At the earliest stage, startups and pre-seed venture capital firms frequently use founders’ stock or have raised some startup financing from close friends or family and are hesitant to use a transfer agent. To keep track of who owns what, internal spreadsheets or self-administration applications are employed and investor contacts are frequently handled directly by the CEO or founder. This is a natural way to begin when a fund is still small but this approach does not last very long. Even if the entrepreneur only knows a few investors, serving them professionally is key and being subject to rapid expansion, either in assets or investor count, without the assistance of a transfer agent is a recipe for future operational problems.
Seed-stage companies are more likely to use a transfer agent since they have raised money from angel investors, venture capitalists or, increasingly, equity crowdfunding platforms. Because these investors may not know the CEO/founder directly, there is a higher demand for the accuracy, accountability and transparency that a transfer agent can provide in investor record-services. Seed stage businesses often undertake these responsibilities in-house with the assistance of a law firm or a CFO. But, as the company grows, internal focus is diverted to growth management. Investor administration, fund accounting, and transfer agent functions may fall by the wayside. The lack of a skilled transfer agent often results in incomplete records, poor investor service and/or non-compliant reporting, payments or tax documents. To avoid these issues, forward-thinking fund managers are beginning to understand hiring a transfer agent as a necessary part of their operations.