A capitalization table or cap table for early-stage startups lists your startup’s shareholders and their relative stakes in the organization. It is a spreadsheet that gives a summary of the capital structure of the business. Every investor will ask for your cap table to understand the financial system and the weight of each partner in your business.
This article emphasizes the importance of maintaining a simple cap table for early-stage startups. We will discuss the purpose of the cap table and the benefits of a simple and smart cap table. We will also compare cap table software vs excel to understand how to use cap table software to maintain a simple cap table for early-stage startups.
Simple Cap table for early-stage startups
Maintaining a simple cap table means it must be continuously updated. Every time you raise capital, your company’s ownership structure will evolve, and all potential investors will want to examine the updated cap table before determining whether or not to invest.
All prospective investors can get a precise and relevant understanding of the firm’s ownership structure if all capital adjustments are correctly and timely documented. A simple cap table will demonstrate that your company is well-run and takes business seriously.
What are early-stage startups?
Early-stage startups are businesses that are in the stage of:
- Proof-of-concept phases of development.
The company could merely have a small number of employees, a single offering, or a collection of concepts. An early-stage startup’s primary goal is to sell an idea and provide early indications of its viability. Early-stage firms often center their business models around a minimum viable product (MVP) to increase sales and expand their range of products.
The objective of an early-stage startup is to create a consistent and sustainable business strategy. At this point, a firm could raise more funds to grow. This might include a purchase, public listing, or fundraising. As a result, the early stages of a business are volatile periods when preparing for long-term sustainability, and the rate of development is crucial.
Why should early-stage startups maintain a cap table?
A simple cap table will be necessary if an early-stage startup decides on a fundraising round, goes public, or considers M&A. Cap tables should always be consulted before making any equity-related decisions. It is the only record that compiles every bit of stock ownership data of an early-stage startup in one place. The most significant grounds for an early-stage startup to have a cap table are as follows:
- The prospective information investors could appear on a simple cap table. Investors may better comprehend the company’s financial position, structure, and related developments using a cap table. Every stakeholder included on your cap table should have this precise information.
- Using a cap table, you may also note any dilution brought on by stock purchase contracts or convertible loan agreements, two popular ways for businesses to obtain money from investors.
- Company owners can make choices according to the amount each stakeholder has contributed and their relative ownership after each fundraising round by using the proportion of ownership shown on a cap table.
How can a simple and attractive cap table help early-stage startups?
As mentioned above, the equity condition of a corporation is often dynamic—that is, it changes over time and is seldom stable for an extended period. Every company has the issue of keeping up with these adjustments and updating its cap table when there are new transactions, equity awards, or acquisition of additional funding. The cap table and the maintenance procedures become as complex as the particular business’s operational requirements.
However, if entrepreneurs put a little energy toward maintaining a simple cap table for early-stage startups, they can avoid the pain long-term. Here are a few benefits of simple and smart cap table for early-stage startups –
- Can easily understand complex data – The cap table will have several components that need ongoing monitoring and updating, such as:
- Valuation – Any changes to the market value of individual shares
- Investors – when new investors join, their names with pertinent information about their investment amount
- Stock and options – track all the information of issued stock to workers, whether at the time of hiring or on an ongoing basis. The founding teams may later prevent disagreements over relative ownership and shares of the firm by recording this in a straightforward, well-managed, and up-to-date cap table for early-stage startups.
- Help in getting funds – If you’re trying to raise money, it’s critical to understand precisely what you’re going to give up, as investors will want a share of your business in exchange for their capital contribution. You can arrange your business structure and track all your choices’ influence with a simple cap table. You can monitor how different fundraising rounds will influence the holding of your and your group of stakeholders in the company. You can ascertain whether issuing new options before or after funding will impact your firm and comprehend what will change your position and company control at various valuation levels.
- Help investors make investment decisions – Investors-to-be will inquire about ownership information and any modifications made since the company’s prior investment rounds. An updated cap table will reveal any legal difficulties and a company’s potential for development and success. Investors may assess your business’s overall health and get an understanding of their potential ownership arrangements through your cap table.
- Simplified ownership structure for a company – Stock options are excellent methods to match employee incentives with your business goals. Employees who get options often have the choice to purchase or sell the company shares at a predetermined price before a specific date as part of their pay. In addition to tracking the shareholder’s stake in the company, a simple cap table makes it easy for the founders to track employee options by displaying the number of options available to issue at any time. The date, recipient, amount of shares, cost, fixed price, and a total number of exercised options are normally included in the information.
