Startup

All you need to know about Cap Table Management

All the newly formed businesses and start-ups find it difficult to keep track of the ownership and shareholders. It can become a challenging task for them. In such cases, cap table management can be of great assistance. It can allow you to track and manage all equity capitalization of the start-up. It is one of the most crucial activities to be set up right from the early stages of a start-up. This article will provide a complete overview of Cap table management.

Meaning of Cap Table

A Cap table, also known as the capitalization table, is a ledger analyzing the equity capitalization of a company. The table includes the company’s share of ownership, equity dilution, and equity value in every investment round. The cap table lists the securities of the company that have been issued.

Although start-ups commonly use the cap table, all types of businesses and companies can use it.

Usually, a cap table delineates the type of equity ownership capital, share prices, etc. Other table types also include information on prospective funding sources, public offerings, mergers, acquisitions, etc. Private companies typically utilize the cap table to give details about the investors of the company and its market value. It can be used by venture capitalists, investment analysts, and business owners to analyze crucial scenarios of dilution of ownership, the issue of new securities, and employee stock options.

Cap Table Management- Brief Overview

A Cap table is not just a business financial instrument but also acts as a legal document showing the legal claims for the company’s assets. Proper cap table management is useful for many, including capitalists, business owners, and investment specialists.

In order to ensure proper cap table management, there must be accurate and regular updating of information. To witness a beneficial result going forward, cap tables should be updated- when the company sells shares, when the shares of new securities are issued by the company when the company’s offerings are raised to new levels when employees resign, or share options expire when a shareholder utilizes its vested stock option, or when a shareholder transfers or sells or redeems the shares.

Doing the aforesaid exercise can ensure proper management of the cap table. Apart from that, mergers and acquisitions and IPOs are a few things that may also have to be altered in the cap table.

Who needs to do cap table management?

The founders may require the cap table of a start-up and business owners. It is the most vital document for start-ups. The start-ups may begin with a small number of owners initially in the form of family members, friends, etc. When the company grows, it may add investors like venture capitalists^[1]. Therefore, the company is required to keep track of such things.

Start-ups can use the cap table to determine the share of company ownership they can give to the investors when inviting new investors to the start-up.

For instance, start-ups may enter into agreements with investors and alter the liquidation preferences or change the founder’s ownership controls. In such scenarios, the cap table becomes effective.

Investors also need to consider the cap table as it provides them with all crucial information. An adequately managed cap table is vital for investors as it allows them to compute the ownership they possess in the company after the investment. They can also analyze the latest shareholding pattern with the help of a cap table.

How does Cap Table Work?

Cap tables help in making business and financial decisions. An organized and updated cap table can provide a clear picture of the equity of the company and its holdings. Some of the usual ways that companies use their cap tables are as follows-

• As a mechanism for raising capital

An updated cap table can be helpful in fundraising that one does for the company. Prospective investors would want to witness a cap table to understand the company’s equity position before investing in it. This is done to allow the company to know the valuation aspect of the company and how their investment can impact investors.

• Compensating employees

It has become usual for companies and start-ups, in particular, to provide their employees with equity ownership in the compensation package. The cap table allows one to track and monitor employee shares, terms, vesting schedules, etc.

• As a means to ensure compliance with regulations

The cap table may not be a legal document; however, it can ensure that the legal documents pertaining to taxes and compliance are managed well and kept updated. It can help professionals to perform their tasks with ease.

• As a channel to seamlessly ensure proper distribution of funds

If a merger, acquisition, or sale occurs, then the cap table clarifies how much every shareholder gets from the proceeds. A cap table that is updated regularly can ensure that lawsuits arising from cash distribution after such an event are avoided.

Inclusions in a cap table

A cap table usually includes the following-

• The total valuation of the company, including the total equity value as well as per-share prices;
• It also includes pre-money valuation, which means the valuation of the company before the fundraising round;
• It includes the amount raised for each funding round;
• It shall consist of post-money valuation, which means the valuation of the company after the raise;
• It also includes the number of shares. This means it can contain the information on the shares that are outstanding for the company that is documented by type and shareholder;
• It shall comprise the company’s list of shareholders and the information about the kind of equity held by every shareholder and the shares held by the shareholder. It shall further comprise details on the ownership of the company;
• The cap table can also include the number of options in the employee pool, forming part of the employee stock option plans (ESOP).

Cap Table Management- Checklist

It is advisable to have a proper record in the form of a cap table for any business, whether big or small. It will ensure that the financial statements are accurate. With the help of cap table software, one can save some time required for filing the information. You can use that time to plan strategic permutations for the company.

Many companies pay firms to manage their cap table. The payment can be in huge amounts. Although it is not a bad option, not every company can afford it; hence, entrepreneurs can use some best practices to maintain and improve the cap table management process.

Some of the best practices have been discussed below, which can be followed by business owners.

• Keep it simple

The cap table should not be complicated; instead should be simple. It should be well-updated. In order to keep it simple, utilize the right resources and put in place accurate details.

The Cap table should be simple to understand, thus avoiding making things complex, which will lead to confusion.

• Ensure all key inclusions

The cap table looks very basic in the initial stages of the business. However, it will evolve with time and may become complex. It should show the overall capital structure of the company and should contain detailed ownership information, as we discussed earlier.

• Understand the value it brings

You should know that the cap table brings value to the business. In case you don’t use it to its full potential then you are lacking at some point; hence you must review your way of dealing. In other words, it should help you to solve business issues. If you can obtain alignment on the business needs, then through it, you can address many problems of the company. 

• Keep it centralized

Instead of making too many spreadsheets and managing the entire data, centralize it on software and share it with those who need it. With the help of software, one can ensure that the company’s information is accurate and consistent.

• Ensure compliance

You should be able to keep up with the compliance of different rules and regulations. Not complying with the laws of the land can be catastrophic for the entire business. Therefore, you should keep track of all the latest updates and amendments in the field of business.

• Review

In the case where a change is made relating to obtaining funding, appointing new employees, or other share transactions, one should review the equity plan and update the table accordingly. You can do that when you hold the regular meet-up with your accountant. As a business owner, you should be aware and know who has made investments in the company. Having an updated cap table will assist you in staying ahead in this aspect. Thus, reviewing and updating are imperative.

Takeaway

Ensuring proper cap table management is crucial to keep all your important transactions organized in one place. Neglecting the cap table can be disastrous for a company. Thus, one should have the knowledge of managing the company’s cap table, which will be invaluable to the growth of the company or business. 

Read our Article: Amendments in the Multi Cap Funds Sector