Many people find difficulty while creating and maintaining a cap table for their startup. However, this is one of the most important tasks that need to be done to keep up a track record of the company’s shares. Though in the earliest period of a startup, the cap table is quite simple. As the company starts growing, the cap table becomes difficult to manage and understand.
During the growth period, the employee stock options and funding rounds come into the real picture, making things more complicated. If you are finding difficulty in managing the cap table for your startup, this article will help you. We will let you know the most important tips to keep a cap table that contains all the important details about the company.
Let’s dive deep into the article to gather more information about what a cap table is and how it can be created to keep up its shares’ track record.
What is a Cap Table?
A capitalization table is also called a cap table used by the startups to keep up their company’s shares. It is a spreadsheet that lists all the company’s securities, such as warrants, common shares, and preferred shares. It also includes the prices paid by the investors to own these securities. A cap table can be used by an early-stage venture or the most-established company.
This spreadsheet helps business founders know more about investors’ ownership in the company, their value in the company, and dilution over time. Generally, cap tables are created before preparing any company’s documents in the business’s starting period. As soon as the company starts growing, the cap table becomes more complex and starts listing all the potential details of funding sources, acquisitions, mergers, initial public offerings, and other types of transactions.
Well, a cap table also contains other legal documents such as cancellations, transfers, conversion of debt to equity, and stock issuances. Since the company conception, every company executive should accurately manage all the documents and transactions to add all the details. This cap table is used by the investment analysts, venture capitalists, entrepreneurs to analyze important events such as employee stock options, issuance of new securities, and ownership dilution.
How to Create a Cap Table?
Many companies in this fiercely competitive business world have started creating the cap table since its inception. It helps them to manage their track record of the company’s shares and run their company smoothly.
Use Cap table Templates
Remember that the cap table should be designed in a simple and precise way so that business founders and managers can easily interpret who owns certain shares and the number of outstanding shares. The cap table’s most common list is the investor’s name, which is usually listed on the Y-axis, and the types of securities they own on the X-axis.
If a company wants to use a spreadsheet template, it can start creating the cap table by adding the business’s information and details. The first row of the spreadsheet should infer the total number of the company’s shares and the subsequent about the shares. Below shares are the details for subsequent information that you should be aware of:
- Authorized shares: The total number of shares that are allowed to be issued to the investors.
- Outstanding shares: The total number of shares that are owned by the company’s shareholders.
- Unissued Shares: The total number of unissued company’s shares.
- Shares reserved for stock option plan: The total number of unissued shares which are just reserved for future hiring.
More importantly, there should be a separate table in the cap table, which includes:
- Names of shareholders: The name of the shareholder who owns the company’s shares.
- Shares owned by each shareholder: The total number of shares owned by every shareholder of the company.
- Stock options: The stock options held by each shareholder.
- Fully diluted shares: The total number of outstanding shares.
- Options remaining: The total number of remaining shares available to be optioned.
Remember that the business founders are listed first, followed by executives and the company’s employees who own equity. After that, the investors, such as venture capitalists and angel investors, should be added in the subsequent rows.
Pros and Cons of Using Cap Table Templates
The cap table templates are more sophisticated and easy to understand than creating the cap table in Excel. It will also save your money and time to create the cap table from scratch. But there are some pros and cons of using a cap table template that you should be aware of:
- Pros: With the cap table template, you can quickly fill your company’s important details as per the pre-filled cells. It will give you a good starting point and save time during the initial stage of the business. The process of adding basic information about your business is quite simple. Therefore, executives can easily interpret the business information and number of shares or securities held by investors.
- Cons: It is really hard to keep updated the cap table template. This is not a one-stop solution for all the robust needs of the business. As soon as your company starts growing, the template would turn useless. Let’s say you have raised multiple rounds of funding. In that case, there are more chances that the cap table template may create errors. That is why cap table software is the best option.
Use Cap Table Management Software
Startups should incorporate the usage of cap table management software for their startups. Though it might seem easy for you to use the spreadsheet template as a small business owner, it is essential to start using the cap table management software once you start raising money. This software will also help you to remain updated for filing 409A valuation, offering liquidity, and issue options.
To be very honest, this is one of the easiest ways to keep all your data updated in the cap table. All the details will be added in real-time, so your managers and company shareholders won’t have to own different cap table versions. It will help them save time and money while handling all the company’s shares in one place.
This article is all about creating the cap table and why it is important to have your company’s records of shares. As the company starts growing, it becomes cumbersome for the startup owners to manage all the things in one place. The cap table management software will relieve you of your worries by creating a handy and user-friendly cap table for your company.