B2B finance SaaSSoftware only
Cap table and equity management software testing
FintechAssuranceLabs engineers test cap table and equity management software, the category of products like Carta. Cap table testing covers vesting schedules, option exercise, dilution and liquidation waterfall calculations, 409A valuation workflows, 83(b) and Form 3921 deadlines, Rule 701 thresholds, and the ASC 718 expense reports that equity management software hands to auditors.
What breaks in vesting, exercise, dilution, and waterfall math
Cap table software earns a subscription from startups that keep their equity ledger in it and from funds that model ownership and exit proceeds with it. A calculation defect repeats in every grant, exercise, and exit model the subscription covers, and the tax or securities law consequence lands on the subscriber.
- Incentive stock option limit checked per grant instead of per calendar year. An employee holds two incentive stock option (ISO) grants, each for shares worth 80,000 USD at grant, both first exercisable in 2026. The platform checks each grant against 100,000 USD and labels every share ISO. 26 U.S.C. 422(d) treats options first exercisable by one individual in one calendar year above 100,000 USD of grant-date value as non-ISOs, taken in grant order, and 26 CFR 1.422-4(b)(4) places accelerated options in the year the acceleration is triggered. The company issues Form 3921 for shares whose exercise spread, per Publication 525, the employer should report on Form W-2 with code V.
- Grant priced from an expired 409A valuation. The grant workflow prices options from a valuation dated 13 months earlier, or dated before a priced round closed. Under 26 CFR 1.409A-1(b)(5)(iv)(B)(1), a previous valuation is not reasonable when it is more than 12 months old or fails to reflect later information that may materially affect value. A nonstatutory option priced below fair market value at grant falls outside the stock right exclusion of the same regulation, and 26 U.S.C. 409A(a)(1)(B) adds 20 percent of the included compensation plus interest to the optionee's tax.
- 83(b) deadline counted in business days. An employee early-exercises unvested shares, and the reminder counts 30 business days from the exercise. 26 U.S.C. 83(b)(2) requires the election not later than 30 days after the transfer, and section 7503 extends only a last day that falls on a Saturday, Sunday, or legal holiday. An employee who files on the displayed date has no valid election, so section 83(a) taxes the value above the price paid as each tranche vests.
- Rule 701 tracker that counts options at exercise. The compliance report sums cash received from exercises over a rolling 12 months. 17 CFR 230.701(d)(3) counts options on the grant date at their exercise price. Once 12-month sales exceed 10 million USD, paragraph (e) requires the plan summary, risk information, and financial statements no older than 180 days, delivered a reasonable period before an option is exercised. A company with 11 million USD of grants and 2 million USD of exercises gets no alert, and sales that miss a condition fall outside the exemption under paragraph (a).
- Non-participating preference paid twice. In a synthetic exit, a fund holds 25 percent of fully diluted shares with a 1x non-participating preference on 10 million USD invested, and the company sells for 30 million USD. The fund takes the greater of 10 million USD or 7.5 million USD as converted, so common holders receive 20 million USD. A model that pays the preference and then shares the remaining 20 million USD pro rata pays the fund 15 million USD and common holders 15 million USD, and a distribution schedule built on that model moves 5 million USD from common holders to the fund.
Licence flag and the evidence buyers, auditors, and tax authorities ask for
Cap table and equity management carries licence flag "no": the software records equity and calculates, so evidence requests come from enterprise buyers and auditors, and the rules below set the values the output must match. Sources in this section were checked on 2026-09-16.
Enterprise buyers and their auditors
Stock compensation expense feeds the customer's financial statements, so buyers ask for a SOC 1 report on controls relevant to financial reporting, a SOC 2 report, and a security questionnaire; EU employee records add GDPR data processing terms. ASC 718-10-35-8, as amended by ASU 2018-07, allows straight-line or graded attribution for service-only awards with graded vesting, with cost recognised at any date at least equal to the vested portion of grant-date value. ASC 718-10-35-3, as amended by ASU 2016-09, requires an entity-wide election to estimate forfeitures or recognise them as they occur, and bars reversing cost when a vested option expires unexercised. Evidence we produce:
- expense recomputation per grant under each attribution and forfeiture policy
- reconciliation of the expense report to the journal export
- change history for grants, cancellations, and exercises
United States
- Form 3921. 26 U.S.C. 6039 requires a return for each ISO exercise and an employee statement by 31 January of the following year. For 2025 exercises, the General Instructions for Certain Information Returns set 2 March 2026 for paper and 31 March 2026 for electronic filing.
- 83(b) election. 26 CFR 1.83-2 requires the written statement at the IRS office where the employee files, plus a copy to the company; Form 15620 is optional.
