Cap Tables feature spreadsheets that businesses use in order to keep track of shareholders alongside a percentage of their shares in the company. For instance, when two people start an eatery, they will own fifty percent of the business each. The ease of their cap table at this level does not require much tracking. However, as the eatery expands and they hire more employees and seek additional investors, the management becomes complicated. This obliges the owners to structure an official cap table using Excel and other cap table management tools.
The Anatomy of Cap Tables
Every company can feature different elements in its cap table. Nonetheless, they must all display the following:
- The shareholders
- The value (price) of each investor’s investments
- The percentage of shares that each investor owns
- The actual worth of each shareholder’s shares when liquidated
Based on these components of a typical cap table, it is definite that one can notice the changes in values and percentages with every new investor as well as the increment of the company’s equity with each transaction.
Who Manages Cap Tables?
Businesses frequently refer to their cap tables even though they are not at-a-glance files. Cap tables reveal shareholders’ data, regulations and the firm’s equity transactions. Hence, they require updating with every transaction. This makes managing them tougher than keying in data in the spreadsheets.
Some people presume that cap table management tools in spreadsheets that accountants or CPA’s manage. However, you will manage your cap table alongside a law graduate. You need to work with a law firm from the time you establish your company. Even so, managing your cap table depends on your business’ size. At the initial stages of many businesses, the founders work solely and then incorporate legal experts later.
No one will offer funding for your company without asking for a legal document that highlights the terms of your agreement. Normally, lawyers draft these documents and state the amounts that each investor owns or the amount that they offer as loans as well as the amounts that they will possess over time. Similarly, they will assist you in updating your cap table based on the terms of your contracts.
Starting business often depend single legal contacts before resorting to law firms when they expand. The transitions often come with hiccups demanding the founders to track all transactions. However, as your company enlarges towards its series A or B, you will require a controller or CFO to manage those transactions with a 24/7 in-house attorney.
How to Use a Cap Table
You will not use your cap table daily or weekly. However, you will rely on it when making decisions for the benefit of potential investors and yourself as founder in equal measure. Hence, you should refer to your cap table in the following moments:
- When generating funds since your cap table helps in guiding employee & investor negotiations. Investors will use it to project their position because they can view the business’ capital structure. Founders on the other hand can estimate the level of dilution on their ownership percentages owing to the new investments.
- When providing stock options to your employees. You will track the amount of vested shares and thus make necessary changes upon the exit of an employee with restricted transfers, stocks and repurchases.
- When hiring and retaining talents: employees often pursue equity as a portion of their compensation. Hence, upholding transparency with your cap table will help your HR team in negotiating.
- When outlaying your exit strategy: you will use the cap table to control the amount of info that goes into the public space.
Using Cap Tables during Investments
Fundraising is among a company’s core milestones during its lifetime when its owners cannot assume their cap table. This is because investors must view all your tracked transactions hitherto.
You will incur more costs if you preserve your records manually rather than in a specialized software. This is because law firms must analyze your records and verify their reconciliations while updating them. All this becomes significant billable hours for your company.
Every round of funding requires the modeling out of your cap table management tools in order to weigh the amount of funding and its impact on dilution. Whenever investors step in, you must negotiate based on your firm’s value.
Investors often refer to the cap table in order to know your current capital and the structure of your business. This way, they can tell their position if they choose to put their resources in your business. Hence, when negotiating, they will focus on the company’s actual value, the benefits accruing to shareholders & new investors and the price of new stock.
These exchanges are manifest in all episodes of Shark Tank. Business owners’ step in looking for targeted investment amounts for given percentages of shares of equity in the company. These estimates emanate from the value of your business as evident in your cap table. You expect founders and potential investors to conflict because founders seek higher valuation while investors want to pay less for more shares of the company. This makes cap tables critical for the central and most dramatic scenarios during investments.