Starting a new business from the ground up requires sufficient and useful knowledge from the word go. There is a lot to learn, particularly on the job and this is where it gets tricky. Even if you get someone to tackle the paperwork and financials, you must oversee every aspect of your company and understand your numbers.
In the process, you will face acronyms that you have never seen or heard before. However, this shouldn’t scare you because we’ve got your back. If you are a business person, then you have probably heard of capitalization tables, shortened as CAP tables. You are probably wondering, what is a cap table? Read on as we discuss it in detail and why it is important for any business venture.
Basics of Capitalization Tables
Capitalization table is an official way of stating ownership, including all the company’s securities (options, stocks, preferred shares, etc.). In simpler terms, cap tables refer to who owns what in the company and are formulated in a chart displaying the percentage of each ownership.
The main purpose of a cap table is to provide a quick summary of ownership. At the beginning of your company, as a founder, it is vital to make a note of the assets owned by individuals in the business. This becomes more crucial when investors join the business. Here, they will need a clearer insight of what they are purchasing, and also the shareholders have to keep up to date with what they stake in your company.
A basic cap table displays who has invested in the company and how much they have put in at every round. It also shows the price paid, the shares owned, and where they stand when the company fully dilutes. A more intricate table may include particulars on mergers and procurements, new subsidy sources, public funding, and other transactions.
Cap tables are used confidentially by private companies to relay information on the investors of the company as well as market value. It is used as a major citation for business managers to make every financial decision impacting the market capitalization and the company’s market value. Therefore, the table needs to display accuracy, business needs customization and should be maintained frequently to make financial decisions based on the current information.
Generating and Maintaining Cap Tables
First, you need to begin with the basics whereby you indicate the shareholders and the shares owned as well as the percentage of your company owned by them. A great way to do this is by separating holdings by either common or preferred shares.
After that, you need to monitor all legal documents linked to the shareholders and record the transactions done by shareholders to report to investors. By doing this, you avoid contradictory records, making it easy for everyone to obtain the needed information.
Thirdly, you should correspond with compliance at an early stage to ensure everything that shows on the cap table is legally correct and can be verified. Here, you can seek counsel from a reputable attorney.
Ensure that relevant parties are at par with the cap tables. This helps to avoid making financial decisions based on obsolete data.
Last but not least, it is important to organize and manage your cap table in software rather than spreadsheets. Spreadsheets are more susceptible to errors which often bring about complexity in capitalization tables.
Cap tables are important when you are starting your business. And as your business grows, the cap tables should be updated to remain relevant. When someone injects money into your business for your company equity, you should have a legal document to back it up and also indicate the terms of the agreement. A well-maintained cap table simplifies many financial decisions made for the company.