- Transfer agent registration. Exchange Act section 17A(c)(1) requires registration to act as transfer agent for a security registered under section 12, or one exempt only under section 12(g)(2)(B) or (G). The SEC proposed modernised transfer agent rules on 1 September 2026; the proposal is not in force.
Evidence we produce: deadline tables for 83(b) and Form 3921, 409A expiry and material event checks per grant, and Rule 701 totals recomputed at grant date.
Canada
Under Income Tax Act subsection 7(1.1), a Canadian-controlled private corporation (CCPC) option benefit is taxed in the year the employee disposes of or exchanges the shares, provided the employee dealt at arm's length with the corporations named in that subsection immediately after the agreement. For options granted on or after 1 July 2021 by an employer that is a non-CCPC or a mutual fund trust and has, or belongs to a consolidated group that has, revenues above 500 million CAD, the CRA applies a 200,000 CAD annual vesting limit on the stock option deduction, measured at grant-date fair market value. The employer informs the employee in writing within 30 days of the agreement about non-qualified securities and reports them on Form T2SCH59. Evidence we produce: CCPC deferral and vesting limit test cases per employer type.
Vesting, exercise, dilution, and waterfall test scenarios
- Grant four-year monthly vesting with a one-year cliff on 31 January, and check February vest dates, suspension during leave, and termination one day before the cliff.
- Grant ISOs across plans first exercisable in one year, accelerate them on a change in control, and compare the ISO split in grant order with a reference model from financial calculation testing.
- Exercise by cash, net exercise, and early exercise with repurchase, and exercise an ISO more than three months after termination under section 422(a)(2), then compare Form 3921 and Form W-2 code V output.
- Early-exercise on dates whose 30th day falls on a Saturday, a Sunday, and a legal holiday, and check the 83(b) deadline and the record of the copy given to the company.
- Grant options 11 and 13 months after a 409A valuation date and after a financing marked as a material event, and verify the workflow blocks each grant.
- Close a priced round with an option pool increase in the pre-money, post-money SAFE conversions, and a capped, discounted convertible note, then compare ownership per holder and fractional share rounding.
- Run exits at each breakpoint of stacked and pari passu preferences, participation capped at 3x, and conversion, and compare payouts per share class.
- Sum Rule 701 sales over rolling 12-month windows at grant-date exercise prices, and check the paragraph (d)(2) limit and the disclosure alert above 10 million USD.
- Recompute ASC 718 expense for graded and straight-line attribution, both forfeiture policies, and vested options that expire unexercised.
- Import a cap table from spreadsheets or a prior platform and reconcile share counts per class and vesting start dates through data migration testing, ahead of technical due diligence before funding.
Integrations and protocols to cover
- HRIS: APIs and SFTP employee files with the hire, termination, and leave dates that drive vesting.
- Payroll: exercise income and withholding for Form W-2 code V and Canadian T4 security option codes.
- Exercise payments: Nacha ACH debit files and wire instructions for exercise price and withholding.
- E-signature: grant agreements, board consents, and 83(b) statements with signing events.
- IRS filing: FIRE files in the Publication 1220 format for Form 3921.
- General ledger and ERP: ASC 718 journal exports and expense schedules.
- Valuation and fund reporting: 409A report imports, and waterfall and ownership exports for funds.
Sample deliverable
Sample, synthetic data
| Case ID | Calculation and rule | Inputs | Reference value | System value | Result |
|---|---|---|---|---|---|
| CALC-01 | Mid-cycle plan upgrade proration; plan terms prorate the old and new plan prices by whole days remaining in the billing period | Old plan 30.00 per 30-day period; new plan 90.00 per 30-day period; upgrade effective at 00:00 on day 11, leaving 20 days | 40.00 | 40.00 | Pass: the system charges 60.00 for the new plan and credits 20.00 for the old plan, matching the reference |
| CALC-02 | APR on a closed-end loan with an origination fee; actuarial method under 12 CFR 1026, appendix J; the APR shall be considered accurate if it is not more than 1/8 of 1 percentage point above or below the reference under 12 CFR 1026.22(a)(2) | Principal 10,000.00; origination fee 300.00 withheld from proceeds; note rate 9.00%; 36 monthly payments of 318.00; amount financed 9,700.00 under 12 CFR 1026.18(b)(3) | 11.09% | 9.00% | Fail: the system solves the APR against the 10,000.00 principal instead of the 9,700.00 amount financed, 2.09 percentage points below the reference; critical; blocks release |
| CALC-03 | APR on a closed-end loan with an origination fee; actuarial method under 12 CFR 1026, appendix J; the APR shall be considered accurate if it is not more than 1/8 of 1 percentage point above or below the reference under 12 CFR 1026.22(a)(2) | Principal 5,000.00; origination fee 100.00 withheld from proceeds; note rate 12.00%; 24 monthly payments of 235.37; amount financed 4,900.00 | 14.05% | 14.00% | Pass: the system APR is 0.05 percentage points below the reference, inside the 1/8 of 1 percentage point tolerance |
