A company’s “capitalization table” is a list of who owns what in the company. The table shows how much each owner has invested and how much ownership they hold.
This table is essential for understanding who has a stake in the company, and how that ownership might change if new investors come on board. It’s also a key document for calculating company valuation and employee stock options.
This article will further explain what a capitalization table is, what you should keep in mind, and which software tools can be used to create one.
What Is A Cap Table And What Does It Track?
As mentioned above, a cap table lists all the shareholders in a company and their ownership stakes. It typically includes the name of the shareholder, the number of shares they own, and the value of those shares.
The cap table is used to track changes in ownership over time, as well as calculate things like the company’s total value and the amount of equity each shareholder owns.
It is especially important for startups since it can help them determine how much money they need to raise to capitalize on their business fully.
Why Is Understanding Your Cap Table Important?
Business owners need to understand how their company’s cap table works to make informed decisions about their business. All shareholders should be aware of the critical components in the capitalization process, such as common and preferred stock and how options work.
How To Create A Cap Table
Anybody can create a cap table on their own, but it does take quite a bit of effort to keep up with all of its moving parts.
A software tool can help you accurately track ownership stakes, calculate equity values, and determine valuation based on exit scenarios. Here are several software tools that can make creating a cap table a breeze:
Carta is a leading web-based app used by thousands of companies worldwide to make cap tables, get valuations and raise money. It is the easiest way to create a cap table for your startup to track ownership, value, and equity compensation.
- Supports all security types in public and private companies
- Allows you to monitor transactions in real-time, including contributions, issuances, pledges, encumbrances, and conversions
- Provides the ability to manage valuations for employees with stock options or restricted stock units (RSUs)
- Provides ASC 718 reports and 409A valuations
- Available in iOs and Android
Pulley is a web-based software that helps entrepreneurs create a cap table and track ownership. The app’s price starts at $100 per month for 25 stakeholders. Pulley also offers a premium service that includes legal templates, contract negotiation support, and more.
- Pulley is the only platform that generates fully executed and signed legal documents.
- The suggested valuation is calculated using the discounted cash flow (DCF) method, but you can also choose an equity valuation model
- Use machine learning models that read documents to create cap tables
- Provides audit-ready 409A valuations in 5 days
3. LTSE Equity
LTSE Equity (formerly known as Captable.io) is best for small to medium businesses looking to create a straightforward cap table. It creates a 409A valuation in less than an hour. LTSE Equity also allows you to track investments from seed rounds through Series C. In addition, it can calculate the net present value (NPV) of your company.
- Capable of handling IPOs and private companies
- Displays all financial information in beautifully formatted charts and tables
- No limits or extra charges for additional stakeholders
Why Do You Need To Use A Cap Table Tool?
As a business process, cap table management is rather complex. This procedure may put a firm in legal difficulty with investors and other stakeholders. Most often, mistakes in cap table administration result in steep fines.
The following are some of the most important advantages of using cap table management software:
1. It simplifies the process of tracking ownership changes.
2. It helps you calculate the value of your company’s stock.
3. It provides a snapshot of your company’s ownership structure at any time.
4. It can be used to generate reports for investors and other stakeholders.
5. It’s a valuable tool for due diligence purposes.
6. It can help you identify potential investors and partners.
7. It can help you negotiate deals with potential investors and partners.
8. It can help you track your company’s progress over time.
9. It’s a valuable resource for managers and employees.
10. It’s an essential tool for startups and early-stage companies.
Things to keep in mind when creating a cap table
When creating your cap table, it’s important to be accurate. Any errors can significantly impact your business because they could cause complications when raising funds, diluting equity, or altering ownership percentages.
The following are the three most common mistakes entrepreneurs make while creating their cap tables:
1. Not keeping track of capital contributions.
On multiple occasions, investors have requested ownership percentages due to a lack of record-keeping by the founders. It is very easy for an investor to misinterpret the percentage of shares held by each party after years of stake accumulation.
The best practice here would be to maintain daily records of all transactions made by shareholders, whether it’s a cash infusion or new issuance of stocks/options/RSUs/warrants, etc. This will help avoid confusion and resolve any questions in the future.
2. Not keeping track of all capital gains.
All transactions made by shareholders should be documented, including stock sales and option exercises (this is especially important for early-stage companies). From an investor’s perspective, this is critical information influencing their valuation.
3. Counting private company shares as outstanding during fundraising rounds.
There are strict rules governing when private company shares are counted as part of outstanding shares (i.e., 10% ownership threshold is not met).
If you’re raising money from institutional investors, they will most likely ask if your share count has been properly calculated — so don’t risk ticking them off right off the bat!
Final Thoughts: Cap Table
Cap table management can be complex, especially if you’re not using the right solutions. If you’re looking for software that provides you with all the tools necessary to create an accurate cap table, those three applications mentioned above are available in the market.
It’s no wonder cap table management software is in such high demand: It simplifies the process of tracking ownership changes, provides two levels of security, generates reports for investors and other stakeholders, and is also a valuable resource for managers and employees.