When a person becomes a founder, they know all about the many different aspects of a company, such as important business documents and how to manage a company to become successful. And one of the most important documents that an entrepreneur needs to know about is a capitalization table and what proper cap table management is. This seemingly simple document, which for some is just a standard spreadsheet, lays out who takes how much of the company.
More importantly, you will want to know how it will affect your ownership when bringing on new people and any possible share dilution. In all possible scenarios, the story is told by the cap table and there is a lot that you need to take care of. You will learn it all here, starting by understanding what a cap table is.
What is a cap table?
A cap table, also known as a capitalization table, is a table that shows the equity capitalization of the company. It is basically an intricate breakdown of the shareholder’s equity in the company. This is why a cap table normally holds all the equity ownership capital such as the common equity shares, options, warrants, preferred equity shares, and convertible equity in the company.
A simple cap table lists all the kinds of equity ownership capital, share prices, and individual investors. And more complex cap tables can also include details on potential new funding sources, public offerings, mergers and acquisitions, or other hypothetical transactions. Moreover, a cap table is normally used by private companies to offer information on the market value and investors in the company.
How to Make a Cap Table?
A lot of companies use spreadsheets to create a cap table at the beginning of the business, and move onto using a cap table software later on. Regardless of the method used, a cap table should have a simple design and an organized layout that shows who owns specific shares in the company and the number of outstanding shares. The most common structure is the one with a list of the names of the owners/investors on the Y-axis and the type of securities on the X-axis.
A company can use a spreadsheet template that permits for the addition of information and figures related to their business. The first row would indicate the total number of shares in the company. The subsequent rows would list the following:
- Authorized shares: This is the number of shares the company is allowed to issue.
- Outstanding shares: This is the number of shares held by all shareholders in the company.
- Unissued Shares: This is the number of shares that have not been issued.
- Shares reserved for stock option plan: These are the unissued shares reserved for future hires.
You will also need a separate table that would show the following:
- Names of shareholders: The names of shareholders who have bought shares in the company.
- Stock options: Stock options owned by each shareholder.
- Shares owned by each shareholder: The number of shares held by each shareholder.
- Options remaining: Number of remaining shares available to be optioned.
- Fully diluted shares: Total number of outstanding shares (helps shareholders determine the value of their shares)
After setting this up, the founders of the company are listed first on the table, followed by the executives and other employees that hold the shares of the company. And then the investors such as venture capitalists and angel investors are listed.
In addition to this, it is very important to keep some things in mind while you work towards managing your cap table properly. The next section would explain this better.
Consider These Rules for Managing your Cap Table
An early-stage company might not need a cap table, but it is always better to have one to keep a proper record right from the beginning. It would give you a high degree of confidence that your financial statements are accurate. Also by using cap table software, you also save time on filing in the details, as the information is automatically synced through the app.
This would in turn help you spend more time in making better strategic financial decisions for the company. A lot of companies rely on legal firms for their company’s cap table management and even pay a large amount for the work to be done. Instead of doing this, founders can conveniently use a good cap table software to manage it on their own, saving both time and money.
Here are some of the best practices that would help you maintain and improve an effective cap table management process:
1. Don’t over complicate your cap table
Your cap table needs to be well-understood, up-to-date and well-managed. And fortunately, this cap table management does not have to become another headache. With the right resources, communication, considerations, and ownership, you can put the correct details and process in place to effectively and efficiently manage your cap table.
In short, the cap table should be easy to understand and read with supporting commentary and documents, and where necessary to make the information self-explanatory.
2. Understand basic terms and formats
There are a lot of different formats and elements of a cap table. It can be viewed as a chart, table or even a spreadsheet. But whatever the view is, the cap table can look very different for each company at every stage of its growth. And even though the cap table is usually very simple during the initial stages of the business, it evolves and becomes a lot more complex as the company grows.
At a basic level, the cap table would have just the equity stakes in a company, which includes stock options, preferred stock and common stock along with an outline of all the ownership details for these securities. The other elements include the legal restrictions including the exercise of options, transfers, sales, transfer restrictions, and the conversion of debt to equity and other transaction history.
The cap table would have to display the complete capital structure of the company at a glance. Along with this, it should also have detailed ownership information for every series of stock outstanding and equity classes, and always be up-to-date. That is what cap table management is all about.
