Guide to Managing Complex Cap Table Structures
This article throws light on the benefits of cap table management and why it is important to use cap table management software.
Every business needs an accurate record of shareholders and their equity stakes in the company. It is crucial to track and manage each of their ownership percentages to improve the operational activities of the company. It is comparatively easier to manage such records as the number of shareholders and shares is low in its early stage. However, a company, especially in its growth stage must find ways to maintain and update these values regularly. But this is also the time when the maintenance may require more assistance and care.
This is why businesses today maintain a standard cap table structure. Yet, cap tables can become complex as the company grows in value over the years. This article throws light on the benefits of cap table management and why it is important to use cap table management software for your business.
Cap Table Management and Cap Table Software
As you focus on growing your business it can be challenging to create and maintain a cap table. Thanks to today’s technology, it is easier to monitor and manage your company shares using high-quality cap table management software. To understand how that works, you first need to have a brief idea about cap table guidelines.
What is a Cap Table?
A cap table, or capitalization table as it is usually called, is a record of equity ownership and share distribution of your company. It covers every minor detail of the equity of the shareholders like warrants, preferred and common shares, warrants, convertible notes and options. Simply put, it is everything that an investor might want to learn about your company’s equity. Business owners must invest time and effort in rolling out a detailed cap table to attract better investment opportunities and bring down dilution rates. This can be done in a simple spreadsheet or a software-based cap table depending on the capital raised, investors, and the number of shares.
How Does Cap Table Work?
The capitalization table for every business varies depending on their investor capacity, ownership capital, and the fair market value of company shares. A simple cap table reveals these aspects of a business at its early stage. The number of investors and the value of shares will be considerably low here. In a complex cap table, you can find details of potential capital sources, transactions and public offerings. It serves as a reference source for managers and investors regarding the company’s market value and other financial information. You can find the individual investor’s equity stake in the company using the cap table.
Equity stake of an investor = Number of shares × share price
The cap table structure also varies depending on each funding round. When there is a change in the employment condition, share sales, or expiry of options, the cap table needs to be updated.
What Does a Cap Table Include?
Typically, a cap table has a list of ownership and financial information that an investor needs to be aware of. There is no one size fits all strategy for cap table management. The information you can find in a cap table includes the following aspects.
- Shares – Along with the details of common and preferred shares, the table will have information regarding authorized, unissued and outstanding shares. And then there are shares that the company reserves for stock options.
- Valuation data – The capital raised in the most recent funding round, pre-valuation price, post Valuation price, and the total number of shares will be included in the list.
- Shareholder details – The ownership percentage of every shareholder in the company, types of shares, and the count of shares are revealed in the list.
- Convertibles – The convertible debts are often added to a separate section of the table. This is because the values may change depending on future financing rounds.
Benefits of Cap Table Management
Cap table management is a crucial verification document for most investors. However, there are more reasons why it is important for a business, which are as follows:
- Demonstrates the founder’s power over the company – The equity stakes of the founders in the company show how credible they are. If a financing round has swept the founder’s stakes clean, then the investors should be alarmed. A well-managed cap table offers such insights to investors.
- Predicts the possibility of dilution – If the cap table reveals more debts and liabilities, there are chances of dilution in the future. This might help the investors make an informed decision.
- Reveals information about other investors – When a company has too many or too few investors, the founders need to align their roles and positions in a way that prevents complications in the future.
- Assists pool management – With proper cap table management in place, the founders can understand how the investor stakes are operating and make decisions in the issuance of options for employees. As a result, they can effectively manage the employee shares pool.
- Keeps track of important documents – The cap table does not just record information regarding shares but also stores legal documents of every transaction. This will help during financial audits during funding rounds.
When Does the Cap Table Become Complex?
With each advancing financial round of a company, the cap table structure may become more complex. The following are the most common conditions that add to the complexity of a cap table.
- When a cap table requires more than just the information of shares like multiple liquidation options, discount rates and valuation caps, When the startup faces a down round, the anti-dilution provisions of the existing investors may be threatened.
- Sometimes, the option pool might not be sufficient to fund the new employees.
- When there is a change in the ownership of shares or transfer of shares to a trust.
- When employees leave the company before their shares are vested.
How to Make Your Cap Table Less Complex?
Although there are accesses to advanced cap table management software and tools, maintaining a complex table can become overwhelming at some point. It is important to keep the following tips in mind to make it less complex.
- Include Every Detail – Be updated on every detail of your company equity. Whether it is the data of the founders, significant talents, or experts, you must know the details regarding their equity types, options and roles in the company’s finances. Then, make a record of all the details in a place that is secure and flexible. You can also consider using automated tools to update the information like cap table software. Remember, the cap table evolves. So, update any change in vesting schedules, grant options, or ownership accurately and on time.
- Follow Each Step – It is important to not skip any steps in cap table management. Cap tables keep track of every asset and liability of your company. So even the minor steps in recording the details must not be overlooked. Right from filling the table with information to adding new sections for options or warrant issues, share transfers, or issuance of convertibles must be duly updated. Your audits whether monthly or annually must be revealed in the table. Also, remember to review the cap table for ensuring accuracy in transactions.
- Don’t Use an Excel Sheet – Spreadsheets certainly help you maintain a record of your company data. However, as a business owner, you cannot completely rely on it when it comes to balancing a company’s cap table calculation and its legal documents. To prevent data conflict, consider using automated software, to avoid manual entries and human errors. It reduces labor as well as ensures accuracy. Also, you can process different functions like calculating waterfalls, export sheets, and terminating grant options.
- Use Cap Table Management Software – Cap table management software becomes a necessity when a company transitions to the next level. When more shareholders are joining your business your records will need constant edits and additions. Cap table software will help you avoid manual labor. Also, you need a standard place for all the legal documents like grant notices, purchase contracts, and incorporation documents. This will serve as a main source of reference for your company to understand investment options in the future.
- Take Experts Help – Although you may have enough experience in the industry, managing a cap table requires professional expertise. The person involved in maintaining the process must know the science and maths behind cap table management. No matter how many audits you run, formulas and cap table calculations are a sensitive process. When a knowledgeable person monitors, cap table management can become more efficient. So it is advisable to find a professional service provider who can guide you through the journey.
How Can Eqvista Help?
With Eqvista’s cap table software, you can manage your shares, options and convertibles in a unified space. You can access all the data from your dashboard.
You can begin by creating an Eqvista account for your company. The options on our platform allow you to create new options classes and security types. The ‘issue shares’ option will require you to fill in the information regarding shareholder details, option price, vesting schedule, and security. After the information entry is done, you can view the details again by checking the ‘summary’ option. Eqvista cap table management software helps save much time and labor in maintaining your company equity. You can also share equity data with key professionals of your company including the investors. There is also an option to control how the receivers view the data shared.
Manage Your Cap Table on Eqvista Today!
The need for a cap table is not restricted to just tracking details of company shareholders and equity. It is also evidence that you are strictly complying with the shareholder regulations and standards. If you would like some help from Eqvista to create and manage a perfect cap table for your business, get on a consultation call with us today!