What makes a founder start a startup? Is it a unique way to earn more or deliver the best to the market? Out of all the billion reasons that provoke a person to start their business, one of the most common ones is a unique idea around which the company is built.
In order to grow, a company should develop great future strategies and techniques. And business evolution consists of expanding and managing the shares of the company. All this tracking and management is done with the help of a cap table.
Let us dive deep into what a cap table is, how to manage them, and the top 5 cap table management software in the market.
One of the essential documents that every business person must understand and know is the Cap table. After the stage at which a company figures out that equity distribution is inevitable, the concept of a cap table comes in.
Often simple cap tables are maintained on spreadsheets, while complex ones on equity distribution software. Founders must learn that the company details are held perfectly at every stage of growth with the help of a cap table.
What is a Cap Table?
To alter the equity structure on a regular basis, an active business undergoes several processes. These processes consist of funding rounds, stock issuance, cancellation of shares, exercising options, etc.
A capitalization table is an up-to-date document that contains all details of who owns how much in a company at all times. Therefore, each company owner must know how to build a cap table.
Equity is issued in many ways: stocks, convertible notes, warrants, equity grants, etc. A cap table structure is created to accommodate all types of equity grants from the beginning stage of company operations. The fundamental details included in a cap table are names of stockholders, date of issuance, number of issued shares, vesting date, expiration date, etc.
Aside from the details of the stockholder, a cap table also holds information about total stocks that are previously exercised and the option pool.
Thus, a cap table is a document that provides a picture of the company’s ownership stakes, equity dilution, and changing equity values after every funding round. Cap table involves comprehending who owns how much of the company.
It also includes different processes of frequently updating the document and sharing it with all stakeholders. Along with determining who holds how much of the company, it also requires accurate updating, monitoring, and constant communications with all stakeholders.
Why is a Cap Table Essential for Business?
A cap table presents you with data laid out practically, such as the company’s debt and company’s equity ownership, liquidation rankings of all investors, and the lenders who have invested in the business. As the maximum number of startups do not have traditional debt lenders, the list ordinarily consists of data of the shareholders and the owned percentages.
Nevertheless, various forms of equity, such as common stock, preferred stock, and convertible notes. All these impacts the present and attainable future investors.
A cap table is imperative for a company as you will eventually make decisions that will affect the capitalization of the Company. For example, while running the business activities, a cap table will assist you in running through several possibilities such as available options and pre-money valuations faster.
If there is significant new hiring in the Company, the candidate may ask for getting percentage ownership in the Company. To check in case the option is available or not, discover how much grant you will give, and calculate the percentage you are ready to offer. For this, you will need a cap table. This is why cap table management is essential for modern companies.
Cap Table Management
Entrepreneurs with long-term goals spend time with important employees who are growing the company to be successful. They are realistic about their requirements for additional growth. Also, their hiring needs are highly preferred and made in order to attract appropriate investors. There are some tips for getting your cap table management done. A few of them are:
- To understand and have knowledge about the equity details of the company
- To record the basic share details
- Data centralization and sharing
- Up to date information sharing to everyone in the company
- To review the information consistently
Different Features of a Cap Table
Many businesses use a spreadsheet to make their cap table. The cap table needs to be designed in a simple layout that displays every detail in a manner that anyone can understand. A cap table that should hold the following features:
- Shareholders’ name: It indicates the name of all shareholders who have bought shares of the company.
- Shares owned by every shareholder: A cap table is responsible for the total number of shares that each shareholder holds.
- Stock options: The stock options owned by each shareholder.
- Fully diluted shares: The total number of outstanding shares, which help the shareholders in figuring out the value of the shares they hold.
- Stock Options remaining: This determines the total number of stock options possible for any new shareholders who may join in the future.
Cap Table Management using Excel vs. Software
A new startup is always busy and a capitalization table can be a huge hassle. During the later years of a company, capitalization is used. In the beginning, this is manageable work and can be done by the most basic users of Excel. This simple spreadsheet on Excel includes the titles, names, number of shares, and percentages.
With time as the company grows, the intricacy of the cap table also grows. The company raises capital, the number of investors, and the different classes of shares. Also, growth in a company will mean adding more employees, which further leads to testing schedules and tracking the option grants.
Consequently, if an employee decides to resign, their options will be returned to the company or purchased. Any updates will demand time, similar to that of a cap table.
Even minor errors can result in loss or wrong decisions as all of the information that is mentioned on the sheet is sensitive data. But the moment you manage a cap table on an excel file, it becomes less efficient and time-consuming. In case your company goes through a significant shift, an Excel file will not cut it.
Top 5 Cap Table Management Softwares
To help you pick the best system for your startup, here is a list of the top 5 Cap table management software for founders.
Carta allows users to experience real-time cap table updates and reports that are auditor-ready with formulas. It offers support for all types of security. It also ensures compliance when issuing equity, and has built-in checks. It gives robust scenario modeling tools that pull data directly from the cap table, making it smooth and straightforward to plan for financing rounds and exits.
A streamlined process is provided for option grants, board consents, and approvals stored and encrypted for historical documents. Updates are sent on financials, customer wins, and company performance through the investor updates portal.
Eqvista is advanced software that will manage your company shares, valuations, and cap table. A good choice for entrepreneurs is working with high-end equity management software such as Eqvista. One can save time and money to consolidate spreadsheet cap tables. From cap table management to 409a valuations, everything is provided by Eqvista.
Captable.io enables startup founders to set up their cap tables. Cap tables are free and securely shared with co-founders and investors. The company also offers a reliable round and exit modeling tool that allows founders to explore. The software also allows you to access tools such as a hiring plan, runway, and disclosure, which are beneficial for your startup.
Gust is best for startups. This free software gives a full suite of cap table management tools, modeling for rounds and exits, 409A valuations, and ASC718s. The major features consist of options and valuation management, private equity, and cap table management. These features enable users to look at cap tables at any stage and share customized views with all stakeholders.
Pulley assists in managing and issuing digital certificates to investors and employees. Also, it can provide 409A valuations. The tool used machine learning models that are specialized to read documents in order to produce cap tables, resulting in fewer data entry errors and modeling tools.
We understand that it can be a challenging task to choose an equity management system for your startup. Your selection will depend on what you value more of the critical criteria:
- Ease of use
- The comprehensiveness of cap table management capabilities
- 409A valuations
- Compliance stack
- Scenario modeling capabilities.
We recommend choosing a system that fits your needs today and enables your plans for the future.