Guide to Cap Table for M&As

When your business expands, there will be several internal changes such as stock and option grants, employee exercise, hiring and firing, and fundraising, which grows exponentially. The potential for mistakes to be made on the capitalization table grows with each new transaction. Likewise, mergers and acquisitions (M&A) are business-to-business financial transactions involving the combination of two or more firms or the acquisition of one or more of a target company’s significant financial assets.

A company can acquire another by merging with it, acquiring its assets, making a tender offer for its stock, or conducting a hostile takeover. All of these endeavors include a change in the organization’s capitalization table as the details of various investors who have stakes in the company take a whole shift. All these transactions have to be updated in the cap table then and there with proper information and guidance. In this article, we’ll get to know the uses of cap tables, how to structure a cap table for M&A, and a complete guide to cap tables for M&As.

Cap Table for M&A

A straightforward cap table lists each type of equity capital, the individual investors, and the share values. A complicated cap table contains information on potential new funding sources, mergers, and acquisitions (M&As), public offerings, or other potential transactions. It also shows the total market value of a company and each of its divisions. The cap table is taken into account in every financial choice that affects market capitalization and the company’s market value as a crucial point of reference for business management. To make decisions based on the most up-to-date information, the cap table must be accurate, tailored to the needs of the organization, and frequently updated.

An acquisition is a transaction where one business buys another and declares itself as the new owner. Conversely, a merger refers to two businesses that are around the same size and combine their efforts to operate as a single new organization rather than continuing to be owned and operated separately. So generally these activities will happen to affect the internal information of the company that is made visible on the cap table for viewers to understand the company’s position, this is an important cause to update the details of M&A transactions in a cap table.

Importance of cap table in M&A transactions

Cap tables can rapidly get complicated in actual situations. The founders will start to experience dilution once a company moves past the early stages and implements a stock incentive plan or adopts new investment vehicles like convertible notes and SAFEs(Simple agreements for future equity), which means their ownership percentage in the company will start to change as the company’s shareholders increase.

Also, when M&A transactions take place there is a drastic change in the ownership of the company. Since there are so many various variables, such as separate vesting periods, the task of determining “who owns what?” while taking all these into account the company’s ownership is no longer a straightforward calculation. Here the cap table comes into the picture which depicts the capital structuring of a firm. A cap table is crucial in M&A transactions for the following reasons:

• The most important financial tool for organizations exercising M&A is a cap table, which keeps track of the capital structure and the number of shares owned by each shareholder.
• In an M&A transaction, the acquiring company’s shareholders become the acquired company’s shareholders after the acquisition. Every commitment of equity has an effect on your cap table and the future of your return on investment as a founder.
• A founder can both view the existing ownership distribution and forecast how that ownership will change under various circumstances by employing a strong, well-maintained cap table. As M&A transactions alter the ownership of a company, the cap table assists in providing a clear view of the complicated ownership details.
• In an M&A transaction, the acquiring company will calculate purchase consideration by referring to the current market value of both, the company itself and the acquired company. A cap table facilitates this process as it depicts the current market value of a company.

Uses of cap table in M&A

To discuss and understand the uses of the cap table in M&A, an understanding of the technical terms in M&A is necessary. An M&A transaction involves two or more companies, the company which acquires another company is the “acquiring company” or “acquirer” and the company which is being acquired is the “acquired company” or “acquiree”. Also, the acquirer company takes over the acquiree company in exchange for the net assets of the acquiree company which is technically termed “purchase consideration”.

The cap table and balance sheet are similar in many ways because both show the company’s status at a particular point in time. The assets and liabilities of the business are shown on the balance sheet. The ownership of the corporation and the associated economic and voting rights are displayed in the cap table. The following are the uses of a cap table in an M&A transaction:

