How to Use a Cap Table to Track Your Equity Holdings

Introduction

A cap table (short for 'capitalization table') is an essential tool to track equity ownership in a private company. A cap table is a long-term record of all security issued, the percentage ownership of each security, and any changes that have taken place over time. The purpose of using a cap table is to track and manage the ownership percentage of individual shareholders, as well as report commitments and distributions.

Definition of a Cap Table

A cap table is a document containing the list of all shareholders, the number of shares (both common and preferred) that each shareholder owns, and the associated value for each share. This information is essential for any organization performing dilution analysis, understanding ownership structure, or calculating the estimated value of a company.

Purpose of Using a Cap Table

• Track conversion events and percentage ownership of each investor
• Pass financial audits and competently answer investor questions
• Evaluate the valuation of a company, both pre- and post-investment
• Compute returns for shareholders upon exit
• Calculate dilution and forfeited equity upon the issuance of additional equity

Gathering Necessary Information

Using a cap table to track your equity holdings requires gathering certain types of information about your company’s capital structure. This will involve keeping records of the company’s equity and rights documents, as well as key information regarding the series and types of share issuances.

Types of Equity and Rights Documents

You should first gather any equity and rights documents that were created when the business was founded and when subsequent equity grants were made. This includes articles of incorporation, partnership agreements, share purchase agreements, and documents related to any dilution events that have occurred.

Key Equity and Rights Information

Next, you’ll need to collect information such as the number of issued shares and the class of shares, who holds what amount of equity and the dates of grants, vesting terms of option grants, and any vesting acceleration or layoffs that have occurred. In addition, you should also note any important events such as lockup periods, funding rounds, dividends, or preferred stock conversions.

Gather Series and Types of Shares

The number and types of issued shares will vary depending on the company and its capital structure. Typical types of shares include common, preferred, and restricted. Some companies may also include classes of floating or par value stock. It’s important to collect data on the number and types of issued shares as this will be essential for deriving the fully diluted share count of the company and for modeling different financing scenarios.

Entering Information into the Cap Table

Creating and maintaining a cap table is a critical task for any company that tracks and manages its equity. A cap table is an essential tool for monitoring equity owner categories, security rights, historical activities and more. To ensure your cap table accurately reflects your company's ownership structure, you'll need to understand how to enter and update the relevant information. Below are a few helpful tips for getting started.

Creating Owner Categories

The first step in setting up your cap table is to create your investor and equity owner categories. These may include current stockholders, founders and other equity holders, as well as employee categories. Make sure all of the relevant information for each category is successfully captured, including whether or not they are restricted stockholders, and note any special class of equity.

Entering Equity and Rights Information

Once all the ownership categories have been established, it’s time to enter in the relevant equity and rights information. This includes the total amount of equity owned, the percentage of the company owned, and any associated securities such as options, warrants and convertible debt. Additionally, you'll want to include any restrictions or contingencies placed on the equity.

Supplying Historical Activity

Finally, you'll want to include any relevant historical activity. This may include changes in equity ownership, additions or reductions in the number of shares, or even the granting of security options. Make sure to include documentation and records for the various transactions to ensure accuracy in your cap table.

Managing Your Owners in Your Cap Table

Understanding who owns what equity in your company is essential for managing your cap table. Accurately documenting the equity and rights each shareholder owns helps facilitate communication, project capitalization, calculate a company’s value, and identify when investor rights have been triggered.

Assessing who is Currently Owning Equity

The first step in managing your equity holders is to assess who is currently owning equity. Many times the shareholder may be an individual, a group, or a company. The cap table should be updated with each investors name, the number of shares, type of security held, and the contact information. Updates should be made as soon as any changes occur, or any new investors come into the fold.

Updating Equity and Right Information

The next step in managing your equity holders is to keep track of updates to the equity and rights. This includes adjusting the number of shares, the type of security held, and the exercise price of stock options. This information should be kept current to ensure the cap table reflects accurate information about each investor.

