Guide to Cap Table for Equity Financing Rounds
This article will cover everything you need to know about equity financing rounds.
Any business, no matter how great its concept and potential are, requires funding to thrive. The initial capital raised from the immediate circle would be sufficient to pay short-term needs, but the bigger picture needs bigger funding. It is important to acknowledge that every developmental stage of a business requires a different level of financing. Equity financing is an ideal fundraising process for companies with growth potential as it offers quicker funds according to the needs of the founders.
As you raise more funds and take your company to the levels it deserves, your onus of creating and tracking its equity information becomes necessary. This article will cover everything you need to know about equity financing, the importance of Company Valuation in equity financing, and how to create and manage a cap table for equity financing.
Cap Table for Equity Financing
A cap table is significant in tracking details of your company’s equity and ownership. With every progressive stage of a business, the terms of ownership change and it is important to record these changes. Before you learn how to manage these records, you first need to understand what equity financing is.
What is Equity Financing?
When an investor comes forward to fund your business, it does not always have to be in return for interest or debts. Some of them offer the necessary funds to build your business in return for a part of your company shares. Any equity instrument (common or preferred shares, stock warrants, or options) shared in turn for a fund, is called Equity Financing. There are 5 types of equity financing based on the sources of investments:
- Angel investors – Angel investors usually have a wealthy financial background and come forward to fund businesses that can potentially bring greater returns. They do not stop with monetary offerings but also bring in influential networks, insights on the market and advice from their expertise.
- Venture Capital firms – VC firms invest in companies that demonstrate the potential to deliver high success value and returns. They usually travel along with companies from their early stage to their public offering stage. They offer high investment and require the companies to let them involve in management and operational decisions.
- Corporate investors – This type of investors fund startups with the view of creating a corporate partnership with them. They also help the companies to draft strategies to market themselves and scale.
- Crowdfunding – The most preferred form of investment, crowdfunding, gathers funds from multiple investors through a single platform. When an impressive business idea pops up, investors from several backgrounds and expertise will come forward to fund them by raising the expected capital.
- Initial Public Offerings (IPO) – When a company becomes well established, it might need more finances, inputs, and time from external resources. At this stage, they sell their shares to the public through IPOs. Here, the involvement in company decisions and management is less in comparison to VC firms.
Types of Equity Financing Rounds
When an entrepreneur puts his idea out there for investors to fund, he offers them a part of his company shares in return. This equity funding will be done in a series of rounds. With every capital raised at different rounds, the company will have changes in its ownership. It can be difficult to keep track of such changes as the company grows. This is exactly why every developing company must invest in cap table management.
Cap tables help you organize and manage information like the capital raised so far, ownership of shareholders and potential rise or fall in securing capital in the future. To understand this better, you must first know what are the different types of financing rounds.
- Seed Round – This is the stage where the founder has an idea that he believes is worth establishing. Companies at this stage will not have enough resources to cover even their daily costs of operation. Investors offering capital funding to such companies do not expect much but some equity shares. Funding a seed round is usually more challenging because there is less scope for profits and more risks.
- Series A – A company at its Series A stage is a little riskier than the seed because it has still not advanced from the startup stage. The founders in this round will offer the investors another round of shares other than the seed stage. These companies will be funded by angel investors or VC firms. Standard company valuation in equity financing is between $10 million to $15 million.
- Series B – This type of funding round can also be funded either by angel investors or VC firms. The valuation for this round is higher than the previous one, usually between $30 million to $60 million. The risk factors are lesser here as the company will have a record to prove to the investors of their worth. If the previous investors are reassured of the potential success of the company, they reinvest to protect their shares.
- Series C – Companies that have demonstrated significant revenue returns and are looking for expansion across markets usually reach this stage. This type of equity financing offers up to $120 million in funds. The investments can be made by banks, hedge funds and equity firms. It also depends on the revenue records in the past, potential growth and customer base. Funding beyond Series C caters to support businesses that have been more successful in terms of revenue generation and expansion.
Role of Cap Table in Equity Financing Rounds
As mentioned above, every company requires proper cap table management as it reaches different growth stages. A capitalization table is an extensive list of shares, warrants, the ownership percentage of shareholders and the value of shares of a company. After raising funds through a series of equity financing rounds, it may become difficult to track this information and maintain them. Here are a few reasons why cap tables for equity financing are crucial.
- Determine Ownership Stakes of Existing Shareholders – You can document the details of your investors and their ownership stakes using a cap table. This is important because the staff in managerial roles must be aware of the number of shares allocated to every shareholder and their level of authority over the firm. Cap tables also have data regarding when a particular share was sold and the dates future issuance of shares will take place. So it’s important to keep the sheet updated with every transaction and convertible.
- Determine a Company Valuation – With a promptly updated cap table, investors can understand how the company maintains its ownership structure. The tables should also reveal the capital raised in previous financing rounds and the pre and post-money valuation estimates of a company. Through this data, the investors will be able to understand their position in terms of shares and also fund requirements in the future.
- Allocation of New Funding – The company needs to update the cap table for equity financing rounds at every stage to help investors better understand future funding. The data on common, preferred, outstanding and diluted which are already mentioned in the table can demonstrate if the funding requirement is going to be high or low. Especially maintaining automated cap table tools will help you draw insights on how to allocate these funds to enhance company growth.
Tips for Managing Cap Table During Equity Financing Rounds
If you are a new founder the cap table management can be exhausting. However, understanding how to spot the right resources and implementing certain practices can help you manage and use the cap table to your advantage. The following tips will help you manage your cap table just how it should be.
- Keep the Cap Table Accurate – While this may sound basic, it is also the most overlooked part of managing a cap table. A cap table may be a spreadsheet or advanced software depending on the company’s need and ability to maintain accuracy. Accurate records on a spreadsheet require manual effort while software can automate the process. This can be achieved by having a dedicated team or an expert review the equity stake list regularly. Data like transaction records, grant prices, debt conversions and legal regulations. It should be maintained in such a way that a viewer understands the ownership details in just a glance.
- Communicate/Timely Update All the Shareholders About the Round – A company must make the equity ownership details transparent for all investors and shareholders. This will guide them to understand the position they are in, in terms of ownership so that they will have power over deciding how much to offer or decline in future rounds. Updating the shareholders regularly about every equity financing round and capital raised can help them build a bond of credibility with the management. At the same time, you must also have power over what information you choose to reveal, especially among employees.
- Use a Cap Table Management Software – An ideal cap table allows you to access accurate equity data without much labor. For example, Eqvista’s cap table management software assists companies in tracking equity ownership details by the number of shares and their current value. Also, you can update the cap table for every equity financing round in a matter of minutes with less human intervention. The level of accuracy that such software provides, can enhance your company’s scope for better decisions.
Why Choose Eqvista to Manage Your Cap Table?
Cap tables offer the founders and investors to have a healthy relationship based on credibility and easy access. Eqvista’s cap table management assistance can serve as the perfect option to understand and enhance the fundraising process. Our software allows you to create share certificates, IRS Filings, and conduct valuations, with a wide range of features that caters to your businesses Imagine having a single platform to manage and track all your ownership stakes and updates! This is exactly why you need Eqvista. Want to know how? Contact us now!