How to Create a Cap Table for Your Company

Introduction

A capitalization table, or cap table, is a vital tool used to track the ownership of a company. It is a summary of the securities of a business, including both the equity and any debt issued to finance the company. Creating a cap table involves calculating the relative ownership of a company, from its earliest investors to the present day.

The primary purpose of a cap table is to provide an accurate and up-to-date overview of the equity of a business. This includes who owns what and how much the shares that the owners have are worth in the event of a sale, liquidation, or exit. A cap table also serves to show the total dilution of a company, which helps investors and entrepreneurs understand the structure and make a prudent decision about the value of their investments.

Having a well-organized cap table can provide many benefits to a business, including:

• Providing financial transparency to investors and stakeholders
• Highlighting the ownership structure of the business
• Tracking the cost basis of investments
• Identifying and calculating the ownership distribution
• Valuing securities for tax purposes

Who Uses a Cap Table

A cap table, or capitalization table, is a document that outlines important information about a company’s ownership structure and security issuances. It is a key tool used by both the issuing company and investors. This article will discuss the different players that use a cap table, including company founders, the issuing company, venture capital firms, and investors.

Company Founders

When company founders are starting off, they will create a cap table to help them determine how to issue and manage their equity to shareholders. A cap table accurately outlines the ownership, type of security issued, and number of securities issued to each individual shareholder. This helps company founders accurately assess their current ownership situation and evaluate the best approach moving forward.

Issuing Company

The issuing company will also use the cap table to track their security issuances. This allows the company to have an up-to-date record of its ownership at any given moment. Additionally, the issuing company can use this information to determine a fair price in the event that they need to issue any more securities.

Venture Capital Firms

As venture capital firms assess a potential investment, they need to evaluate the company’s ownership structure. Having a cap table allows for a quick and accurate assessment of the company’s current ownership situation. This information can then be used by venture capital firms to assess the company’s risk/reward profile.

Investors

Investors rely heavily on the cap table in order to understand the ownership structure of the issuing company. The cap table can provide investors with important information, such as the number and type of securities issued, who the key shareholders are, and the ownership structure. This information is invaluable to investors who are considering an investment in the company.

Items to Include in a Cap Table

A cap table is a snapshot of the ownership and financial structure of a company. A comprehensive cap table lists key information regarding its capitalization, which is important when calculating financial performance or fundraising. It is essential to know what to include in a cap table in order to have a useful, accurate document. The following are some of the most important items to include:

Equity Owners

The equity owners of a company should be listed on the cap table. This identifies who owns stock and how much they have. It is important to include the name of all shareholders and the amount of equity they hold. This information should be compared to the total amount of outstanding shares to determine the individual ownership in a company.

Equity Owned by Owners

The amount of equity owned by each equity owner listed in the cap table should be detailed. This includes the number of outstanding shares for a company, the number of shares owned by individual owners and the percentage of ownership for each. This can help analysts, investors and shareholders to better understand a company’s capital structure.

Exercise Price per Share

The exercise price per share, known as the strike price, is the price that an owner pays when they exercise their right to buy or sell a share of company stock. This should be included in the cap table in order to provide an understanding of the company’s financial structure. The exercise price can also be used to calculate potential future value.

Type of Security

The type of security should be listed on the cap table. Common types of securities include common stock, preferred stock, convertible notes, warrants, options and other non-converting debt. Knowing the type of security held by equity owners is important for understanding how securities may affect ownership and any potential future value.

Dates Associated with the Ownership

The dates associated with the ownership should be listed in the cap table. This includes the date when securities were issued and the dates when ownership was transferred. This information should be used to ensure that the accounting for ownership correctly reflects current ownership.

Vesting Information

Finally, the cap table should reflect any vesting information associated with the securities. Vesting generally refers to the process of shareholders obtaining full ownership of their stock over time. This can include cliff vesting or graded vesting, which are both terms that need to be detailed in the cap table in order to accurately reflect the ownership of a company.

Defining Equity

Creating a cap table for your company means understanding and accurately defining the different kinds of equity categories used. This includes common stock, preferred stock, restricted stock units (RSUs), convertible notes, and warrants.

Common Stock

The most common type of equity is common stock. Common stock is the cornerstone of an equity investment because it conveys ownership in a company and entitles the holder to certain shareholder rights. Common stockholders are last in line when it comes to the payment of dividends and other distributions, but they are first in line when it comes to receiving proceeds from the sale of the company.

Preferred Stock

Preferred stock is another kind of equity that typically gives holders a higher priority claim to dividends and other distributions. This means that preferred stockholders are first in line when it comes to the payment of dividends and other distributions. Preferred stock does not typically carry the same voting rights as common stock, although in some cases it may. It is important to note that preferred stock does not automatically give holders the right to receive proceeds from the sale of the company; rather, these rights depend on the specific terms of the preferred stock.