• Keep track of company equity/vesting details – An M&A transaction requires the management to make executive-level decisions for obtaining the approval of all the shareholders for the same. The cap table assists the management in making these decisions as it depicts the information on shareholders, their ownership percentages, and voting rights. Based on the vesting schedules available in the cap table, the acquiree company can assess its future vesting rights in an acquirer company.
• Negotiating deal terms for the acquisition – In an M&A transaction, the calculation of purchase consideration is a fundamental element. It involves the process of calculating the net assets of the acquiree company and also shows the synergy gain. Synergy gain is the gain that an acquiree company receives in the process of M&A. The cap table depicts the purchase prices of shares of the company thereby facilitating the calculation of purchase consideration. With the details about the capital structure available in the cap table of a company, the negotiating deal terms for the acquisition are calculated. In simple terms, the cap table enables the acquiree company to calculate synergy gain in an M&A transaction.
• Determine a company valuation – The basic procedure in an M&A transaction is determining the fair value of the companies involved. The cap table provides the current market value of the company thereby facilitating the valuation procedure of a company. Any proceeds from the sale, acquisition, or merger of a business are typically given to the shareholders. This procedure is made simple by an up-to-date cap table, which lists the priority of shareholders and the percentage of proceeds that should go to each. A waterfall analysis is typically used to determine a company’s liquidity. The amount that each shareholder would receive if all of the company’s assets were converted to cash is calculated through this approach. The correctness of the cap table will have a significant impact on this analysis.

How the Cap Table Might Evolve or Be Integrated After a Successful M&A Transaction?

A cap table plays a crucial role in mergers and acquisitions (M&A) transactions, as it directly impacts the deal’s structure and distribution of proceeds. It ensures all stakeholders understand their position in the transaction and helps prevent disputes over ownership or proceeds distribution. Companies should work closely with legal and financial advisors to effectively manage the cap table integration process during and after an M&A transaction.

Here’s how a cap table might evolve or be integrated after a successful M&A transaction:

• Ownership Consolidation – The acquiring company typically consolidates ownership of the acquired company’s shares. This means the cap table of the acquired company will be significantly altered, with the acquirer becoming the majority or sole shareholder.
• Share Conversion – If the acquired company had different classes of shares (e.g., preferred and common stock), these may be converted into a single class or shares of the acquiring company. For example, preferred shares with liquidation preferences might be converted to common shares of the acquiring company.
• Option Pool Treatment – Employee stock options in the acquired company’s cap table may be handled in several ways:
  • Accelerated vesting and immediate exercise
  • Conversion into options or shares of the acquiring company
  • Cash-out of vested options
  • Cancellation of unvested options

• Liquidation Preferences – The cap table’s liquidation preferences come into play during an acquisition. These preferences determine the order and amount in which different shareholders receive proceeds from the sale.
• Earn-outs and Escrows – The updated cap table may reflect earn-out provisions or escrow arrangements, where a portion of the purchase price is held back and distributed later based on certain conditions or milestones.
• Integration with Acquirer’s Cap Table – If the acquisition involves a stock swap, the company’s cap table must be integrated into the acquirer’s cap table. This consists of converting the acquired company’s shares into shares of the acquiring company based on the agreed-upon exchange ratio.
• Dilution Effects – The acquisition may result in dilution for existing shareholders of both companies. The extent of dilution will depend on the deal structure and the relative valuations of the companies involved.
• Waterfall Analysis – A detailed waterfall analysis based on the cap table will determine how the acquisition proceeds are distributed among various stakeholders, including founders, investors, and employees.
• Tax Implications – The evolution of the cap table post-acquisition can have significant tax implications for shareholders, particularly regarding the treatment of stock options and the timing of share sales.
• Compliance and Reporting – If the acquiring company is public, the integrated cap table must comply with public company reporting requirements, potentially requiring more detailed disclosures about the ownership structure.

Example for Cap Table for Merger or Acquisition

Here we illustrated an example of a simplified cap table representing the ownership structure of a company after a merger or acquisition?

Zen Pro Inc. is a growing software company delivering products that seamlessly integrate into everyday life, enhancing productivity, efficiency, and overall user experience.  

The company plans to merge or acquire the company Pro Corp Tech for its next growth phase.

The company now has two founders (with 1.75 million shares) have issued:

• The type of security – common shares, options, and warrants to shareholders.
• The role of shareholders in the company – Founder, Advisor, Investor, and Employee.
• 2 million common shares to its shareholders at $0.0001 price per share.
• 70,000 stock options to its shareholders and has authorized 40,000 stock options to be granted in the future.
• 15,000 warrants have been issued to its shareholders.
• In total, 2.1 million shares have been issued to its shareholders.

The cap table of Zen Pro Inc. after merging or acquiring the company Pro Tech.

The cap table shows the distribution of shares after acquisition along with ownership percentage and capital committed by the company.

