Complete Guide to Cap Table
A cap table is a tool used for startups or new businesses to show the ownership of the company.
A cap table is a tool used for startups or new businesses to show the ownership of the company. This normally includes common shares, preference shares, options, warrants, convertible notes, and many others. It would have an effect on the founders, investors, employees and other third parties. These company transactions would ultimately allow you to determine who owns the company shares, how many shares each person holds, and dilution of share price over time.
As you can see, there are many variables involved in this process. This is the reason why the cap table was created to track this data. While it may be fairly simple at the beginning, as a company grows and attracts more investors through financing, initial public offerings, mergers and acquisitions and other transfers, it can become quite complex.
What type of shares are there for a company?
Generally there are two types of shares that most people involved in a company deal with; common shares and preference shares.
- Ordinary shares represent the ownership of a company, and shareholders with common shares are able to vote on important company policies and exercise their rights as the owners. However, they normally do not receive a fixed dividend and have less preference if the company goes into liquidation following a bankruptcy.
- Preference shares on the other hand normally are for investors. These preference share normally have a fixed dividend, however preference shareholders often do not have any voting rights within the company. They do have preference over common shareholders in the event of liquidation of assets for a company going through bankruptcy.
Other factors that affect the Cap Table
Once you know the two main types of shares for a company, the next step is to understand the other factors and transactions that affect the cap table. These transactions are issued by the company and all can have an effect on number of shareholders and overall share distribution.
A few of these include:
- Options are a type of contract between the company and a receiver that gives them the option to either buy or sell shares at a fixed price before a certain date. These normally are issued to investors, founders, or as an award to employees for their services to the company. An option should include the grant date, receiver, number of shares, cost, strike price (fixed price), vesting start date and exercise date (if any). These options may affect the overall cap table of the company if the option contracts are exercised.
- Warrants are similar in nature to options, however a warrant is issued directly by the company, whereas options may be issued by a separate investor holding company shares. As warrants are issued directly from the company, a company may provide these to initial investors for further investments or to build confidence in the company. A warrant would also include the grant date, receiver, number of shares, cost, strike price (fixed price), vesting start date and exercise date (if any). As similar to options, they would affect the cap table once exercised.
- Convertible-securities (debt that converts into equity) are normally bonds or company loans that can be converted into company shares at a later date. These types of securities offer the holders a choice on their security, in terms of direct financial gains through interest and loan payments or company ownership in the case the company have high potential for growth.
- Restricted stock are unregistered shares of a company that are normally issued to people inside the company, such as to the company executive or directors. These types of shares are non-transferable and must adhere to special SEC (Securities Exchange Commission’s) regulations when traded. These are normally issued as a form of employee compensation, as they often are fully vested after certain conditions are met, such as continued employment or achievement of certain goals.
- Restricted stock units (RSU), as similar to restricted stock, also offer a type of employee compensation when certain performance goals are met. However, they differ in that these employees are not initially issued shares until the vesting is complete, in a similar nature to options rights. This can be advantageous for the company in certain situations, as it does not immediately dilute the share number, as is easier in terms of the bookkeeping and possible taxation affects until the stock units are converted to shares.
These are some of the factors that are issued by companies that affect the cap table and shareholdings, but there are many others as well.
Managing the Cap Table
At first your company’s cap table will be relatively simple, with a list of the founders and their shareholding. This organized table will clearly show who the founders are, the number of shares they have, and what percentage they own of the company. It will also include the number of outstanding shares in the company.
The first few rows of your table should include:
- Total authorized shares: Total number of allowable shares in the company
- Total issued shares: Total number of shares issued to shareholders in the company
- Unissued shares: Total number of shares not yet issued
- Names of founders: Names of the initial founders of the company
- Ordinary shares held: The common shares held by each initial founder
- Preferred shares held: The preferred shares held by each initial founder
The next rows of your table may include:
- Seed round & Series A, B, C: This would include the investments received and shares issued
- Employee stocks: Any shares, options or warrants issued to your employees
- Award stock: The restricted stocks and restricted units based as awards based on staff performance
Other forms of financing that may affect the shareholding and dilution of share price may include warrants, convertible notes and transfers. These additional items will add complexity to the shareholdings, so it’s better to keep things organized and recorded in the cap table. You may also choose to store the company documents for these forms of financing in the cap table.
Steps to make a cap table
In order to take advantage of our pre-made cap table, follow these steps to complete the information for your company.
For example, let’s say you have authorized 1,000,000 shares for the company. On April 1st, the date of incorporation, you issue 30% of the shares to yourself, 20% to your business partner, 10% to your employees and a further 10% to investors in the Series A round investment. The remaining 30% shares will be kept for future issuance as options.
- Fill out the basic information of your company, and the questionnaire regarding your company. These include if the company had transactions which may affect the shareholdings of your company, such as Series financing, options, warrants, convertible securities and transfers.
- Enter all of your shareholder’s information and also the share information for your series financing, such as the date, total shares, price per share and shares per investor/founder. You can add all the shareholders of the company at once, or step by step as you go.
- Go to the next section if your company has issued any options or warrants. You should enter in all the shareholders, grant date, number of shares, vesting date, strike price, and if these options/warrants were exercised. This will determine if these have been converted to shares or are fully vested.