Restricted Stock Units (RSUs)

Restricted stock units (RSUs) are another equity category that may be included in a cap table. A restricted stock unit (RSU) is a type of equity award that is given to an employee in certain circumstances. Unlike common or preferred stock, the employee does not receive immediate ownership of the stock; rather, the employee is given the right to receive the stock once certain vesting requirements have been met. This means that, while the employee will ultimately receive the stock, they do not have any ownership rights until the vesting requirements are met.

Convertible Notes

Convertible notes are also often included in a cap table. Convertible notes are debt instruments that can be converted into equity at some point in the future, usually at a pre-determined conversion price. The terms of the convertible note may also provide for the issuer to repurchase the notes at a certain price or to extend the note's maturity date. Convertible notes provide financing to the company while allowing investors to benefit from possible upside associated with the conversion of the notes into equity.

Warrants

Finally, warrants may also be included in a cap table. Warrants are similar to convertible notes in that they can be converted into equity at some point in the future. However, warrants are typically issued alongside an equity investment and give the investor the right to purchase additional shares at a predetermined price, rather than converting the debt instrument into shares. Warrants are typically part of a larger equity package and are used to incentivize an investor to commit to an equity investment.

Creating a Cap Table

Creating a cap table is an important step for any company, especially when raising money for investments. A well-structured cap table will allow company owners to keep track of the equity structure of their company, including the type of security, the number of shares outstanding, vesting schedules, and the current equity recipients.

When creating a cap table, it is important to gather all the necessary financial and personal information. This includes recording the total number of authorized shares, granting numbers, and the prices per share. In addition, company owners should record the type of security, such as common and preferred stock, and document the percentage that is issued to each shareholder.

Collect Necessary Financial and Personal Information

When creating a cap table, it is important to gather financial and personal information from shareholders, including their contact information, the type of security they are receiving and the amount of equity they are holding. This information should be accurate and up-to-date as it will be used to calculate the company's ownership structure.

Assign Stock Ownership

Once the information is collected, company owners should assign stock ownership and record the exercise prices. This is especially important for investors and early stage founders who need to know how much equity they will receive. Exercise prices should be determined based on the market value of the company, and owners should also record additional information such as vesting schedules and exercise prices.

Input Share Amounts

Once the type of security is known and the exercise prices are set, owners should input the share amounts. This is a crucial step as it will determine the ownership structure of the company. Share amounts should accurately reflect the number of authorized shares, granter shares, and the number of shares each shareholder holds.

Record Grant and Vesting Dates

Recording grant and vesting dates is an important part of creating a cap table. Grant and vesting dates are when the stockholder will receive their shares and when the shares will vest. Grant dates should include the date when the investor received their shares, and vesting dates should be based on the terms of the grant. It is important to document these dates accurately as they can have an impact on the equity structure of the company.

Creating a cap table is important for company owners to keep track of their equity structure. By collecting necessary financial and personal information, assigning stock ownership, recording exercise prices and inputting share amounts, owners can create an accurate and well-structured cap table. In addition, recording grant and vesting dates is important as it can have an impact on the equity structure of the company.

Benefits of a Cap Table

Creating a cap table for your company is essential to provide founders with vital financial information and clarity regarding ownership. Knowing and understanding the ownership of the company can drastically improve decision-making processes and allow for smoother development of your business as it grows.

Provide Founders with Vital Financial Information

A cap table compiles all financial data regarding the company’s assets into one place for easy access. This enables founders to keep track of the company’s financial status and better understand the estimated values of assets. Having the information gathered in one place also allows founders to respond more quickly to investor inquiries and to determine the amount of equity in their venture.

Clarity between Founders Regarding Ownership

A cap table also provides a good understanding of the ownership stake of each founder in the company, broken down into its various components including equity, shares, and founder interest over time. It clarifies the balance of ownership between each founder, giving insight into who gets what percentage of the company in the event of a sale or liquidation.

Assist in Making Decisions Based on Ownership

A cap table not only helps founders better understand the equity of their business, but also gives them insight into how decisions should be made based on the ownership of the company. Whether it is the division of profits in order to facilitate reinvestment or a decision between the founders on how to structure a transaction, a cap table can help coherently execute decisions that benefit the company as a whole.

Make Changes as Company Grows

As a company grows, the dynamics of ownership between founders also changes. A cap table can be used to make necessary adjustments as these changes occur. It provides an understanding of how new forms of capital affect the ownership of founders and makes it easier to calculate the impact on equity. This helps the company stay organized and accurately reflects the status of the venture over time.

Conclusion

Cap tables are an essential tool for any company. An up-to-date cap table better positions founders for financing conversations and provide more transparency on ownership structure. Many investor and venture capital firms require an up-to-date cap table prior to investment.

Constructing a cap table is a detailed process, however the rewards far outweigh the effort. Analysing and understanding your cap table will enable you to make important ownership and dilution decisions. A cap table should be periodically reviewed and updated to ensure that it is up-to-date and accurate.