All types of companies may use a capitalization table, but it is important to understand the relationship between cap table management and your board of directors. Cap tables are most commonly used for startup companies and companies that are in the early stages of business. Private companies often use cap tables internally to get a clearer understanding of the company’s investors and the market value of the company.
A cap table is a spreadsheet or table that depicts the equity capitalization of a business. It’s used as a key point of reference for business managers. A capitalization table is always considered when making financial decisions that have an impact on market capitalization and on the market value of the company. Cap table management is a complicated process. Most startup companies struggle with it.
Because the cap table provides a clear picture of a company’s worth, it’s vital for the table to be accurate at all times. It also must be customized according to the business’s needs and regularly maintained so that the board can make wise and informed decisions based on the most current information available.
Many different people need access to the cap table, which causes some issues. Too many people updating it poses the risk that it will be inaccurate. With so many people having access to the cap table, it poses a security risk for highly confidential business information. These are issues related to manual spreadsheets. Technology gives us a way to control who can access the cap table and document what changes were made and who made them.
What Information Does a Cap Table Include?
The scope of a capitalization table details the total market value of a company and its various components. According to Investopedia, the table lists each type of equity ownership capital, individual investors and share prices. It also provides a breakdown of the company’s shareholder equity.
A capitalization table includes equity shares, preferred equity shares, warrants and convertible equity. It may include details on potential new funding sources, mergers and acquisitions, public offerings and other hypothetical transactions.
Creating and Managing a Capitalization Table
As difficult as it is to create an accurate capitalization table, it’s just as difficult to manage it so that it continually provides clear, updated information. There is software that simplifies this like our partners at EquityEffect.
A company’s cap table can be viewed in conjunction with the shareholders’ equity portion of the balance sheet, which also provides details about the company’s equity capital structuring. The table depicts each investor’s equity capital stake in the business. This calculation is done by multiplying the share price by the number of shares owned.
Typically, the creator of the table lists the names of the security owners on the Y-axis and the types of securities on the X-axis. Each investor’s holdings should be shown in a single row.
A capitalization table can be structured in various different ways. Usually, the format is geared toward the target audience. Sometimes, cap tables list investors by founders first and then follow them with executives and key employees who have equity stakes. Angel investors, venture capital firms and others who are involved in the business plan would follow on down the line.
Another way of creating a cap table is to list investors in order, with the largest shareholders at the top and the lowest shareholders at the bottom.
One of the greatest challenges in utilizing a capitalization table is keeping it continuously updated. Common changes that can be difficult to keep up with include when companies sell new shares of current securities or they issue shares of new securities. Other changes include increasing the offering of options and offering options to employees.
Companies also must update the capitalization table when an employee leaves the business and their options terminate with their employment. In addition, companies must update the capitalization table when options expire, when investors exercise vested options, and when investors redeem, transfer or sell their shares.
Addressing Cap Table Management Issues in the Most Secure Manner Possible
In simple terms, a capitalization table is merely a ledger that keeps track of who owns what portion of the company. Yet, cap table management isn’t simple because many things can complicate it, such as complications in tracking, presenting debt, convertible debt option, warrants and derivatives holders. These issues can cause ledgers to get out of control quickly.
Capitalization tables have long been done on manual spreadsheets. However, manual processes are quickly becoming outdated, as they’re inherently difficult to keep updated and they lack security controls.
Many different people need to get information from the company’s cap table. Many people also need to update the cap table, such as the accounting department, board directors, senior managers, invested parties with partial ownership and lawyers. When the proper parties don’t have access to the cap table, it creates a lag in getting the table updated. Lack of secure communication means that no one is sure if the table is accurate and up-to-date.
The manual spreadsheet process is quickly becoming outdated, as it takes a lot of time to update it and it also presents numerous opportunities to create mistakes due to human error. The modern solution to managing a capitalization table is to use a cloud-based, centralized system with state-of-the-art security and granular permissions.
EquityEffect is a cap table management company that provides a secure, centralized system that gives companies control over who can access the cap table and ensures it stays updated in real time.
The platform makes it easy to organize and track cap table management. Digital tools for automated calculations and formulas decrease the chances of mistakes due to human error. An online system makes it easier to remember to include the many new or small changes that need to be made to the cap table. As the table can be continually updated in real time, EquityEffect’s platform makes it easier to factor in liquidity in the most accurate way. Real-time updates will match information that’s stated and formalized in legal documents, which also helps to avoid future confusion.
Most of all, having the ability to control who updates the table, and being able to ascertain who has made changes to it and when those changes were made, means that the cap table will be as accurate as possible at all times.