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...
Variable Costs, Fixed Costs, Total Costs: How Do They Differ?
Nearly every business has both fixed and variable costs. To ensure that your business remains fiscally solvent and profitable, it is important to understand the different types of costs and how to manage them. In general, variable costs relate to the number of items...
Debt vs. Equity Financing: Which to Choose?
Every business needs financing to fund growth. The old adage is true: it takes money to make money. There are two basic types of business financing: debt and equity. Each has its advantages and its drawbacks, and over time most businesses will need both. Finding the...
Strategies for Improving Vendor Contracts
For businesses that are inventory-supported, such as retail, resale, or manufacturing businesses, strategic vendor contracts can greatly enhance your profitability and cash flow. For some companies, vendor contracts are a set-it-and-forget-it portion of the business....
Basics of Business Banking
Every business needs banking services so they can receive funds, pay bills, and finance large purchases. It may be tempting to just use your personal bank for your business needs. However, a business has much greater need to understand and carefully select its banking...
How to Determine Cost of Goods Sold (COGS)
What is Cost of Goods Sold (COGS)? Cost of Goods Sold is also known as COGS or Cost of Sales. It is a critical financial metric that indicates the direct cost of creating or acquiring the goods a company sells during a given time period. This figure helps companies...
7 Most Common Financial Mistakes Construction Companies Make
Strategic CFO, Bradford Pack, discusses the 7 most common financial challenges faced by construction companies. With long project times, sizable material orders, and upfront labor costs, the construction industry often faces a variety of financial challenges. Below...
Evaluating Your Company’s Financial Confidence
An axiom in business is that CEOs and founders must “know what they don’t know.” It’s rare that a CEO or founder has expertise in all arms of the business. Instead, they must rely on identifying their weaknesses and make strategic adjustments—usually by hiring someone...
How Does a CFO Add Value?
CFOs are high-level, strategic experts who optimize financial resources in a company while using those resources to achieve company goals more efficiently and effectively. Unlike bookkeepers, controllers, and accountants whose primary functions are rear-facing,...
5 Hiring Tips from a CFO That Will Save You Time & Money
When is the best time to make a new hire? Hiring too late can mean work (and clients) falling through the cracks; hiring too early can mean unnecessarily increasing your expenses. Payroll is one of the largest expenses a company will face, which makes the decision to...
10 Benefits of Hiring a Virtual CFO vs. an In-House CFO
When your organization decides it’s time to bring in a new chief financial officer, is it better to hire a virtual CFO or an in-house CFO? When many companies think of CFOs, they default to the expectation of a long-term hire requiring an office, six-figure salary,...
How to Determine How Much Your Business Is Worth
Business Valuation Methods & Determining What Your Business is Worth Whether you're preparing for a sale or acquisition, seeking debt or equity financing, or evaluating other strategic business decisions, it's helpful to have a good pulse on the value of your...
Understanding the 9 Core Traits and Qualities of a Successful CFO
As Preferred CFO performs speaking engagements and advisory with CEOs around the country, one of the topics we’re continually asked to address is how to evaluate the quality of a financial team. Among these is answering the question, “What makes a great CFO?” We’ve...
