Cap Tables Defined

So we have finally secured funding from our investor. The money has reflected in our bank account. We can finally embark on our business mission without fear that our coffers will go empty. Now we can afford to get that office space and sign on additional employees to the company. Thanks to our investors for making this a reality. As mentioned in the article, Understanding Venture Capital, our investors would want to see a return on investment(ROI). So, how do we keep record of this money in our company? If our company has gone through Series A , Series B  financing  and now wishes to go for a Series C how do we proceed and track all  our investors?  This is where the Capitalization Table (Cap Table) comes in.

A Cap Table is a ledger that keeps track of “who owns what“ in the company. It is a list of all your company’s securities ( Derivatives. Stock, Options, Warrants etc) and who exactly owns those securities. Capitalization Tables are a great way for a company to keep track of all the relevant information related to all of its stakeholders. There is however no right or wrong format for a Cap Table. Instead, it’s tailored to suit the needs of the reader. For example, the Chief Financial Officer (CFO)  Cap Table may be of a different format when compared to that  of  the Chief Executive Officer (CEO). The reason for the difference in formatting lies solely on the questions these independent actors are trying to analyze and answer. In addition, the Cap Table for a retail startup that has just closed its Series A financing will be very different from a conglomerate that has just closed its Series C financing round. It all depends with where you are and what information matters most to you.

A Cap table should  enable us to quickly determine who owns which securities hence at minimum should reflect the following bits of information:

• Date of Issuance.
• Stockholder Name as it appears on the security instrument (Promissory note, Stock Certificate etc).
• Number of Shares or Units issued.
• Date of Disposition (if the security is no longer outstanding)
• Consistent and Concise commentary

If you are just starting out, your Cap Table can be stored in the form of a spreadsheet such as Microsoft’s Excel that you update as needed. This method is however not scalable and is prone to human error after many rounds of funding that introduce some sort of complexity in tracking all the investors and their claims on the company. Cap Table automation software may be ideal in such scenarios where there is increased complexity in securities recordkeeping. As an entrepreneur, it is very important to make sure your Cap Table is up to date  for accurate decision-making purposes. For example, you may wish to recruit a talented engineer for the position of Chief Technology Officer (CTO) for your  firm and during the interviews  the candidate requests for stock options within the company. How will you tackle the situation? You will obviously have to go back to the Cap Table to quickly determine if you have sufficient shares in the option pool to allocate to this individual and  how dilutive the share allocation will be to other holders.

Cap tables are very important when considering new financing as they will empower you to quickly run scenarios on topics such as different pre-money valuations , different round sizes etc. When carrying out decision making for your company  that has an impact on capitalization or is colored by it, a cap table may show you the key investors you may need to consult with before execution commences. Check out the various formats of Cap Tables available online to see which format best suits your business needs.