What is a Cap Table?
Capitalization tables, commonly called “cap tables,” are highly useful spreadsheets maintained by companies that have multiple owners or investors. Cap tables are especially important for private companies at startup and in the early stages of the enterprise. They help business owners make critical decisions regarding market capitalization, equity ownership, taxes, debt-to-equity ratio, and more.
Simply put, a capitalization table lists all the shareholders of the business and what percentage of ownership each shareholder has. This is a living document that should be updated often.
A capitalization table often begins as an Excel spreadsheet that is kept up to date manually. As the number of shareholders and the complexity of the business increases, the job of maintaining the capitalization table usually migrates to an accounting software package.
What Does a Capitalization Table Look Like?
The contents of a capitalization table will vary based on the structure and circumstances of the company, but here is a simple example:
The capitalization table clearly identifies the owners of the company and the percentage of equity ownership each shareholder has. Typically, the table is divided by shareholder type and stock type. Shareholders may include founders, executives, key employees, angel investors, venture capital firms, and others.
Alternatively, some companies choose to list shareholders in descending order by ownership percentage.
Additional related information may be included as needed for decision-making by company executives. For instance, it may include details about different rounds of funding, public offerings, mergers, acquisitions, and significant financial transactions.
No matter what format is chosen for the capitalization table, the most important thing is to keep it up to date. Each time a shareholder is added, vested options are exercised, key employees leave the company, new funding is obtained, etc., the table needs to be updated so that proper decisions can be made.
How Is a Capitalization Table Used?
The capitalization table is a key reference point for business decision-makers. It should be consulted whenever any financial decision is made that involves the company’s market value and capitalization.
Fundraising
Capitalization helps management monitor the effects of different fundraising efforts. It helps determine the company’s debt to equity ratio. It can be used to monitor employee stock options, convertible securities, and the number of shares that are issued and how many are still available.
Decision-Making
The capitalization table shows the current equity state of the company and, over time, indicates the effects of major financial decisions such as stock issuance. It is an important tool for financial forecasting and course corrections.
Another important use of the capitalization table is to monitor the decision-making power of individuals and groups. Typically, the amount of decision-making power is equivalent to the percent of ownership a shareholder has. The capitalization table can indicate whether too much power is being consolidated under a particular individual or group, which might skew the direction of the company.
Financial Analysis
The capitalization table helps entrepreneurs and investors analyze the current state of the company’s capital and predict the effects of significant financial decisions. A capitalization table that shows continuous positive gains can improve the confidence of prospective investors. It can also help key employees understand the company’s financial situation and build their trust.
Company Valuation
When a company is sold, acquired, or merged into another business, any proceeds are generally distributed to the shareholders. An up-to-date capitalization table makes this a straightforward process by indicating the priority of shareholders and what percentage of the proceeds should be distributed to each.
A company’s liquidity is usually determined by a waterfall analysis. This process calculates the amount that each shareholder would receive if all of the company’s assets were converted to cash. The analysis depends heavily on the accuracy of the capitalization table.
Taxation
Capitalization tables also helpful in the preparation of tax returns by showing the ownership levels of the various investors. Investors and employees may need this information for their own tax returns. It is critical to keep the capitalization table updated; otherwise, the company or its shareholders may pay too much or too little in taxes and face consequences.
Importance of the Capitalization Table
A capitalization table records all capital increases, decreases, and financial transactions that materially affect the ownership, market value, and market capitalization of a company. This includes such things as issuance and cancellation of shares, stock options, assumption and payment of debt, etc.
The capitalization table should be one of the first documents a company generates when starting up. It helps company founders, investors, financial advisors, and others to determine the financial state of the company when major decisions need to be made. As the company grows and the capitalization table becomes more complex, it can become more and more useful as a resource for financial decision-making.
In Summary
A capitalization table, or “cap table,” is a document that indicates a company’s equity capitalization, meaning all securities such as common shares, preferred shares, and stock options. It lists all the shareholders, how much stock they own, and what percentage of ownership they have in the company. A cap table is a critical resource at the startup stage and remains a valuable tool as the company grows. The capitalization table helps determine the market value and market capitalization of the company. It helps executives and investors make important financial decisions. Over time it shows the effects of those decisions.
If you would like to learn more, or have need of financial assistance for your business, we invite you to visit preferredcfo.com or contact one of our CFOs.
About the Author
Don Calcote
CFO
Don Calcote has over 40 years of experience as CEO & President, Chief Financial Officer, and Senior Commercial Lender in the banking industry. Don’s extensive experience and historical success in seeing a business through all stages of growth brings expert perspective and insight to companies in a wide variety of industries.
You may also be interested in...
Setting up? Accounting Pitfalls to Avoid
There are a handful of guidelines with respect to setting up an accounting system correctly that are widely accepted. Consider these: Set up a reliable accounting system such as QuickBooks and tie the system to your bank accounts, and as many systems as you use....
Make or Break Your Business: Choosing Accounting Software
Every business is unique and has different accounting needs of its software. There is no single accounting software that is the best or every industry or business. It’s not worth the time or the reading to compile a list of all industries and the best software for...
Hiring the Right Bookkeeper
Strong bookkeeping should be an undisputed given for any company. The benefits of bookkeeping cannot be overstated: its the core to deriving valuable information about a business’s operation in order to make valuable decisions. An exhaustive list of the benefits can...
Reigning in Loose-Cannon HR Departments with Finance Metrics
The human resource department is complex for a number of reasons, centered on the fact that people are complex, their motives are complex, and their decisions are complex. Not surprisingly, whether you’re a large or small company, your finance and human resource...
Stepping into the Minds of Consumers – a CFOs Perspective
Traditional economics teaches us that consumers are rational and accordingly make decisions in a rational manner. They seek to maximize their utility (the use or happiness they get out of products and services) by purchasing and consuming until they reach diminishing...
How to Attract and Retain a Strong Millennial Workforce
I believe some confusion exists in the workplace regarding millennials. Once we get past the often erroneous stereotype of feeling entitled and not willing to work, millennials can add a lot of value to any workplace, with the right touch. Many employers try to attain...
3 Strategies to Make Your Budget Count
A budget shouldn’t be something you draft at the beginning of the year, stash away in a drawer, and then compare with your year-end numbers to see how you did. That may sound ludicrous, and that’s because it is. Unfortunately, the way many business owners use their...
The “Right” Investor Depends on Timing
Too many entrepreneurs approach fundraising thinking that all money is the same. “An ‘investor’ is someone with money, and therefore all people with money can be an investor in my business.” Well, not exactly, and here’s why. The right investor entirely depends on...
Five Common Finance Mistakes Made by Startups
Entrepreneurs are gutsy. They understand the customer, and they are always trying to provide the right value to the customer. But sometimes entrepreneurs make mistakes. Especially when it comes to the finances of the business, which are not always at the forefront...
Is Your Hobby Considered a Business by the IRS?
Let’s face it—hobbies are born of passions, and at some point you’ve spent so much time working at your hobby that you become somewhat of an expert. Experts of some hobbies can make decent money from amateur hobbyists. You may be in this boat (not too bad to get paid...
Tips for Recently Married Entrepreneurs
You’re laser-focused on meeting customer demand and building your business, and then—Wham!—you meet the person of you dreams, and now you’re building a new family at the same time. Unfortunately, all the efficiencies you thought you’d get by being married (fewer...
Customers Create Success, Not Investors
Success is meeting a customer’s need. Too many think of success as having money, but that’s not true success. True success is having a product that meets customers needs, and a proven method for customers to pay for and consume that product. So why do so many feel...