Tools for Managing Cap Tables Post-M&A

By leveraging to effcient tools and strategies, finance leaders can more effectively manage the complexities of cap tables following M&A transactions, ensuring accuracy, compliance, and strategic insight into the company’s equity structure.

When selecting a tool for managing cap tables post-M&A, consider the following features:

• Scalability to handle increased complexity
• Ability to handle different types of securities and equity structures
• User-friendly interface for ease of use
• Strong customer support and training resources
• Robust security measures to protect sensitive data
• Reporting capabilities for various stakeholders

Key tools and strategies available for managing cap tables post-M&A

Cap Table Management Software – Specialized software platforms like Eqvista offer comprehensive solutions for managing cap tables, especially after complex transactions like M&As. These tools provide features such as:

• Automated updates and calculations
• Scenario modeling
• Investor update
• Support for complex capital structures
• ESOP management
• Compliance and reporting capabilities

Digital Cap Tables – Moving from spreadsheets to digital cap tables allows for easier updates, centralized views, and automated calculations. This is particularly beneficial when integrating cap tables from merged companies.

Equity Management Platforms – More comprehensive platforms like Eqvista offer additional features beyond basic cap table management, including:

• Vesting management
• Employee communication tools
• Reporting and analytics
• Compliance assistance
• Integration with other financial systems

Integration with Financial Systems – Some cap table management tools can be integrated with broader financial systems like ERP and FP&A tools, providing a more holistic view of the company’s financial structure post-M&A.

Customizable Tools – Look for software that allows you to customize equity plans and structures to fit the specific needs of the merged entity. Eqvista offers a customizable cap table solution that provides a comprehensive solution for companies to create, manage, and maintain their cap tables efficiently throughout various stages of growth.

Tips for managing cap table during the M&A process

A cap table frequently starts as an Excel spreadsheet that is manually updated. The task of maintaining the cap table typically shifts to an accounting software package as the number of shareholders and business complexity rise. An M&A transaction increases the complexity of a cap table as there is a significant change in the ownership and capitalization details after the merger or acquisition. Suggestions on how to control the cap table during the M&A process are enumerated as follows:

• Communicate with all shareholders regarding the process – It can get more difficult to manage your cap table as your business expands, which will ultimately take more time and effort. All the details such as ownership details, debt-equity ratio, leverage ratios, etc are presented in a cap table. The cap table needs to be updated with every new round of fundraising. The corporation must also update the cap table when important owners leave, shares are transferred to new or existing shareholders, the staff is fired, or they retire. Keeping all stockholders informed about the procedure and explaining to them the complexities associated with this process is a great step for managing a cap table during the M&A process. Also with this initiative, shareholders can better understand the cap table of a company.
• Consider the tax implications – The ownership percentages of the various investors are displayed in capitalization tables, which are very useful in the tax return preparation process. These particulars may be required by employees and investors for their tax returns. The capitalization table must be kept current; otherwise, the company or its shareholders risk paying too much or too little tax and suffering the repercussions. Also, an M&A transaction involves changes in the valuation of shares possessed by every shareholder. With the help of an updated cap table, a shareholder can assess his return on investment which is crucial to assess his tax process.
• Use a cap table tool – You can keep track of all of your financial activities and trades in one place with the aid of a cap table. It is simpler to concentrate on the other crucial facets of the organization when the cap table is organized and updated by an effective cap table management software. Our cap table management software offers a variety of features that are suitable for both new and experienced companies. You may create share certificates, and board resolutions, conduct valuations, file IRS forms, and record stock compensation with us. Your cap table will also always comply as we update our system to reflect updates to the securities laws. You can rely on Eqvista to support you and your business to success.
• Work with a financial advisor – Complicated cap tables are managed with ease with the help of certified financial advisors and experts. They will provide the management, and technical assistance for M&A transactions and record the same in a cap table as they are well versed with the technical know-how. They assist in the calculation of synergy gain and various leverage ratios associated with the M&A transactions. They also ensure a better understanding of the structure of the cap table as management people may not possess the technical know-how to understand a complicated cap table. Hence working with financial experts is recommendable for efficiently managing cap tables.

Manage your cap table with Eqvista today!

A cap table is an indispensable tool during the start-up phase and continues to be so as the business expands. With the help of our cap table management software, you can conveniently record all your M&A transactions and all other debt and equity transactions. So what are you waiting for? Explore the possibilities available to you by signing up with us for free right now. To know more about cap table management services feel free to contact us any time.