What is a cap table?
By Trinity Hanson, Date published: 2021-09-09
A cap table or Capitalization tables are an essential component of all start-up businesses and provide vital information about the ownership structure of your company. Moreover, constructing an accurate, organized, and consistent table allows your business to progress by informing almost all of your financial decisions. This article will elaborate on what a capitalization table is, what information it should entail, and how you can make the most of it as an early-stage company.
What is a Capitalization Table?
A capitalization table, or ‘cap table’ for short, is essentially a spreadsheet record of all securities that your start-up company has issued and who owns them, including common shares, preferred shares, options, and warrants. It is important that your company has a well-structured cap table for investors to inspect how your business has raised money, each investors’ percentage of ownership in the company, the value of their securities, and dilution over time. Essentially, the cap table encompasses all the information typically present within the ‘shareholders’ equity’ section of your balance sheet, in order words, the various classes of ownership established in your company. These spreadsheets are typically created before any other company document and progressively become more complex as the company develops.
Example of a Capitalization Table
As previously mentioned, cap tables range in complexity depending on a multitude of factors; for example, the information presented on the cap table may vary depending on the company’s engagement with transactions like the number of funding sources it has, initial public offerings, mergers, and acquisitions, etc. This means that while a company’s cap table should include information about its shareholders’ ownership in its simplest form, it may also be necessary to include other legal documents such as stock issuances, transfers, cancellations, and conversion of debt to equity.
Below is an example of a simple cap table:
Please note that there is a myriad of ways a cap table can be constructed. The details of each section that comprises the cap table are explained in further detail below.
How Do You Make a Cap Table?
In terms of how to construct your company’s cap table, spreadsheets are commonly used at the beginning of the start-up’s lifecycle. For ease of reference, your cap table should be presented through a simple and organized layout, clearly showing who owns certain shares and the number of outstanding shares. The most common structure is to list the name of investors/security owners on the Y-axis, while the type of securities is listed on the X-axis. As the contents of the cap table may be comprehensive, you can simplify this information by grouping all holders into simplified brackets like ‘founders’ or ‘investors’, or similarly, creating a bracket for all ‘preferred stock’ holders.
That being said, there is no fault in providing a more detailed account of your securities by detailing each individual type of security owned by an owner; it all depends on what you deem to be important and how you will be using your cap table. You may choose to add more rows that break down the make-up of total shares within the company. For example, the first row states how many total shares there are in the company, followed by rows detailing the number of authorized shares, outstanding shares, unissued shares, etc. A separate table would then include the names of each shareholder, shares owned by each shareholder, stock options, fully diluted shares, and options remaining.
If you are unsure about how best to construct your cap table or how granular you would like your cap table data to be, feel free to consult Zegal’s team of experts who will provide bespoke advice and expedite the process for you.
Why Use a Cap Table?
Simply put, your company’s cap table informs you on what decisions to make. As an early-stage company, every decision you make will influence and alter your capitalization, sometimes drastically. For example, if an investor or director requests options covering a specific percentage of the company, you need to be able to quickly evaluate whether this offer is viable, exactly how many shares is representative of the requested percentage of the company, whether you will have sufficient shares remaining in your option pool, and how dilutive the new grant will be to other shareholders. Having an accurate and well-maintained cap table on hand to refer to makes decisions like these significantly easier to make as it gives you a holistic understanding of your company’s framework, allowing you to develop your company with greater confidence.
Is a Cap Table Confidential?
While Capitalization Tables are typically used internally, and so could be considered privately used by private companies, it should also be noted that they should not be considered entirely confidential without security controls. Since the cap table tracks a wealth of information regarding who owns what portion of the company, many different people need to have access to its data, such as the accounting department, the company’s board of directors, senior managers, and lawyers.
How to Update Your Company Cap Table
As your company’s cap table may be accessed frequently by different parties, it is essential that it stays up to date, typically by founders or other executives. This table should be updated in instances including the raising of a new round, when new employee grants are offered, the termination of an employee, etc. You can choose to include this information in a cap table that is manually created and updated intermittently, however, as with all manual processes in the business environment, this is becoming increasingly outdated and can lack security controls.
Alternatively, your company may choose to adopt a centralized platform that gives company members control over who can access the cap table. Using automated software, such as the templates offered by Zegal, allows you to efficiently manage and update your data quickly, and is highly beneficial in avoiding any errors which could result in costly lawyer fees.
Understanding the framework of a company’s ownership structure is essential whether you are an investor or director of a business. Since the information included within each company’s cap table differs across the board, it is important that you strategize as early as possible and construct a table best suited to your own needs and goals. Allow Zegal to assist you in making these complex decisions by consulting our plethora of resources or contacting our experienced team of experts directly.
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DOCUMENT: Shareholders Agreement