: 

 "Here's the good news ... we have a lot of investment in making the health care system more efficient. Just a simple thing like converting from a paper system to electronic medical records for every single person can drastically reduce costs, drastically reduce medical error, make not only health care more affordable, but also improve its quality." 

When I heard this, I imagined for just a moment that he had said "electronic legal records" instead. For years, law firms and medical practices have been slowly migrating their voluminous paper client records to online systems that can be easily searched, tracked and recalled—whether one is searching for the date of incorporation or the last measles shot.

And “slowly” is the key word here.

Historically, administrators and IT personnel have had a heck of a time getting the highest-paid professionals—doctors and lawyers—to use computers or even type prescriptions and client notes. In fact, the age-old joke is that the worse a doctor’s handwriting is, the better the doctor. (My father and two brothers are doctors and I'm a non-practicing attorney, so I know from whence I speak).

About 5 years ago, I noticed that my dog's veterinarian had all of his doggy records entered in a computer system. Every X-ray, shot, cough, bark, and poop sample was recorded and up-to-date. As the proud parents, my wife and I had online access to our pooch's entire medical history. The same was true for my dentist and for my son's pediatrician. None of them could answer a question without consulting the computer in the examination room.

However, my own physician had to flip tediously through a folder when I asked him a question about last year's physical. And when my wife went in for a procedure that required general anesthesia, the doctors were running around looking for the misplaced three-ring binder containing information on her allergies as well as our consent forms. I was shocked that these reputable practices were still stuck in the dinosaur age of client information management.

Sadly, these same examples apply to 90% of the attorneys in the country, despite the fact that unlike doctors or veterinarians, attorneys are charging $400-$1,000 per hour and can well afford to implement a modern electronic records system.

Having worked with hundreds of law firms over the past decade, I've never heard an attorney disagree with President Obama's basic premise that converting from a paper system to electronic records would drastically reduce costs, reduce errors, and improve service quality. For instance, Philip Beck of Bartlit Beck, The American Lawyer Litigation Boutique of the Year Firm, explains their use of technology: "In the office, we have immediate access to whatever information has been stored on the computers, and we can sort it and analyze it instantaneously, without waiting for help from support personnel."

Yet despite the fact that the benefits of an electronic records system are crystal clear—for law firms and their clients—it’s simply not happening in most mainstream practices today.

So what will ultimately entice these firms to make the switch? The transition process itself takes a good amount of time and effort, even if the actual costs are minimal. Will it be the sagging legal market that is crying out for greater efficiency as firms lay off attorneys and staff? Will it be partners watching profits drop or competition for new clients grow? Will it be clients that are demanding lower legal fees and 21^st-century service capabilities, such as self-service portals and 24/7 access to information? 

Imagine the impact on corporate America's legal bills over the next decade if every in-house counsel, CFO and board member for every venture-backed and public company could find all of their minute books, capitalization tables, contracts, due dates, and invoices online—from anywhere, at any time and without paying a single dollar in legal fees.

I'm just asking all the lawyers in America to think about what their doctor friends are about to be mandated to do—and then think about the millions of paper legal records sitting in their offices, growing more cumbersome by the minute.

It may be a challenge for an industry that has typically been a technology laggard, but in the spirit of change, why not practice a can-do attitude when the next technology project is proposed? Think about the positive impact on your bottom line: "Yes We Can." Think about the greater efficiency and productivity: “Yes We Can.” Think about being able to offer exceptional service to your clients in an increasingly competitive legal environment: "Yes We Can."