If you're a startup or early-stage business, then you know that keeping track of your ownership and stakeholders can be a daunting task. That's where cap table management comes in. Cap table management is the process of tracking and managing all of your startup's equity capitalization. This includes shareholders, investors, options, warrants, convertible debt, and any other type of security. In this blog post, we will discuss what cap table management is and why you need it!
Capitalization tables, or "cap tables", are one of the most important tools for any startup or early-stage business. A cap table shows a breakdown of your company's ownership by stakeholders. Cap tables help you and (new) investors understand your firm's capital structure. Cap table management is the process of tracking and managing all of this information.
Cap table management may seem like a tedious task, but it's essential for any startup or early-stage business. By understanding what cap table management is and why you need it, you can take the first step toward keeping your equity capitalization organized.
What is a capitalization table?
A cap table is a spreadsheet or overview for a startup company or early-stage venture that lists all the company’s securities such as common shares, preferred equity shares, warrants, who owns them, and the prices paid by the investors for these securities. It indicates each investor’s percentage of stock ownership in the company, the value of their securities, and dilution over time. Cap tables are created first, before other company documents, in the early stages of a startup or venture.
How does cap table management work?
The cap table management process begins with the creation of a capitalization table. This is typically done by the startup's founders, but can also be outsourced to venture capitalists or a third-party service. Once the cap table is created, it must be updated regularly to reflect any changes in equity ownership or security prices. Updates can be made manually or through automated software, it is important to know that your cap table is constantly evolving. After the capitalization table is created and updated, it can be used to track dilution, calculate valuations, and more.
Dilution occurs when a company issues new equity, which dilutes the ownership stakes of existing shareholders. Dilution can be calculated by subtracting the number of new shares from the number of outstanding shares. For example, if a company has 100 shares outstanding and issues 20 new shares, the dilution would be 20%.
Pre-money and post-money valuation
A company's pre-money valuation is its value before it raises capital. The post-money valuation is the pre-money valuation plus the amount of money raised in a funding round.
The cap table can be used to calculate the pre-money valuation by taking the total number of shares and multiplying it by the price per share. The post-money valuation is calculated by adding the amount of money raised in a funding round to the pre-money valuation.
Assess the company's overall financial situation
A cap table can help you do this by showing you how much equity is held by each type of shareholder. If the company is doing well, then the equity holders will likely have a larger ownership stake. If the company is not doing well, then the debt holders will likely have a larger ownership stake.
By understanding how to use a cap table, you can make better financial decisions for your company. You can also use this information to assess the company's market value.
Why do you need cap table management?
There are a few reasons why you might want to consider cap table management for your startup:
- It can help you keep track of your equity ownership structure and make sure that everyone is accounted for properly.
- It can help you track dilution and make sure you're not over-diluting your equity.
- It can give you a clear picture of your capitalization so that you can make informed decisions about fundraising and investment.
- It helps to step up your shareholder management
If you're a startup or early-stage business, cap table management is an essential tool for keeping track of your ownership and equity capitalization. By using cap table software, you can save yourself time and effort while ensuring that your information is accurate and up-to-date.
Cap table template/example
How to use cap tables
A capitalization table is a document that lists all of the company's shareholders equity shareholders, as well as their respective ownership stakes. This information is important for making financial decisions and assessing the company's market value. Here's how to use a cap table:
Identify the different types of shareholders
There are three main categories: common stockholders, preferred stockholders, and debt holders. Common stockholders are the most common type of shareholder, and they own the company's equity. Preferred stockholders have certain privileges that common stockholders do not, such as preference in receiving dividends or liquidation proceeds. Debt holders are creditors of the company who have lent it money. The cap table typically indicates the accounting ownership of individual shareholders, which is the actual ownership percentage.
Identify the number of shares owned by each shareholder
Calculating the number of shares is important for calculating the company's market value and for making financial decisions. The number of shares is typically listed on the cap table, but if it's not, you can calculate it by subtracting the number of outstanding shares from the total number of authorized shares.
How can a cap table benefit my company?
Cap tables are an important tool for assessing the financial health and value of companies. It is a good tool for recording stock ownership information such as common shares, preferred shares, etc., along with prices paid by investors in those respective categories to help angel investors make critical decisions about whether or not they want to invest more into certain startups
A well-managed capitalization table also includes listings of what stocks have been sold throughout different periods which enables prospective entrepreneurs/investors to know if there's been any deterioration from its previous highs before purchasing additional units.
Capitalization tables help answer important questions, such as:
- How is the ownership percentage divided in the founding team?
- How much will my potential stake in the company be diluted in the next funding round?
- What is the current market value of my company?
- Who are the primary stakeholders in my company?
Cap tables are a way for early-stage companies to determine how much equity has been put into each investor. It starts out simple when only the company's founders have invested but as more people contribute and take on roles with stock options and salary packages, it becomes increasingly complex
A typical startup might not need all these different categories because they're funding themselves internally via incentives or angel investments. However, when your private company gets backed by venture capital and hires more employees (especially key employees like CTO, and CEOs), your updated cap table can get really complicated, with stock options for both founders/CEOs AND advisors + bonuses based on how well certain metrics go this year compared with last year, etc.
Last thoughts on cap tables
When your company starts to grow, managing your cap table is something that is often put off. As a founder, you have so much to do, and keeping track of all the changes can be a horrifying task. The most important thing is to make sure that you have accurate and up-to-date information. You can do this by manually tracking your cap table in a spreadsheet, but we advise using cap table software to save time and effort.
For start-ups and early-stage businesses, cap table management is an essential tool for keeping track of your ownership and equity capitalization. By using our platform you can save yourself time and effort while ensuring that your information is accurate and up-to-date.