Startup Glossary: Cap Table
What is a Capitalisation Table?
Here, you can find a detailed answer to “what is a capitalisation table?”
Capitalization tables, or “cap tables,” are spreadsheets that detail the company’s instruments (common or preferred shares, warrants) as well as the people who own them. The prices paid by investors are also included in these tables. There is a breakdown of each investor’s share of ownership in the company, as well as the value of their shares. Before any other company documents, a startup or venture’s cap tables are established. For companies that have had several rounds of investment, the information on potential funding sources, initial public offerings, mergers and acquisitions as well as other events is included in their cap tables.
Now, you learned about “what is a cap table?”
A cap table contains several legal papers, such as stock issuances, transfers, cancellations, and debt conversions. These transactions and records must be handled by the company’s executives to show the company’s history. All shareholders and their respective shareholdings at the beginning of the company’s existence are included in a cap table. The use of tax tables by entrepreneurs and venture capitalists to assess critical events such as employee stock options and the issue of additional shares is widespread.
Creating a Cap Table
Creating a cap table at the beginning of a company is typically done using spreadsheets. In order to make it easy to see who owns what shares and how many there are outstanding, the cap table should be structured in an orderly and straightforward manner. On the Y-axis, investors/security owners’ names are listed, and on the X-axis, the type of securities are listed.
If a spreadsheet template is preferred, the organisation can input data directly into the spreadsheet. The total number of firm shares should be shown in the first column. Rows 2 through 4 should include the following information:
- This is the total number of shares that can be issued by a firm.
- Overwhelming stockholders: The total number of shares held by all corporate shareholders.
- There are an unknown number of shares outstanding.
- Unissued shares are saved for future hires under a stock option scheme.
The following information should be included in its own table in the capitalization table:
- Listed here are the initials of each shareholder who has purchased stock in the business.
- Each shareholder’s holdings in the company: How many shares each shareholder owns.
- Optional shares of a company’s stock Each shareholder has their own set of stock options.
Diluted to their full extent:
- The total number of shares in circulation (helps shareholders determine the value of their shares).
- The number of shares that can still be optioned after the expiration of the current period.
- Entrepreneurs are mentioned first in the table, followed by executives and other stockholders, and finally investors like angels and venture capitalists.
The valuation and ownership components of the spreadsheet are shown below. Hard-coded assumptions are shown in blue, while formulas are shown in black.
Enter the current worth of the company ($1 million) and the number of outstanding shares in the valuation box (i.e. 200,000).
If more than one investor is participating in the funding round, indicate how much each is putting in under the ownership section.
You can find free excel capitalisation table templates on the internet.
How to Use Cap Tables?
Investors want to know how the company’s ownership is constituted and the changes that have occurred in the prior financing rounds while negotiating for new capital. The cap table may be able to answer questions that investors have. The impact of a new investor’s investments on other investors is one example of this. Consequently, they wish to avoid conflicts with other investors. In addition, investors want to know where they stand in terms of liquidity. In the event of a liquidity event, they want to be at the top so that they can be paid back before other investors.
Most businesses now make their cap tables available to employees as well as investors and executives. Employees that do well are more likely to stay with the organisation because of this. Executives need to know how much money they will get if the firm is sold or dissolved. It is more likely that employees will stay with an open company and organised, especially in times of crisis.
Compliance with Tax and Regulatory Laws
Cap tables are commonly used as a formal legal record of stock ownership in most nations, including the United States. In order to determine whether a corporation, its employees, and investors are paying the correct taxes, the tax authorities use cap tables. You may wind up paying more taxes than necessary if the company’s cap tables aren’t updated regularly Companies who fail to pay all of their tax obligations to face hefty fines for making mistakes they could have prevented.
Making Decisions about the Business
Profits from the sale of a firm are distributed among shareholders when the decision is made to sell the business. As shown in the cap table, each shareholder receives a percentage of the company’s profits. An updated cap table helps to avoid any disputes or litigation arising from the distribution of the proceeds.
You can use a cap table (capitalization table) to see who owns your company’s equity. In a nutshell, it’s a current list of all shareholders (employees, investors, and founders). There are two main approaches to preparing a cap table: Software or office programs are available for this. Hope you find this article helpful. Thank you for reading!