Cap Table Basics Businesses Should Know

It’s critical for any aspiring entrepreneur to understand who owns what at each level of the firm. This is true whether you are conducting due diligence for the purpose of raising funds or merely incorporating a new firm.

A cap table, also known as a capitalization table, is a chart used by startups to demonstrate ownership shares in the company. It includes a list of your company’s securities (such as shares, options, warrants, and so on), how much investors paid for them, and each investor’s portion of ownership in the company.

How to Make a Cap Table?

At the start of a business, most capitalization tables are established in a spreadsheet. It should be structured carefully around a few important elements.

Ownership share refers to who (founders, investors, or employees) owns how much of the company and who has control over it. Because most startups require a voting agreement among common and preferred shareholders, this view identifies who must approve significant company decisions (e.g., company sales or reorganization). The section on ownership holdings will frequently contain shareholder names and the number of shares they own.

The share types show who has common stock with no special treatment and who has preferred stock. Preferred stock can frequently be converted to a 1x return on investment.

The other sort of transaction that is frequently shown on a cap table is the debt which can be converted into equity. On a fully diluted basis, this convertible debt is reflected in all ownership calculations. When all existing warrants, options, and convertible notes are exercised, ownership is calculated on a fully diluted basis.

Other factors in your cap table may be included depending on your specific business needs:

• Valuation — total cost of your company’s shares.
• Total Authorized Shares — quantity of shares that your company is permitted to sell.
• Total Outstanding Shares — total number of shares held by all firm stakeholders.
• Total Reserve Shares — number of shares available to employees, also known as restricted shares.

How to Make Use of a Cap Table?

Startup businesses typically have a small number of equity shareholders. These frequently include the founders, their friends and family, and angel investors. Keeping track of who owns what part in the new firm is critical as it expands and raises funds from other sources, such as venture capitalists, and eventually from the general public through an IPO.

The cap table will be updated following each successive financing round to indicate how ownership is diluted and divided across new owners as the company expands. Business owners and startups need to understand and learn how to use a cap table to buy/sell shares of the company they have to grow the business.

Why Having a Cap Table is Important?

The cap table of a firm is one of its most crucial records. It demonstrates who owns the company’s stock, options, and other securities and is critical to understanding the owners’ economic and voting interests. A badly managed cap table can result in poor decisions, due diligence concerns in transactions, and time-consuming and costly “clean-up” procedures.

Even before incorporation, startups are increasingly relying on third-party systems to handle their cap tables. Many entrepreneurs find these tools to be more transparent, easier to use, and cost-effective in the long term than storing (or having their lawyers maintain) capitalization information in a spreadsheet. Other capabilities that startups find valuable include maintaining stock certificates in electronic form, giving option grants electronically, offering analytics on the company’s capitalization, doing Section 409A valuations, and modeling future financing rounds and exits.

A founder must comprehend the full extent of a cap table and why they are so critical to implement. Cap tables are significant because they show investors the overall health of a firm.

Ownership Breakdown

Founders must be mindful of what their cap table signifies for firm ownership at all times. Understanding ownership becomes increasingly important as the firm grows and develops. Cap tables reveal to investors who owns what percentage of a company. Current investors want to know who is in charge. They also want to be able to estimate prospective payouts and dilution under different ownership scenarios. The distribution of ownership in a startup can affect the total worth of the firm for future financing rounds as well as who needs to be present at certain crucial corporate decisions.

Value Tracking

An up-to-date and detailed cap table is essential for measuring a startup’s value over time. Employees find cap tables beneficial in addition to helping current investors and founders grasp the value of a developing firm. A thorough, well-maintained cap table is useful for employees to consult if they have options or stock shares in the startup for which they work. Offering equity is an intriguing strategy for leading firms to attract top people. The capacity to track value in real time by examining a cap table is a significant aspect of a cap table’s worth.

Fundraising

Cap tables can affect potential investors and future fundraising in addition to present investors who use them for forecasting and dilution forecasts for various outcomes on their investments. A cap table allows potential investors to assess how much power and leverage they can hold during negotiations. A cap table’s historical understanding might influence present value negotiations for future financing raises. Furthermore, an existing shareholder can readily select how much of the company to give to new investors in exchange for the capital invested.

Transparency and making Auditing a lot Easier

A well-managed cap can allow your legal team to show your company’s history and holdings with accurate and well-organized information via a cap table in the event of an audit on a startup. In general, a well-organized and well-maintained cap table is crucial for a company’s health and growth in all financial scenarios.

END NOTE: Why keeping the cap table updated at all times is important?

With the variety of cap table management tools available on the market, updating and maintaining your cap table is easier than ever. In general, founders must keep track of their cap table management. To minimize future hassles, if you raise a new round, provide new employee awards, or terminate an employee, you must make the modifications as quickly as feasible. If you put off updating your cap table in real-time, you may end up paying a lawyer to update and rectify the table.

For all these, and for better workflow is why we are here with high-end software. Our cap table management software offers various features suitable for both new and experienced companies. You may create share certificates and board resolutions, conduct valuations, file IRS forms, and record stock compensation with Eqvista. Your cap table may be easily and effectively created and managed thanks to our straightforward interface. To learn more about our cap table services, feel free to drop us a message.