Many startups seek equity funding during their high growth journey, and while achieving successful funding is incredibly exciting, it also comes with a few management considerations to keep in mind. And this is namely capitalization table management. Using a capitalization table will help you keep a close eye on your ownership dilution, and understand its impact on your company. But let’s start off with what exactly is a capitalization table?
What is a Capitalization Table?
A capitalization table, commonly known as a cap table, is a spreadsheet or table that shows the equity capitalization for a company. The equity section of the balance sheet is different from debt because your company isn’t held responsible for paying back equity to investors. The capital raised through equity funding instead comes in exchange for an ownership portion of your company. Capitalization tables often include all of a company’s equity ownership capital, such as common equity shares and convertible equity.
A capitalization table is most commonly used for startups and early-stage businesses, but it can be used by all types of companies. In general, a capitalization table shows you who holds the money power in a startup, detailing everyone who owns a stake in your company.
A typical cap table will list each type of equity ownership capital, the investors, and their share prices. It shows the market value of a company, and is a hugely important reference point for business managers and owners, especially when it comes to making financial decisions.
Building and Maintaining a Capitalization Table
Your capitalization table will show each of your investors’ equity capital share in the business, which can be calculated by multiplying the share price by the number of shares owned in the business. Most tables will have the names of the investors along the Y-axis and the types of ownership along the X-axis.
You can list your investors in different ways, depending on how you want to look at and analyze your capitalization table. Some tables list their investors by founders first, working down the company, and finishing with angel investors and venture capital firms. However, you may want to list investors in order of ownership, with the largest holders appearing at the top.
Once you’ve got your capitalization table set up, you need to ensure that it’s always updated as your company evolves and grows. For example, many startups go through several rounds of funding, all of which would need to be reflected on your cap table.
Why Is It Important to Manage Your Capitalization Table? Top Considerations
For startups and new companies, managing their capitalization table is the key to real and effective growth. Having a properly set up cap table will make the process of evolving and growing your business that much easier, as you can simply add in and adapt financial model valuations and formulas.
These could even be dummy formulas and data to test out various hypothetical situations that could crop up in funding negotiations with angel or seed investors, which will add to your confidence in the business. It will also give investors a good impression of you and your company, and what they stand to gain from investing in you, because you’re able to provide them with all the details and different scenarios when it comes to their investment.
Starting off your cap table with a solid structure that can handle the more complex formulas – even when your company doesn’t necessarily need this yet – will also be extremely helpful in the long run and ongoing management of your cap table.
Maintaining an accurate up-to-date record of your capitalization table will help avoid any stress or chaos that could come up down the road. You don’t want to find yourself last minute panicking before that all important investors meeting! It’s all about being organized and prepared. Your cap table should be kept updated with information such as: issue and expiry dates, exercise windows, and any changes in employee shares through recruitment or termination.
So, it’s worth setting a regular amount of time each month to properly maintain your cap table to make sure that the structure stays organized and simple to read, and to prevent any information falling through the net. It could also be beneficial to regularly test the capability of your capitalization table in your ongoing management of it by adding in new models and building up your existing ones, so you’re aware of how your table will fare with future growth in the company.
Get Your Cap Table Just Right
When you’re a startup that’s trying to focus on a number of things at once, it may prove difficult to ensure that your capitalization table is as you need it to be both right now and in the future. But through our financial support services, Simple Startup can help you to prepare for your investor pitches and meetings, and fully understand and manage your resulting capitalization table.
We look at metrics as part of our accounting and fractional support services and customize them specifically for each business we partner with. If you’re struggling with knowing your numbers or don’t know where to begin when it comes to funding options, worry not! Grab some time on our calendar and see how we can support you in managing your capitalization table, and implementing the best practices for your business.