What You Need to Know About Cap Tables

Oh, the hardship that comes along with being a business owner. But it does not have to be. Wait, actually, I take that back…running a business is hard work! After all, if it were easy everyone would do it. And those that do, do so with little knowledge.

Many people start a company because they have a startup idea that they want to launch in the market.. In the initial stages, everything seems very easy to navigate.They  just have to concentrate on what you want to achieve and BOMB, you have a business…NOT!. The whole process  seems quite simple but as time goes on, a business starts inhibiting funds and investments. This is where it gets technical and complex. As the funds evolve, business owners have to evolve and the methods used for their company have to evolve as well. There will be a need to make strategic decisions at the right time to make the company grow.

This is where a Cap Table comes handy. A cap table serves as a record sheet of all the ownerships in a company. It comprises the data of all the company owners and the securities they own. A cap table is quite useful for determining the distribution of dividends in a company. It can help the company check its share range and make decisions about granting new securities.

 What Should a Cap Table Include?

In a cap table, all the security shares must be divided according to their class and value. It must hold all the details about the stakeholders, share prices, dates of investments, and type of security. Normally, there are five types of securities that companies offer:

  • Common Stock
  • Preferred Stock
  • Options
  • Warrants
  • Convertible Debt

All of these security types have their concentrated benefits, and must be included in the cap tables.

 How to Design & Manage Your Cap Tables?

1) Get to Know About the Basic Cap Table Structure

There is no single way to design cap tables. It can exist in different formats and structures. The important thing is that you will have to figure out the needs of your company, and then make a cap table according to it. For this reason, you will need to know all those terms that must be present in a cap table.

In the early stages of your startup, your cap table will only list the equity shares and the people that own them. But as things start getting complex, you will have to list all the legal restrictions and transaction histories.

 2) Link it Directly to Your Executive Decisions

The most important use of cap tables is to make executive and strategic decisions quickly and efficiently. But if your cap table is not directly linking your business issues, then it is not serving its core purpose. The cap table should be designed in such a way that it helps you get all the information regarding the shares and the equity packages in an instant. This will help your strategic decisions and will boost your business. 

3) Evaluate the Tools That Can Help You Manage it

Cap tables mature with time. In the initial stages of your business, cap tables will be easy to understand. You will be able to construct it in a simple Excel spreadsheet without the help of a professional.

But as your business matures and the cap tables start growing (which it should), you will find it difficult to hold the information on all financial statements. This is where automated cap management software saves you. They provide you better capabilities, additional features, and more version control than your regular Excel spreadsheets. Overall, it will help you to gather all the information and make all the strategic decisions on time (especially as more information will be analyzed or reviewed)..

4) Share it With the Relevant Stakeholders

Once you’re done with all the concepts regarding the design and management of cap tables, another problem can manifest: consistently updating your Cap Tables. As time passes, you will have to make sure that your cap table remains up-to-date with all the financial developments in the business.

After every update in the cap table(s), you must send it to all the relevant investors, stakeholders, and employees who have vested interest in the company. This will help you gain their trust and avoid any discrepancy in the future and also avoid lawsuits and misinformation in the cap table(s) – we are all human and make mistakes so sharing for review is always a great way to ensure accuracy in business.

 When Are Cap Tables Used?

Cap tables are not an every-day or every-week task (unless you are constantly adding investors and stakeholders). When you’re running a business, you will only require a review of your cap table when you’re about to make an executive decision and/o require some background finances for it. These are the most noted  times when you’ll need your cap tables:

  • Understanding your equity
  • Raising funds for your business
  • Hiring new employees
  • Issuing stock options to employees
  • Managing your company’s taxes
  • Laying your exit strategy
  • Selling the company

A cap table is not a legal document. It is solely a representation of your company’s ownership that can come in handy while making decisions regarding the company’s future. It doesn’t matter whether you hire a professional or design it yourself, the important thing is to keep your cap table simple. If you can’t read and understand your own cap table; how can you expect an external investor to get it? If you can’t, they certainly can’t. This is also why hiring the right professional for cap tables comes in handy.

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