Businesses, especially growing startup companies, need to create and maintain a record of entities that have a stake in the company. Hence, a capitalization table is created in the early stages of a business venture, often even before other company documents. Having this record will help owners come up with critical business decisions.
To provide an initial view of a startup's initial financial health, a fresh venture should create a capitalization table to show the updated share allocations and percentage of ownership.
A cap table, as it's also called, is typically a spreadsheet that records all the company's securities and the names of its owners, including the costs paid for by the investors to obtain them. Put simply, the cap table shows the total market value of a certain company and its several components.
Whether these things sound foreign to you, or you need to know the basics of cap table management, read on as we discuss few things about this essential financial and legal business tool.
The Basic Elements of a Cap Table
In creating a cap table, most go with the simple method; putting investors' or security owners' names on one side and the type of security on the other side.
But more than reflecting the names of business shareholders and their securities, a cap table may also show the following details:
• Authorized Shares: The maximum number of shares a company is authorized to issue to investors, based on the articles of incorporation. Shareholders can increase these at any time following a majority vote in a shareholders' meeting.
• Outstanding Shares: The actual shares that have been issued to investors from the available number of authorized shares. These may be issued by a company in many ways, which include an initial public offering or when someone exercises an option.
• Unissued Shares: This refers to the number of shares that the company is allowed to issues but have not been distributed. These are typically kept in a company's treasury.
• Reserved Shares: This describes the authorized shares that are kept for future issuance. Reserved shares are often issued only through a stock option plan.
The capitalization table should likewise contain the following basic information:
• The names of investors who've acquired company shares
• The number of shares owned by each shareholder
• The stock options owned by each shareholder
• The number of outstanding shares
• The number of reserved shares
More than financial-related information, a cap table must likewise indicate legal business transactions which may cover the following:
• Exercises of stock options
• Debt to equity conversions
• Cancelled shares
• Stock transfers
• Stock issuances
Executives are expected to create and update the entries in the capitalization table appropriately-- a process that may not be totally free from errors.
Creating A Capitalization Table
As mentioned earlier, the cap table shows a shareholder's equity in the company. To arrive at this simple computation, the names of investors are typically listed on the Y-axis and the types of securities on the X-axis.
The creation of a cap table is quite simple at the start of a business, and there's no one-size-fits-all solution. However, managing a cap table becomes complex and time-hungry once the enterprise grows. For this reason, you'd need to consider automating the process by getting an equity management software, such as Cake.
Managing A Capitalization Table
More than being a business financial instrument, a cap table also serves as a legal document that shows the legal claims to a company's assets. This tool is likewise used by capitalists, entrepreneurs, and investment experts to analyze various investment trends.
Cap table management involves accurate and timely updating of information. It can also include other tasks such as creating and signing legal papers, recording transactions, and ensuring compliance with state and federal rules.
Business growth and changes happen regularly, and these are a few of the instances where a cap table should be updated by business executives:
• When the company sells new shares
• When the company issue shares of new securities
• When the company increases the offering of options
• When an employee resigns, and the employee share/stock options are terminated
• When share options expire
• When a shareholder exercises his or her vested (stock) option
• When a stockholder redeems, transfers, or sells his or her shares
Startups are always on the lookout to build their business equity. As such, it has to think of ways to increase its capital funding by tapping various channels. Mergers, acquisitions, initial public offerings are a few of the changes that require alterations in the capitalization table, too.
Cap Table Management Conclusion
Business executives need to refer to the cap table before making critical business decisions related to capitalization and the venture's market value. In addition, as a legal document, a cap table determines a shareholder's legal rights to a company's assets.
With these key functions, an updated and well-managed cap table is necessary to come up with informed decisions, making fund accumulation more strategic.
