What is a Cap Table?
Definition of a Cap Table
Also known as a capitalisation table, a cap table is a spreadsheet that a company uses to list all of the securities that the company owns. This includes assets like common and preferred shares, along with who owns them and how much they paid for them.
A cap table will also outline the percentage that every investor owns in the company, as well as how much those investments are worth and how they’ve been diluted over time.
Cap tables are generally amongst the first documents that a company creates, in part because they get more and more complicated as time goes on due to additional funding rounds, IPOs, mergers, acquisitions and other major transactions that can affect a company’s capitalisation.
Cap tables will also typically include legal documentation and they’re often required by venture capitalists and other investors. Entrepreneurs also use them to make sure that they understand their business and how its finances work.
Most companies use spreadsheet software to create cap tables, although there are also specialist software applications that are designed to help people to create them. They’re normally set up so that investors are listed on one axis while the securities they own is on another.
Specialist cap table software is often the best choice because it can typically bring in data from external finance software and update itself with no input needed from you. Better still, it will stop you from ending up with dozens of different files with different dates on them and causing a version control nightmare if multiple different people are accessing and editing them. Best of all, you can often store your cap table in the cloud so that you can access it from any device and not have to worry about what will happen if your computer dies.
It’s important to note that as the whole purpose of cap tables is to make information more accessible, companies should go out of their way to keep them as simple as possible. Any unnecessary information should be purged from the cap table so that it’s as functional as possible.
Cap tables are used by companies for a variety of different purposes which include:
Fundraising: To show to investors during negotiation so that they can see how the company is structured and the current state of its finances. It also shows them which other investors are already on board.
Hiring: Cap tables can be useful during recruitment because it helps companies to be more transparent. It’s particularly useful for executives because they can get a better idea of how much they’re likely to receive from their stock options if the company is sold or goes public.
Compliance: Cap tables can be useful for companies to legally track who owns equity and to use for taxation and legal compliance.
Selling and liquidation: As you’ve probably noticed, cap tables are useful if the company sells up or goes into liquidation because they’ll show how much shareholders can expect from the proceeds.
What fields are included in a cap table?
Cap tables vary from company to company and so no two of them look the same. However, commonly used fields include:
- Authorized shares
- Fully diluted shares
- Outstanding shares
- Shareholder names
- Stock option plans
- Unissued shares
When should you update a cap table?
Cap tables should be updated with every additional round of funding, as well as whenever new stocks are issued, stock options are changed or stocks are transferred from one owner to another. You should also update them if employees are terminated or retired.
Are cap tables formal legal records?
This depends upon where in the world your company is based and what local law specifies. In the US, cap tables can be used as a formal and legally-binding record of equity and its ownership.
What is a waterfall analysis?
A waterfall analysis is a visualization that shows how much every shareholder in the cap table would be awarded if the company went into liquidation. It’s usually an estimate as opposed to a true record because there are so many variables involved.
What else do I need to know about cap tables?
Some venture capitalists may request preferential rights for their shares which allow them to skip the queue when it comes to receiving capital if the company is sold or undergoes liquidation. If that’s the case, this should be explained within the cap table. The same is true if any class of shares has different voting rights to regular shares.
Some cap tables will also include financial projections that detail an expected return based on either the current market value of the shares or the value that they’re projected to achieve.
What is a clean cap table?
A clean cap table is essentially a fully updated cap table that contains all of the required information and the latest figures for your business. Clean cap tables are easy to read and fully automated so that they pull in the latest figures on a regular basis and preferably update themselves in real-time.
Why shouldn’t you use Excel for your cap tables?
Excel is fine for cap tables when you’re first getting started, but it can soon lead to a headache if your company starts growing. Even though a lot of the biggest start-ups still use Excel for their cap tables, it’s inefficient and often time consuming. It’s not uncommon for companies to have to pay tens of thousands of dollars to financial specialists to merge a bunch of different versions of their cap table together.