What Is A Cap Table? How to read it

4 years ago

Content:

A cap table, also known as a capitalization table and, well to be honest, is nothing but a fancy spreadsheet. A Cap table contains information about who owns those shares or what prices the investors have paid for them.

Therefore, in other words, it can be said that a cap table contains the list of a company’s potential sources of funding, acquisitions and mergers, initial public offerings and other financial transactions. The Cap table tracks the individual shareholder’s equity ownership.

Why do I need a cap table?

A cap table shows you who in your company owns what. Cap table empowers a company to make the right decisions on the basis of its capitalization. How does it do that? – by illustrating the company’s capitalization. This spreadsheet includes all the security holders and shareholders of the company. And it ensures that the share count of the company is equal to the sum of shares held by all the investors, founders, managers, employees, and paid advisors.

How to read a cap table?

Key Terms	Amount	Shareholder	Pre-Money Shares	Pre-Money % Ownership	Investment Amount	Post-Money Shares	Post-Money % Ownership
Pre-Money Valuation	£3384700.00	Founders	6769400.00	100%	£0	6769400.00	80%
Post-Money Valuation	£4230875.00	A Investor	0	0	£634631.25	1269262.50	15%
Price-Per-Share	£0.42	B Investor	0	0	£211543.75	423087.50	5%
		Total	6769400.00	100%	£846175.00	8461750.00	100%

We can easily learn how to read a cap table from the above example. The cap table includes price-per-share, pre and post-money valuation, shareholders, the amount they paid for shares, and the ownership percentage they get.

Now, let’s understand how to read each of these elements.

Pre-money valuation is the amount of money that the company was valued at prior to investment.
Post-money valuation is the amount that it will be worth subsequently. So, Post-Money Valuation = Pre-Money Valuation + Total Investment Amount. Here it is £3384700.00 + £634631.25 + £211543.75 = £4230875.00
The shareholder column contains all the names of shareholders that the company has. As the business grows, this list usually also grows in length.
The price-per-share is calculated by taking the pre-money valuation and dividing it by the number of pre-money shares. So here it goes like this: £3384700.00/6769400.00 = £0.42
Post-Money Shares of investors are calculated by taking Post Money Valuation and dividing it with Price-Per-Share. So, Investor A’s shares amount to £634631.25/0.42 = 1269262.50. Investor B’s shares amount to £211543.75/0.42 = 423087.50.
Investor percent ownership is calculated by taking the investor shares calculated above and dividing them by the post-money shares. So, Investor A’s percent ownership is 1,500,000/10,000,000 = 15% and Investor B’s percent ownership is 500,000/10,000,000 = 5%

How are cap tables used?

Cap tables are important in the case of raising funds. Investors are interested to find out your company ownership structure. They can find out how the previous financing of your company was achieved. Prospective investors want to see your cap table to know their liquidity rank. It helps them to understand the history (and growth potential) of the company.

A well-organized cap table is also used to understand the company’s evolution and derive historical insights. This, in turn, helps in negotiating the present business valuation.

How to make a cap table?

The most common form of cap tables are spreadsheets. Usually, a cap table should be created right at the beginning stage of a business. A clearly organized and simple cap table shows who owns what shares along with what the outstanding shares are. So, the spreadsheet must include a list of the names of the security holders or investors in a column.

Each of these columns should show the types of securities owned by that entity or person.

Apart from that, a cap table or spreadsheet must also include rows on authorized shares, outstanding shares, shared reserved for stock option plans, and unissued shares.

Types of Cap Table

Now, in order to make a cap table, there are a number of methods. You need to choose a method that suits your company’s present phase and its ownership structure.

Excel-based cap tables

Excel-based cap tables are the traditional way to keep track of a company’s shares issued to founders, investors, and/ or other security holders. However, excel based cap tables are becoming outdated and old-fashioned. Currently, there are more efficient and effective ways to manage a cap table.

Cap table templates

Cap table templates are a great way to create cap tables for startup companies. These templates are easy to use and comprehensive for first-time users. It eliminates the need to build your sheet from scratch.

Cap table software

Using cap table software to create and manage your company’s cap table saves a lot of time, money, and effort. If you can integrate a cap table software at the initial stages of your company’s life cycle, then the overall job becomes much easier throughout the process.

Equity management platform

Equity management platforms are great if your company is old enough and raising more money. More so, if you are hiring employees. It does not require you to manually update your cap table every time. Rather, it gets automatically updated. Apart from that, equity management platforms can help you to automatically remain compliant with the necessary rules and regulations such as Rule 144 and 701 that were enforced by US Securities.

How do I manage a cap table?

There are two main ways to manage your company’s cap table. Let’s look at both of them below.

Self-manage

The most obvious way to manage your startup’s cap table is to handle it yourself. In order to do that, there are several solutions (discussed above). You will find many software solutions available for this purpose. This software helps you manage equity, streamline stock issuing, integrating records, and many more. This software is pretty transparent and allow easy online access to stakeholders.

However, there are certain risks to self-managing your cap table. Some of the common risks of self-managing cap table are:

Unintended tax consequences
Lawsuits
Miscalculated valuation
Failure to attract potential investors
Loss of acquisition
Lose fundraising
Failure to comply with laws, statues and regulations

Outsource

You can outsource cap table management to a legal team. A legal team essentially ensures the accuracy, relevance, and consistency of the cap table. Not only that but this way you can make sure that all the compliance needs are addressed properly. The team will take care of your fundraising possibilities and maintain a strong financial structure for your company. It will help you attract potential investors easily.

Conclusion

Managing a cap table is all about accounting and spreadsheets. But still, it is not only time consuming but also quite complicated and tedious. Nevertheless, it is highly crucial for your company’s growth. So, you need the right solution. You need such a solution that can provide up to date and accurate equity data for all the security holders or shareholders at any given point of time.

In addition to that, the solution should also address all the mandatory compliance rules. A responsibly managed cap table can eliminate a lot of risks for your company’s future. On the other hand, an improperly organized cap table can create a lot of potential risks for your company. The key is to make sure that your company’s cap table is an asset, rather than a liability.