What Is a Cap Table and Why Is It Important?

Introduction

A cap table, or capitalization table, is an accounting document that records the ownership of a company. It shows who owns what in the company, and also provides an overview of the company's equity structure. They are an invaluable tool for investors, as well as potential new investors, as they can be used to analyze a company's worth and the potential to raise funds. Ultimately, a cap table can help a company better understand its equity composition and the rights of its owners.

In this blog post, we'll explain in more detail what a cap table is and why they are important. We'll discuss how a cap table is used, why it is critical for entrepreneurs and investors to understand, and how a cap table can give you a better view of the company's equity structure.

What Is a Cap Table?

A cap table, short for capitalization table, is a document that captures a company’s ownership structure. Cap tables provide an in-depth look at the percentages of a company owned by each stakeholder, including any early stage investors, as well as the value of outstanding shares or options. Knowing what’s in a cap table helps companies understand their ownership stake before, during, and after fundraising.

Components of a Cap Table

At its core, a cap table is a document showing who owns shares and/or options in the company. It’s a highly detailed and accurate record of ownership that can be easily adjusted and updated to reflect a company’s current ownership structure. The components of a cap table concretely document a company’s ownership throughout its growth and any major changes. The following breakdown highlights the elements to consider when constructing a cap table.

• Issued shares and options: Common shares, preferred shares, and options directly tied to ownership in the company.
• Shareholder composition: A breakdown of every investor’s share amount, as well as any relevant information about their role within the company.
• Funding events: Historical data about past investments, and dilution calculations showing the percentage ownership of each shareholder.
• Valuation assumptions: A comprehensive look at the data used to determine the value of the outstanding shares in the company.

Purpose of a Cap Table

A cap table, short for capitalization table, is an important financial document that helps companies and their upper-level executives manage equity both in the short-term and long-term. The document is frequently used by venture capitalists and other investors when considering funding a private company. Below are three primary purposes for a cap table.

A. Assist With Fundraising

Cap tables are valuable in the fundraising process, whether a company is going through a private equity round or considering venture capital investments. Investors look to a company's cap table to understand their current ownership structure, the amount of equity held by different owners, and the amount of equity available to offer to potential investors. By having a comprehensive and accurate cap table, a team can provide potential investors with the relevant facts that the investors need in order to make a decision.

B. Represent Ownership Structure in an Entity

Cap tables are useful for tracking the progression of ownership in an entity. Many companies go through several rounds of equity financing, and by recording every new ownership stake in the cap table, it allows company leaders to properly reflect the current composition of ownership in the venture. This data can be used to negotiate more favorable terms when raising capital, and can also provide insight into minority ownership and voting rights in the company.

C. Help Leaders Track Equity Changes

Another purpose of a cap table is to help company leaders keep track of the changes to equity stakes of their company's owners. This includes changes to how much equity a single investor might own, what type of equity it is, and when the changes are made. By having an accurate and updated cap table, company leaders can have a better understanding of the impacts of each equity stake and make informed decisions about future investments in their company.

Types of Cap Tables

A cap table, or capitalization table, is a document summarizing a company's ownership structure. In other words, it records an inventory of the individual shareholders’ and debt holders’ percentages of the company’s shares and their corresponding capital at any given time. There are three main types of cap tables: pre-money, post-money, and modified post-money.

Pre-money Cap Table

A pre-money cap table is the most basic of the three types. It takes its ‘snapshot’ of a company’s ownership immediate before a new round of financing was conducted. Pre-money cap tables are often used to understand the ownership structure of a newly formed or very early stage company. These cap tables are typically used by entrepreneurs and angel investors as they outline the capital structure prior to the new fundraising.

Post-money Cap Table

On the other hand, the post-money cap table presents a snapshot of the ownership structure immediately after a new round of financing has been added. This type of table is most often used to determine how much of the company’s shares a given investor has purchased, to track changes in ownership interests, and to help assess the value of a company as it matures. While pre-money cap tables are most often used early in a company’s life, post-money cap tables become more useful as companies become more established.

Modified Post-Money Cap Table

The modified post-money cap table is considered the most powerful form of the three. It combines the snapshot of the ownership structure that the post-money cap table provides, as well as the equity a given investor is expected to own post-closing of the round. Investors use modified post-money cap tables to get an estimate of their expected ownership stake after the round of funding has closed, as it will not be finalized until the closing documents are signed.

Cap Table Customization

A cap table is a document that outlines the ownership of a company, specifically the distribution of equity among the shareholders. It is important for business owners to understand its components and value. Because a cap table can be customized in many ways, it's important to understand the options and tailor it to meet the needs of the business.

Options to customize equity

The equity structure of a cap table can vary depending on the individual business’s needs. Many investors and business owners opt to use common stock allocations, but other forms of equity can be personalized according to the objectives of the company. This can include incentive stock options, employee stock options, restricted stock units, and even differentiating between classes of stock.

How to customize a cap table

Customizing a cap table requires careful planning and analysis. Owners should determine the best way to structure equity depending on the expected future needs of the business. It’s important to consider the different types of equity available and the potential implications of each type. Owners should also consider the desired overall size of the shareholder base, the potential cost of equity, and the desired liquidity situation for current and future shareholders.

In addition to equity options, it’s important to consider investor rights and preferences when creating a cap table. This could include vesting of stock, ownership percentage thresholds, and dividend preferences.

Understanding the various options available and setting up a well-crafted cap table is an essential step for business owners and investors. With thoughtful customization, a cap table can be used to empower the stakeholders and effectively manage the future of the business.

How to Create a Cap Table

Creating a cap table is an important step for any company. A cap table is a document (such as a spreadsheet) that identifies the ownership of the company’s stock. It provides a clear overview of the company’s capital structure, the ratio of equity versus debt and the differing classes of security holders. Knowing how to create a cap table will help your business make informed decisions.

Steps to Create a Successful Cap Table

Creating a cap table is a complex process that takes knowledge and research. Here are the steps to create a successful cap table:

• Identify all holders of equity including founders, early investors, and any subsequent capital raises.
• Develop a cap table based on data gathered about the share structure.
• Verify accuracy of the cap table.
• Enter details from the cap table into a spreadsheet or other tracking software.
• Determine the company’s total capitalization at the time of a funding round.
• Calculate percentage ownership.
• Update the cap table before and after each funding round.
• Correct mistakes or discrepancies in the cap table.

Formulas to Calculate Percentage Ownership

The next step after creating your cap table is to calculate the percentage of ownership of your company. This can be done using formulas. The calculation of each shareholder’s percentage ownership works the same way as calculating a company’s market value at any given time. To calculate the percentage of ownership, use the following formula:

Percentage of Ownership = Number of Shares Owned / Total Number of Issued Shares

This calculator can be used to help you determine percentage of ownership for each shareholder very quickly. Once the percentage is determined, it can be inserted into the cap table.

Conclusion

A cap table is an important tool and which is used to track ownership structure within a company. It includes the equity owners, any options or warrants issued, and how many shares/maturity terms are outstanding. By having a detailed overview of the ownership structure of a company, it can help inform decisions when it comes to raising equity, issuing new stock and allocating shares.

Cap tables are important because they ultimately help management to assess the liquidity of a company’s stock overall - allowing them to see who owns the company and analyze the funding rounds the company has completed. They can help monitor the overall financial health and performance of the company, as well as inform decisions about allocating funds.

Comparing a company’s cap table to industry averages and competitor companies can provide insight into financial decisions, such as whether to pursue additional rounds of equity or go with alternative financing options. It can also be used to conduct financial analyses of a company before investing in them.