Documenting Shareholder Transfers

Shareholder transfers are inevitable as companies progress. As soon as a transfer occurs, the shareholder information needs to be updated in the cap table. This includes the shareholder’s name, number of shares transferred, the type of security they are transferring, and the contact information of the person or entity they are transferring the shares to. This ensures the current shareholders and their interests are accurately reflected in the cap table.

Once the shareholder information is updated and documented in the cap table, investors should also be updated with any changes. This helps ensure all shareholders are aware of the investor’s rights and any changes that could affect their equity holdings.

Generating Reports

A cap table provides investors, management teams, entrepreneurs, and venture capital firms with live, actionable data that can be used to quickly produce accurate reports. These reports can help facilitate decision-making and offer insights into complicated data.

Automatic Real-Time Reports

The automatic aspect of a cap table allows real-time reports to be generated quickly and without the need to manually input data. This means investment fund and management teams can get immediate reporting on their equity holdings and quickly manage their investments.

Ability to Customize Reports

A cap table allows users to quickly customize reports. This feature allows users to select specific data points to include and tailor reports according to their own specific needs. This can help to filter data for a specific purpose so that users can focus on the most relevant information without having to comb through large amounts of data.

Upload Reports in Different Formats

A cap table gives users the ability to upload their reports in different formats, such as Excel spreadsheets, CSV, or PDFs. This allows for easy access and sharing of data across teams, investors, and other stakeholders.

Using a cap table to track equity holdings can help users quickly and accurately generate reports, customize reports, and upload reports in different formats. This makes data management easier and more efficient for investment funds and management teams.

Using Your Cap Table As a Tool

A capitalization table, more commonly known as a cap table, is an essential tool for tracking and managing your equity holdings. It provides insight into who owns what in the company, and is used to track any changes in equity ownership that might occur. By properly utilizing your cap table, you can gain a clearer picture of your company’s overall financial health.

Using Your Cap Table as a Reference

A cap table should be seen as a living document, constantly updated to reflect the most recent changes in equity ownership. It is important to regularly review and update your cap table in order to make sure that it is accurate. In addition, that information can be used to track the value of your equity holdings over time and inform future investment decisions.

Adding in Anti-Dilution Functionality

In certain cases, it is also beneficial to add in anti-dilution functionality to your cap table. Anti-dilution measures allow you to protect your equity holdings from dilution caused by additional rounds of financing. These measures can help make sure that any new financing rounds are not unfairly cutting into the value of your equity.

Utilizing Accounting Tools

There are several accounting tools available that can help you properly manage and utilize your cap table. These tools can include software solutions for tracking your equity holding, as well as services that provide access to financial and legal experts who can guide you in understanding and utilizing the information in your cap table.

• Software solutions such as SeedLegals, Carta, and Eqvista can provide users with an efficient way to track and manage their equity holdings.
• Services such as LegalZoom, OnCounsel, and CooleyGO can offer access to financial and legal experts to guide entrepreneurs in making sure they are utilizing their cap table information properly.

Conclusion

Using a cap table to track your equity holdings is a smart, efficient way to record, track, and manage equity for organizations of any size. A cap table ensures that decisions can be made quickly and accurately, and that all stakeholders are regularly informed about the company's equity and finances.

Summarizing the Benefits of a Cap Table

Organizations that use cap tables benefit from the following:

• The ability to view and update equity information in real-time, resulting in increased accuracy.
• Streamlined reporting and compliance requirements.
• Expedited decision-making processes.
• Improved shareholder communication.
• Reduced costs due to simplified recordkeeping.

Reminding Reader of Cap Table's Primacy in Equity Management

Cap tables are the gold standard in equity management. They are highly versatile tools that enable organizations to quickly and accurately track, manage, and record their equity. By leveraging a cap table for equity-related operations, organizations can benefit from greater accuracy, improved communication between stakeholders, and cost savings.