- Help in company exit – The profits from the sale are distributed among all the stakeholders when the firm decides to hand over the business to another corporation. The cap table specifies the amounts and the sequence in which each shareholder will receive the profits. An updated and well-maintained cap table for early-stage startups helps avoid any disputes and litigation resulting from cash distribution.
- Can be updated easily – Over time, errors are inevitable when you manually update a spreadsheet to manage the complex information outlined above. In the beginning, a spreadsheet is a practical solution to manage your cap table. Still, as time goes on, it will become more and more challenging to maintain all equity-related developments in the company. Any overlooked inaccuracy, such as an omission or addition, may build up over time and severely damage your reputation in the eyes of potential investors. A smart and simple cap table uses automation technology to fill in blanks. It is easy to update, negates human error, and instantly becomes 100% correct.
- Enable future growth – A great cap table demonstrates the expansion potential of your company and reflects your prudence as a decision-maker. A smart and simple cap table acts as a point of reference when you decide on fresh finance and hiring and possibly someday when thinking about an exit. Maintaining an accurate cap table for early-stage startups from the outset can provide essential insights into how your financial decisions will affect the market worth of your business and help you make decisions at various phases of development.
- Can be easily audit – The company must regularly audit the cap table to ensure it is current and meets all applicable regulatory requirements. Additionally, it will guarantee that the information entered in the cap table and the information found in the transactional records do not contradict. Further, it would ensure that the corporation does not award investors or workers more shares than permitted. The cap table for early-stage startups may be audited monthly, three months, or every year. However, it must be completed before the business engages in any corporate transaction, such as financing, a merger, acquisition, or initial public offering (IPO). This would provide the company enough time to identify and retain legal counsel to fix any mistakes in the historical legal and transactional papers or on the cap table.
How can a messy and complex structured cap table affect your business?
Even if you can maintain control of a messy and complicated structured cap table, the time required for manually entering and updating the database renders the procedure ineffective.
The most significant danger is that many copies of the cap table could end up with various individuals. This results in divergent reports created due to different details in different document versions, producing the kind of total disaster that can be a miserable experience to decipher. Spreadsheets have a lot of risks that frequently result in a messy startup.
Avoiding such traps is something you owe to everyone involved in the firm, including your coworkers, employees, and family. Choosing a software solution is the best course of action for this. Only then can you keep that crucial cap table with confidence and without spending much time doing so.
Eqvista’s cap table management software
The restricted capabilities of Excel templates make it challenging to classify the data and differentiate between various stockholders. One of the greatest methods for a business to handle its shareholders’ data is using cap table software. Companies can readily acquire, analyze, and manage their data, enhancing productivity and business development by reducing mistakes and hastening the shareholder listing process. This will provide the finest possible insight into your company.
How Eqvista helped companies with their simple and attractive cap table management – a case study
Excel may be a straightforward tool for creating documents used in various ways, but it takes a lot of time and effort to utilize excel templates. Identifying the mistakes produced while modifying Excel templates is not always possible. As a result, the cap table software is highly advised since it helps to reduce risks and errors. With the use of Eqvista’s cap table software, the faults that are often seen in excel sheet layouts are removed.
Although the cap table software only handles shareholder data, with Eqvista, all users may efficiently utilize its technological capabilities, which operate exceptionally well. It offers a sophisticated database management and analysis function that is useful for making decisions, tracking data, etc. Experts created Eqvista’s Cap table software, which is very precise in data collecting.
Eqvista’s cap tables include all the facts necessary to track the stockholders of your business and their individual information. Cap tables are crucial to any firm, playing a part in everything from decision-making and assuring transparency to receiving startup finance. The greatest method for a startup to efficiently handle shareholder data is Eqvista’s cap table software. Use Eqvista’s cap table software if you’re seeking ways to raise money for your firm.
How can companies manage their cap table on Eqvista?
It is crucial for the companies’ development and future that they comprehend the specifics and keep a clean and simple cap table. Eqvista supports emerging firms in raising money and expanding their operations with easy-to-use cap table software. Eqvista is the best place to start if you’re searching for a cap table management business to assist you in raising money. Due to the team’s extensive industry knowledge and experience, they can support early-stage startups and assist them in achieving their objectives. So, boost production and efficiency with a trustworthy partner like Eqvista. Contact us today if you need help.