A cap table is a spreadsheet designed for early-stage ventures or startup companies. It lists all the securities of the company, such as preferred shares, common shares, warrants, prices paid by investors for the securities, and the details of the investors. A cap table highlights the ownership percentage of each investor, including the value of the securities and the dilution with time.
This table is the first thing that a company creates before creating other documents. At the early stage of the company, the cap table is often simplified. However, as the company progresses and the financial activities take place, it becomes more complex.
The company would have to include other details, such as initial public offerings, potential funding sources, acquisitions and mergers, and various other transactions. In addition to the records of a company’s financial transactions, cap tables also contain different legal documents of the business.
These legal documents may include stock issuances, debt to equity conversion, transfer of stocks, cancellations, and other documents. These documents must be managed appropriately because it details the events and activities of the organization since inception.
Who Can Use a Cap Table?
As mentioned, a cap table is designed for startups and early-stage ventures. This means that cap tables can be used by entrepreneurs, venture capitalists, as well as investment analysts that have the job role of analyzing critical events of an organization, such as ownership dilution, issuance of new securities, and employee stock options, among others.
The simplest type of cap table covers the details of the shareholders at the start of the business and the respective ownership shares of these shareholders.
How to Create a Cap Table
Many organizations use spreadsheets to make their cap tables at the start of their companies. The fact is that a cap table does not have to be complex at the inception of a business. It should be created in an organized but simple layout to indicate who owns what shares and the volume of outstanding shares in the organization.
The commonly used structure for a cap table is to itemize the investors’ or security owners’ names on the Y-axis and the securities type of the company on the X-axis. A spreadsheet template can also work since it allows for the addition of figures and information associated with the business.
Ideally, the first role of the cap table should show the number of shares available in the company, while the following rows should itemize details such as authorized shares, outstanding shares, unissued shares, and reserved shares.
There should also be another table in the cap table that indicates the names of the shareholders, shares owned by each of them, fully diluted shares, stock options, and options remaining.
How to Update a Cap Table
As the company gets additional rounds of funding, there is a need to update the cap table. Additionally, when a key shareholder leaves the business and transfers their shares to a new shareholder or another existing shareholder, the cap table must be updated to that effect.
Additionally, when an employee retires or is asked to go, this must also reflect in the cap table. Updating the cap table helps venture capitalists and entrepreneurs to use the current information to make informed decisions.
How to Use Cap Tables
Cap tables can be used for a variety of purposes. It all depends on the objectives of the organization. Some of the uses of cap tables are as follow:
- Raise funds for the business
- Hire new employees
- Tax & regulations compliance
- Sale of the company
Conclusion
Cap tables are very important in the scheme of things for startups and early-stage ventures. In this post, we have looked at what a cap table is, who can use it, how to create it, how to update it, and how to use it. With this information, you can get started using your cap table.
