How to Use a Cap Table to Analyze Your Company's Valuation

Introduction

A cap table is a form of record-keeping that helps manage and monitor information related to the ownership of a startup business. It provides an overall overview of the amount of stock and equity of the company, typically referring to the ownership of the founders, employees, advisors and investors.

The purpose of the cap table is to provide an analysis of a company's valuation. A cap table is an efficient and accurate way of tracking the company's various investments and stock ownership. It allows stakeholders to ascertain the overall ownership of the company and, therefore, the rewards that each stakeholder is entitled to.

Preparation

The foundation of an effective cap table analysis is proper preparation. This section outlines the important steps that companies should take to properly prepare themselves for an in-depth cap table review.

Identify Stakeholders

The first step companies should take before analyzing a cap table is to identify the stakeholders involved in the company’s financial decisions. Depending on the size of the company and its complexity, this may include shareholders, lenders, employees, suppliers, executives, and any other party that holds a financial interest in the company. Once this list is established, each stakeholder’s percentage of the ownership or financial interest can be easily determined.

Collect Relevant Financial Data

The next step in proper cap table preparation is to collect all relevant financial data concerning the company. Data points should include current and past earnings, sales, debts, and liquidations. These figures should be maintained and updated on a regular basis to ensure accuracy when calculating the company’s organizational and equity valuations.

In addition to the basic financial information, the company should also collect any documents related to the investment terms and agreements. These documents are used to determine the terms of the financing and investments, such as ownership percentages, preferences rights, conversion ratios, and other rights. By collecting this in-depth information, the company can properly manage a cap table review to ensure the optimal outcome.

Construct the Table

A cap table is an essential tool to have when it comes to analyzing your company's valuation. Creating the table is relatively straightforward, but there are several steps involved to generate an accurate and useful document.

Establish the Total Equity

The first step in constructing a cap table is to establish the total equity of the company. Equity is the total value of ownership in the business, determined by taking into account all outstanding debt, liquid assets and shares of ownership.

Divide the Equity Among Stakeholders

Once the total equity is established, it should be divided among the stakeholders. Generally, stakeholder equity will include preferred and common shareholders, officers, directors, and other investors. A cap table helps to capture this information in one organized document.

• Preferred shares—Shares denoted as “preferred” have advantages over common stock, such as priority to dividends and liquidation preference.
• Common shares—Shares under this category don’t have priority to dividends and liquidation preference, but they still provide a share of the company’s total value.
• Officers, directors, and other investors—Include all invested parties in the cap table and their associated ownership percentage.

Analyze the Table

A cap table is a great tool to analyze your company's valuation and owners’ equity. You can take the information in your cap table and analyze it in order to get a better understanding of your company’s financial position. Here are a few ways to use a cap table to analyze the valuation of your company.

Identify Dilution of Ownership

One important part of analyzing your cap table is to identify any dilution of ownership that may have occurred. To do this, compare the equity in the cap table to the shares issued before the dilution. This will give you an idea of how much ownership has been diluted and what the impact has been on existing and new shareholders.

Compare Valuations to Market

Another way to analyze the valuation of your company is to compare the valuations to those of the market. Take a look at the valuations in your cap table and compare them to the valuations of other similar companies in your industry. This will give you an idea of whether you are undervalued or overvalued in the market.

Once you have done the analysis, you can use the results to address any issues with ownership and valuations. This will help you make decisions that will benefit your company and hopefully increase its value.

Record Table Updates

Recording updates to a cap table is essential for accurate analysis of a company’s valuation. Investors, shareholders and company owners should always have an up-to-date version of the cap table to determine a company’s present value.

Record New Investments

It is important to document any new investments into the company. New investments can come from a variety of sources such as a loan, private investors, grants or venture capital. Anytime new funds are allocated into the company, it must be added to the cap table. This makes it easy to calculate the amount of equity a particular investor holds in the company.

Track Changes to Shareholder Stakes

Changes in shareholders’ stakes should be tracked as well. This includes any new shareholder purchases, stock splits, and dilution. Each one of these changes will affect the amounts of each share held by investors, which in turn affects the company's valuation.

Keeping track of these modifications is important in order to get accurate data when analyzing the company’s valuation. All changes need to be recorded in the cap table, and any confusion or discrepancies should be clarified before continuing.

Leverage the Cap Table

A cap table (or capitalization table) is a summary of all financial commitments made to your business and serves as a pivotal tool for analyzing the company’s current status. Estimating valuation and ownership percentage can give good insight into a company’s potential fundraising opportunities, as well as strategic decisions. Here, we will highlight two ways to use the cap table.

Use for Fundraising

Having an accurate cap table helps when evaluating potential fundraising and investments opportunities. Investors use the cap table to assess the current shareholding structure, evaluate equity and ownership percentage, and calculate the potential pre-money and post-money company’s valuation. The information included in the cap table allows the investors to make a decision based on the company’s overall equity composition.

Utilize for Strategic Decisions

Cap tables are also an essential tool when it comes to assessing more strategic options like acquisition, merger, or sale. The cap table contains all the information needed to calculate and compare the equity held by different investors, stakeholders, and founders. A clear view of the ownership of the capital allows for better decision making when it comes to determining what equity is worth to those who hold it.

The cap table can also be used to determine fair value in cases where large amounts of stock must be issued in a complex arrangement, such as equity grants given to employees. It provides a detailed overview of all the current investors, the nature of their shareholding and the levels of percentage each stakeholder holds. With such information, a clear picture of current equity and ownership can be submitted to stakeholders, investors and potential investors.

Conclusion

The cap table is a core tool used in venture capital and venture financing at all stages of a company’s growth. It can provide invaluable insights into the valuation of a company and its ownership structure. By understanding the key elements to building a cap table, it is possible to analyze its use for various objectives.

At its core, the cap table is a name, a list of shareholders, the value they hold, and a list of transactions. It is important to accurately track the information of shareholders, as well as to understand the various dilution and capitalization methods used in venture financing. It is essential to understand the types of securities issued and to accurately track and update the cap table as new events occur.

Using a cap table is an effective way to analyze a company's valuation. It provides a detailed picture of the ownership structure and enables venture capitalists to make informed decisions. Additionally, a cap table can be used to understand key stakeholders, measure dilution, and evaluate the terms of a particular deal.

By understanding the key elements of a cap table, it is possible to understand its use and its importance in venture capital and venture financing. The use of a cap table provides venture capitalists with valuable insights into the valuation of a company, as well as its ownership structure.