Whether you’re just beginning your journey as a start-up aiming to grow, or you’re looking to invest in a new venture, understanding how to read and use a cap table can be an incredibly important skill set. Cap tables exist to help you make well-informed financial decisions, you just need to know how they work.
What’s a Cap Table?
Okay, so what is a cap table? A capitalization table often abbreviated to a cap table, is most simply put a comprehensive spreadsheet that breaks down the ownership of a company. Cap tables are most often utilized by start-ups and new ventures looking to chart their financial futures and court investors.
A cap table usually consists of an excel sheet that lists all security holders and shareholders in the company along with what they paid for those stakes. The goal is to have a clear and comprehensive summary of ownership by investor and type.
A cap table should list every equity stake in the company. It must be a living document that catalogs how you have raised money, who owns your company, and in what percentage. At a glance, your cap table should be able to tell you how many common stocks, preferred stocks, and stock options have been issued and to who at any given time.
Because they are living documents that evolve with a company, cap tables need to be continually updated so that they always hold the most current information. It should be possible to tally up a company’s shares at a moment’s notice to be sure that they are equal to the number of shares currently being held by investors and security holders, and that there are no discrepancies.
Cap Tables Aid Investing Decisions
Cap tables are also used to run pro forma financial statements to help companies and investors make decisions with regards to leadership and capital.
If you think of your company as a pie, it doesn’t just matter how many slices you get, but how many slices are cut. The fewer slices you cut, the bigger your piece of the pie. A cap table should keep track of how many slices you’ve cut, and who’s gotten them.
This information is important because it allows potential investors to easily assess what percentage of a company their investment would buy them. It also allows founders to quickly calculate how much of their company they would be succeeding to a venture capitalist or outside investment company in exchange for an infusion of capital.
Cap tables are also important tools for when a company wants to issue more shares as part of say employee incentive plans. It’s common practice as a company grows to include stock options as part of employee incentive plans.
The theory behind which is that ownership stake in a company incentivizes employees to perform at their highest level. These stock options can be a valuable tool in attracting top tier talent to a company, but it’s important to understand how those options will affect your existing stockholders.
When a company considers issuing more shares it must be able to understand how this dilution will affect the proportional ownership of existing shareholders. This is important for both shareholders and founders to understand because it directly affects the percentage of the company they own. That’s not something you want to take lightly, so having a cap table that can quickly formulate those percentages is critical.
When weighing the risks and rewards of investing in a new venture, bringing investors into your new start-up, or issuing new shares to company employees a comprehensive cap table with tested and proven formulas can provide you with important pro forma information you need to help inform your financial decisions.