| CALC-04 | Federal income tax withholding on a supplemental wage payment at the flat rate; IRS Publication 15 (2026), section 7: if income tax was withheld from regular wages in the current or immediately preceding calendar year, the employer can withhold a flat 22% on supplemental wages identified separately | Bonus 5,000.00 paid separately from regular wages; income tax withheld from regular wages in 2026; supplemental wages before the payment 20,000.00; employer elects the flat rate | 1,100.00 | 1,100.00 | Pass: the system withholds 22% of 5,000.00, matching the reference |
| CALC-05 | Federal income tax withholding on a supplemental wage payment that crosses 1,000,000.00 in the calendar year; IRS Publication 15 (2026), section 7: the excess over 1 million is subject to withholding at 37%, without regard to the employee's Form W-4 | Bonus 50,000.00 paid separately from regular wages; supplemental wages paid in 2026 before the payment 980,000.00; employer elects the flat rate for the amount up to 1 million | 15,500.00 | 11,000.00 | Fail: the system applies 22% to all 50,000.00 instead of 22% to 20,000.00 and 37% to 30,000.00, so 4,500.00 is under-withheld; critical; blocks release |
| CALC-06 | Stock option vesting with a one-year cliff; grant agreement vests 25% at the first anniversary, then 1/48 of the grant monthly on the commencement day, or on the last day of a month without that day | Grant of 48,000 options; vesting commencement 2025-01-31; cliff date 2026-01-31; vested balance requested as of 2026-02-28 | 13,000 options | 12,000 options | Fail: the system skips the February vesting event because February has no 31st day, so 1,000 vested options cannot be exercised; high; blocks release |
| CALC-07 | Per diem allowance for meals and incidental expenses under the high-low method; IRS Notice 2025-54, section 5, paragraph 1: 86.00 per day for a high-cost locality; Rev. Proc. 2019-48, section 6.04(1): the payor may allocate three-fourths of the rate to each partial day of travel | Travel to Boston/Cambridge, a high-cost locality from October 1 to September 30 under Notice 2025-54, section 5, paragraph 2; departure 2026-08-10; return 2026-08-12; lodging reimbursed on receipts; payor policy uses the three-fourths method | 215.00 | 258.00 | Fail: the system pays 86.00 for the departure and return days instead of 64.50 each, so the allowance is 43.00 above the reference; high; blocks release |
| CALC-08 | Taxable interest on a return rounded to whole dollars; Form 1040 instructions (tax year 2025): if you have to add two or more amounts to figure the amount on a line, include cents when adding and round off only the total | Three interest statements of 120.40, 80.40, and 45.40 for line 2b; return set to whole-dollar rounding | 246 | 245 | Fail: the system rounds each statement before adding, so line 2b is 1 below the reference; medium; release allowed with the defect scheduled for the next release |
Amounts use XTS, the ISO 4217 code reserved for testing, with rule thresholds stated in US dollars applied at one XTS per dollar. Loans, employees, grants, trips, and returns are generated test records, and every reference value was computed outside the system under test.
Questions
What is a cap table?
A cap table, or capitalization table, is the record of who owns a company's equity. A cap table lists common and preferred shares, stock options, warrants, restricted stock, and convertible instruments, with holder names, share counts, prices, and ownership percentages. A fully diluted cap table also counts every share that outstanding options, warrants, and convertible instruments could create.
Why do startups need a cap table?
A startup needs a cap table to know what each holder owns before the startup issues new shares, grants options, or signs a financing. Investors review the cap table in due diligence, 409A valuations and ASC 718 stock compensation expense start from the share and option records, and an exit waterfall uses the cap table to split sale proceeds among holders.
What is a waterfall analysis?
A waterfall analysis calculates how the proceeds of a company sale or liquidation are paid to each shareholder, in the order set by liquidation preferences, participation rights, and conversion terms. In a synthetic example, an investor holds 25 percent of the shares with a 1x non-participating preference on 10 million USD invested; in a 30 million USD sale, the investor takes 10 million USD instead of 7.5 million USD as converted, and common holders receive 20 million USD.
How to create a cap table?
To create a cap table, list each share class from the company's charter and stock ledger, then add every holder's shares, option grants with vesting terms, warrants, and convertible instruments with conversion terms. Reconcile the totals to board consents and authorised shares, then calculate ownership on an outstanding basis and on a fully diluted basis.
Scope your equity management software testing
Send your vesting rules, exercise flows, valuation workflow, tax forms, and waterfall model, and we return a test scope with reference values and the evidence buyers and their auditors request.
Scope your testing