Cap Table Crash Course: Everything You Need to Know Including 4 Ways to Maintain It
You might have noticed the need to list your company’s stake and how much each shareholder owns. How do you make that happen professionally? In this blog post, you will learn how to use and create a cap table and how to maintain it.
A cap table, AKA capitalization table, is a spreadsheet or table that showsa company’s stake in the business. It’s used to list a company’s securities.
This includes stocks, common shares, preferred shares, convertible notes, SAFEs, options, and warranties. It’s also used to highlight how much security each investor owns and the percentage of ownership in the company.
How Do I Make a Cap Table?
Making a cap table is not hard. You’ll need the ownership stake of the shareholders and other data like:
The layout ought to be simple. You should have the name of the investors/shareholders on the Y-axis and the type of securities on the X-axis.
You should also have room for additional information and figures related to the company—for example, unissued shares, outstanding shares, etc.
If you don’t know how to put all this data in one document, there are several simple ways you can do it. The best method for your company will depend on your current ownership structure.
There are three ways you can create a cap table for your company. You can use excel spreadsheets, an online template, or software. Here’s an overview of the three:
Using an Excel Spreadsheet
Spreadsheets are relatively easy to use and offer long-term solutions as you can scale as you grow your business.
Using a Cap Table Template
You can get many cap table templates online and key in your data. The good thing about templates is they come ready-made, and all you need to do is to customize the fields to match your company’s needs. However, they may not be an excellent long-term solution.
Using Cap Table Software
You can also use cap table software. These are flexible to use and have a good management interface. However, they are pretty pricey.
While every shareholder can note down the number of shares in their notebook and keep it to themselves, having a cap table that the whole company can use has many advantages. Here are reasons why this is essential.
Helps Understand Equity Distribution
A cap table breaks down the company’s stake ownership in writing which helps create a good foundation that’s clear from the onset of the business. It also acts as a formal legal record that can be used foraudits or compliance checks.
Helps Manage Employee Option Pool
With a cap table, you can easily allocate a certain amount of stock to employees to compensate them once your company goes public.
The table, in this case, will help you match an employee contribution with their appropriate stock amount. Employees that have worked longer for the company usually get more shares, while those that joined later get less.
What’s more, this table will, at any given time, show you the number of options authorized, available, and used to avoid too much dilution that can cause friction when giving out the shares.
Helps the Company to Run More Efficiently
The company founders can use a cap table to evaluate and ensure the right investors stay in business. They can also use the cap table to decide whether they should issue new shares or share options. Additionally, a cap table can provide insights about your company’s potential growth, success, and legal issues enabling you to move quickly to look for solutions or tap into the opportunities.
Helps Acquire New Investors
When negotiating with investors, you can use this table to show that the company’s founders still have significant stock ownership. This can help motivate investors to move forward in partnering with you. Most investors tend to back away from a company whose founders do not hold significant equity ownership.
After making a cap table, you’ll want to know how to maintain it, as you should expect to edit it now and then, which can cause a lot of structural overlaying that can be difficult to understand. Here are four practical ways you can maintain your cap table.
Record Every Detail
You should ensure the cap table is up to date at all times. If there are changes such as new shareholders, stock options exercise, buying back of company shares, transfer of shares between shareholders, or any other transaction, it should be recorded.
The more frequently the changes are updated, the better, as these changes actually affect individual shareholders’ ownership of the company.
Centralize Data and Share It
You can make your work easier by centralizing the table so that everyone who needs a copy can easily access it. This will reduce the number of spreadsheets you need to make, and you can easily make updates from one place, which will help maintain data accuracy and consistency at all times.
Include Pre-Money Valuation
You should add pre-money valuation (the equity value of your company before receiving a new funding round) when planning to give reference to the fair value of the shares Pre-value money valuation also helps the company understand how much it should get from new investors.
What’s more, adding a pre-money valuation gives new investors an idea of how much ownership they will get if they invest a certain amount into the company.
Add Details of Possible Dilution
Dilution refers to the reduction of shareholders’ equity position due to issuing new shares. When this happens, it decreases the company’s existing stockholders’ ownership percentage.
Frequently Asked Questions about the Cap Table
Here are some common questions asked about cap tables.
Do Investors See the Cap Table?
Yes, investors can see the cap table. They have to see it to help them understand the current ownership stake in the company and evaluate if they should make investments in the company. There is no legal requirement to keep the cap table confidential.
Do Employees Have a Right to See the Cap Table?
Most companies don’t make the cap table accessible to employees. However, there are certain people in the company that will need to be given access to certain information on the table.
Is a Cap Table Legally Binding?
Yes, a cap table is a legally binding document.
Any time a change happens in the company’s ownership stake, it should be recorded in that table. What is usually recorded is what is legally valid. Ownership by investor X cannot be put in the cap table unless that is what they actually own legally. Simply put, the document needs to be legally valid.
Is a Stock Ledger the Same as a Cap Table?
A stock ledger and a cap table are two different things. A stock ledger is a list of stock certificates highlighting when those certificates were issued and to whom. They also show the cancellation history.
On the other hand, a cap table highlights the relationship between the company ownership and the various equity holders.
Who Should Manage the Cap Table?
Different companies choose different people to manage their cap tables.
Some go for an in-house employee, while some opt for legal counsel. The most important thing when choosing someone to manage your this document is looking for someone that’s competent, able to maintain your cap table and provides you with insightful information in a digestible format.
A cap table for your company can help you run your company effectively. It will help highlight the company’s ownership distribution, manage your employee option pool, and influence investors to partner with you.
Creating a cap table is not hard. You can use a spreadsheet, a template, or available software. After creating, you should never forget to maintain it to ensure accuracy and consistency.
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