3. Recognize the value of the executive alignment
A cap table is created to solve business issues. If you are not using it to help make financial decisions of your company, then it is not serving the core purpose. In fact, the cap table is critical for your management. There are certain aspects that may be primarily of use, but if the management of the company does not find the cap table helpful, there is some problem.
One great example of this is its role in the hiring process. Equity is one of the main considerations in talent recruitment and retention packages. If you do not have an accurate cap table, you would find yourself in situations where you have to routinely ask yourself how many shares you can offer talent in the market to hire them. This can unnecessarily slow down the process of hiring and can also affect the decision in a wrong way.
Nonetheless, if you can use a cap table as a way to gain alignment on such matters, you can begin to use it to solve a lot of issues in the company. And instead of discussions for which equity package is the best for a new employee, the HR team can provide routine feedback on the standardized equity packages to help improve or maintain competitive compensation.
4. Centralize and share the data with company lawyers/accountants
Instead of keeping countless spreadsheets and managing the data across all them, centralize the data and share it with your accountant and lawyer. The best way to do this is with cap table software. Using a spreadsheet can just make things highly complicated for you. But using software can help you in keeping the information in one place and sharing as you please without the need of creating different files and folders.
5. Create and share an equity incentive plan for investors
When it comes to the question about how much information you need to share with investors, there isn’t any right or wrong answer. Providing investors with a summary cap table is the common practice used by many. With this, investors can easily calculate their ownership position for their internal tracking and audit purposes.
There are chances where investors ask for a detailed list of all the shareholders in the company, but it’s not a must to provide it. In fact, if you use an application such as Eqvista, you can share just the summary of the cap table with the investor and they will get all the relevant information they need from there. Also, in case an investor wants to view the detailed cap table, you can share that as well without the need of creating another spreadsheet. This type of cap table management will greatly help in reducing stress and paperwork.
6. Create and share an equity incentive plan for employees
Understanding the amount of information you need to share with your employees is another huge consideration for any founder. And the key to this is to determine how comfortable and transparent you want to be with your employees. Some founders tend to be completely transparent while some opt to not share the main information of the cap table with them. So, you need to see what you want the employees to know and share the details accordingly.
For example, if an employee wants to understand how their payout will be after some funding rounds have taken place in the company, you may need to share with them more details for them to understand how everything is broken down. On the other hand, if the employee isn’t showing the productivity you were hoping to get, then showing them the complete information wouldn’t be a good idea.
7. Keep track of stock options and vesting schedules
Normally, options to purchase stock will vest over time. This means that you will have to keep proper track of how many shares have been vested for every option grant. Company employees and your fellow founders would be grateful to have clarity over this.
8. Record convertible notes
Convertible notes are rarely recorded in a cap table when you are using a spreadsheet. But it is important to stay on top of this, and with a proper cap table software, you can easily keep track and record your convertible notes as well. This will save you from any unpleasant surprises when you raise a conversion triggering equity round.
9. Review your cap table regularly
Anytime you make a change in your company such as issue a round of funding or hire a new employee, you will need to review the equity plan and update the cap table even if you are using cap table software. Just like you would normally check with your accountant from time to time, you will also have to keep reviewing your cap table on the same kind of schedule at a minimum. Being a business owner, it is vital that you understand how much of the company everyone owns. It will help keep your control and ownership on it secure.
10. Choose an easy and effective cap table management platform
Up till now, you might have understood that using cap table software is the best way to avoid errors in a company’s cap table. If you have already started off with a spreadsheet, no problem. An early-stage company doesn’t have many details to hold initially. But as the company grows, it becomes difficult to recreate the cap table on an ad hoc basis. An Excel sheet would not be able to hold all the information and becomes highly complex to manage and understand.
That is why it’s recommended to make the switch to a cap table management software instead. It helps you in controlling everything right from one place. That is where Eqvista comes in. Eqvista is a FREE cap table application for small companies with up to 20 shareholders and affordable plans for larger enterprises. Our app offers everything you need for cap table management and for making the right financial decisions.
How does Eqvista help to manage your cap table?
Being an entrepreneur, you should follow these rules strictly to maintain and improve the cap table management process in your company. The Eqvista cap table application allows you to record, track, manage and issue shares of your business all from one convenient location. The software also specializes in tracking vesting schedules and calculating financial modeling like waterfall analysis and round modeling.
All this can be done with just a click of a button on Eqvista. In short, the Eqvista platform helps you keep an eye on all that happens in the ownership of the company. To try it out now, click here!