What is Cap Table?
A cap table, formally known as a capitalization table, refers to a ledger used to assess and analyze a company's equity capitalization. The cap table lists all securities, including stock, warrants, and equity grants of a company. Such a capitalization also lists the owners of these company's securities.
Some of the everyday items in a company's equity capitalization include a company's percentage of ownership. In addition, the cap table may incorporate equity dilution and the actual value of equity.
A cap table often gives stakeholders a breakdown of a company's ownership. Also, the cap table helps indicate the distribution of a company's assets. Managing the cap table is essential for startups at the initial stages of development.
It's also a key indicator for more established companies who wish for a transparent organizational structure. For example, a company's cap table may include stock, convertible notes, and warrants issued to various shareholders.
What Does a Cap Table Look Like?
Cap tables often include lists of names or groups with stakes in the organization. Such titles include founders, investors, and familiar stakeholders. Again, the names are on one axis, and the details around each of those are listed.
The table also specifies what type of securities each of the individuals owns. Cap tables also indicate when each investor and founder first invested in the company on another axis. There's never a predefined template on what a cap table should look like.
The format and flow of a company's cap table depend on the company's stage of growth. It also depends on the ownership structure. You may manually create or use an automatic template when creating a cap table.
The Purpose of a Cap Table
There are many reasons why companies need cap tables. Here're some common reasons.
Among the many reasons, you need cap tables is to make better decisions. Therefore, companies must constantly create up-to-date cab tables that can help them develop accurate capitalization information.
Well-developed capitalization information helps businesses make fully informed and quick decisions. Typically, the decision-making process is often slower without a cap table and lacks a basis for justification.
Keep Track of Equity
At first, it may be easy to track equity during the initial stages. However, as the company grows and expands, it may become a reality that keeping equity can be challenging. In such cases, the role of a cap table is to keep track of equity.
Without proper and accurate recording, it's easy to have inconsistencies in the final presentation of equity. The cap table makes it easy for a company to keep track of all the equity and shares owned by all the company investors, founders, and stakeholders.
Nothing is more time-consuming than creating a cap table way into the company's journey. By the time a firm attempts to bring together information about the ownership of the securities, it may often be way later, with notable time lapses.
The consequence of such time lapse is often the need to spare additional time to bring together resources and time to gather and compute information related to stakeholders.
Defined Organizational Structure
Companies that have a cap table tend to have a defined organizational structure. The structure is easy for anyone who wants to learn more about the organization's stakeholders and shareholders. Further, having a clear cap table also helps identify how the company's ownership spreads across the proprietors.
It's a Legal Document
The cap table is critical, given its legal importance. In the United States, cap tables can be used as formal legal records to show equity ownership. However, they need consistent updating for these cap tables to be used.
When the cap table reflects stock ownership changes, it serves a critical purpose as a legally recognized document.
Who Needs a Cap Table?
Most companies grapple with this question. For startups, the cap table is typically one of the most important documents. Likewise, private companies often use the capitalization table to offer critical information to investors about the market value.
If you are a private startup, owning the capitalization table is useful. The table helps offer helpful information about the company's total market value. In addition, most corporations create cab tables to help ease the assessment of investment and shareholders in the company.
Often, investors want to see that companies are reserving enough equity before investing in such companies. Therefore, any organization that hopes to open doors for investors over time should consider creating these necessary capitalization tables.
Cap Tables and Startups
For startups, managing the cap table is a matter of grave importance. It's amongst the best practices for a venture-backed startup. As startups prepare for a round of equity funding, they need to develop a deep understanding of the capitalization table.
It may be a far-fetched assumption that a company can access startup funding without a clear cap table. The good thing is that it's possible to present accurate equity capitalization tables for all to see with a lawyer for a startup.
Startups also need to keep updating the cap tables to reflect the changing dynamics in ownership and interests. Some startups go for the automated cap table software to help them keep tabs on the changes in ownership.
The need to maintain an updated cab table is also helpful towards ensuring that startups send certificates of ownership interest to new shareholders on time. Startups may also need to set up a structure to provide a quarterly and annual preparation of all the 409a valuation forms that would ordinarily affect the company's material valuation.
Examples of Cap Tables
When creating a cab table, many factors come into play. You may need to include specific variables to help you fully capture your company's ownership. A great example of a cap table incorporates the following components.
Total of authorized shares
A good cap table should analyze the number of shares the company has authority to sell, and this is above the number of shareholders already on board.
Total of number of outstanding shares
The table should also indicate the number of outstanding shares held by the principal and medium-scale shareholders.
Reserved shares, also known as restricted shares, are another part of the cap table that's important. These reflect on the total number of reserved shares available to the employees.
What Do Investors Look for in a Cap Table?
Investors understand the obvious conspicuous indicators that a cap table presents. Such include the amount of stock raised and percentage ownership of equity. But beyond this basic assessment of the most common indicators, they also pay attention to some unique things in the capitalization table.
Breaks are among the most important factors that investors focus on when assessing the cap table. Page breaks are a red flag. Companies with lots of investors may be distractive. Page breaks often indicate more investors and can interpret as a potential risk.
Another factor that investors pay attention to is the loners. Investors may have second thoughts if the cap table shows clear signs of uneven equity distribution. Most investors like to see a complete team with notable long-term investments.
Our Commitment to Startups is our Unwavering Legal Support
When dealing with issues as complex and confusing as the cap table, it's so easy to get frustrated. You don't have to go through the complex process of creating and updating the cap table if you have professionals on board.
Our team of legal experts is always eager to help businesses looking for a lawyer for a startup to help with the cap table preparation and updating process.