- Go to the transfer section if your company has any transfer of shares, including sales, transfers, repurchases or cancellations of shares. All of these should be recorded to have an accurate standing of the current shareholders, as well as to establish a price for your shares.
- Add another section if your company has issued any convertible notes /convertible bonds. You will need to fill in the information about the convertible securities, which may affect the shareholdings in the company.
Below is an example of this on a typical excel sheet:
This is the same information on the Eqvista Format:
After you have entered in all of your information, all of the data from these tabs will be integrated into the cap table. Here you can see all of the shareholders of the company, their capacity, their particular share transactions, number of shares held and percentage of ownership.
All of this information should give you a clearer idea of the overall ownership of the company, and the makeup of the shareholders. This data will automatically update when you make any changes to the previous tabs.
How to update the Cap Table
Once you have your company running for some time, you will need to update the cap table with each new financing or transfer of shares among your shareholders. This could include the issuance of new options for employees, sale of shares from a shareholder, or retirement of an old employees. All these activities would require the update of the cap table.
Having an updated cap table is not only useful for your organization, but also for outside investors and venture capitalists to get more information when investing in your company. This cap table will provide them confidence in an accurately recorded set of documents. It also serves as a form of legal records of your important documents and transactions, and will prove useful in tracking possible gains and tax obligations near the year end.
Waterfall analysis is chart that shows data visualization in a new light, and helps you better view the shareholders and amount of equity of the company. This method shows the total amount of shareholdholding’s and percentage of proceedings of the company upon exit. You can create a waterfall analysis from the data in your cap table, to give you a better picture.
Round modeling is a table or chart that shows how new finance rounds will impact your current cap table of the company. This may cause dilution in the existing shareholdings, and you can see how potential new financial rounds will affect the shareholders.
What are the uses of a Cap Table?
You will find that there are many uses for the cap table well beyond the total share count of the company. Here are some additional ways how to benefit from an organized cap table.
1) Investor financing
When pitching your company to interested parties, investors will want to see how the company ownership is structured. They will want to know the current makeup, past finance rounds and impact of their investment on the shareholding. The cap table will let them know where they rank in shares, and how much they need to invest to increase their position.
2) Keeping track of the total shareholders
A Cap table is perfect to manage the shareholders of your company, how many shares they have, and what percentage of the company they have. You will also be able to see the vesting schedule to know when more shares will be issued to your shareholders. You will need to keep this up to date when adding more transactions such as options and convertible notes.
3) List of legal documents
Not only does the cap table track the number of shares, but also the legal document that goes with each transaction. This is a good resource for tracking important legal documents, and verifying which legal form has been recorded.
4) Future planning and important dates
The cap table not only records the current shareholders and investors of the company, but also lets you know important dates when your options, warrants and convertible bonds can be converted into shares of your company. This may have a great effect on your staffing decisions and plans for your company in the future.
5) Selling the company
If the company decides to sell the business, the total proceeds of this sale would be split amongst the shareholders. The cap table would summarizes how much each shareholder would receive, and shown to each shareholder in case there are any disagreements from the distribution.
Not only is it important to have accurate records of the shareholders of your company, but it is equally important that you are following the relevant regulations and requirements for your company. Mismanagement of the shares of the company could not only put you in legal troubles, but also tax liabilities if you or your employees received earned compensation from it.
Below are some of the common regulations:
1) IRC 409A
The IRC 409A is the regulation for conducting a formal valuation of the company, which must be determined if your company wishes to get investors through financing. It is also important for any share based compensation plans, such as stock option plans to the company employees.
2) ISO 100k
This outlines the number of options which can vest during a particular year to qualify for a particular tax treatment.
3) ASC 718
This is a requirement in the accounts that measure and record the issued equity-based compensation in terms of the company expenses.
4) Rule 701
This is an exemption for the requirement to register equity based compensation with the SEC over a period of 12 months.
This election is in regards to the restricted stock awards, and should be finished in 30 days of a specific grant.
There are other regulations and tax requirements for the shares, however these listed requirements are an important component to consider for your cap table.
Selling the company
If you are a business owner or professional, you can start creating your cap table and manage it online. Try out our Eqvista App!
Once it’s time for the company to be acquired, all the work and details of keeping an update cap table will come into play. This important information will be reviewed to see the breakdown of the shareholdings of the company, and the conditions of the proceedings upon exit of each shareholder, share issuance and convertible equity.
The accountants and lawyers will be reviewing the agreements of the shareholders, convertible notes, options and warrants to see who gets what for the cash distributions. And if these records are incomplete or missed out, it could cause trouble for the shareholders, and more legal disputes.
This is why it’s important to keep all these details in the cap table, and that everything is correctly organized. It will save you both time and money in the end to invest in a good cap table software when selling the company.
As you can see with the details of the cap table, that it is vital to keep all this information for the shares and owners of the company up to date. In addition to the basic information of the shares, options, warrants and convertible notes of the company, the cap table can also ensure that the company is adhering to the various regulations surrounding the company shares, as well as organizing all the shareholder agreements within the company.
If you would like to know more about our complete guide to cap table, or about our online Eqvista cap table software, check it out here. Our cap table offers a wide range of functions in managing your company details and share issuances.