Starting a business is a huge undertaking. To establish steady traction and growth, one requires a brilliant idea, plenty of effort, and innovation. Additionally, when the business expands, it hires new employees and may decide to provide stock options in order to entice new hires and financial backing from investors. All of this information is included in a document known as a cap table.
You may handle business decisions strategically with the use of a cap table. Are you curious about a cap table, its significance, and how to keep one in order to grow your company? Let’s start now.
What is a cap table?
The capitalization table is another name for a cap table. The capitalization of the corporation is shown in the following table. It is a list of every shareholder and grant in a firm, to be more precise. When a firm needs to keep track of the total number of shares, their value, and the equity ownership of all the shareholders, a cap table is used.
A cap table is used to present the company’s information, including debt and stock ownership. This cap table includes information such as investor liquidation rights and total capital provided by lenders.
Since virtually all startups lack traditional loan lenders, the list often includes information about the shareholders and the percentage of the company they own. Additionally, different equity structures, including preferred stock, common stock, and convertible notes, have an impact on both current and possible future investors.
Elements to include in a cap table
Let’s check the various elements that need to be added to a cap table
Shareholders
An individual or business that holds one or more shares of the company is referred to as a shareholder. Members of a corporation are referred to as shareholders. Simply described, a cap table is a list of the shareholders who have purchased firm shares.
Authorized shares
The total amount of shares that your startup’s owner has set aside for issuance is known as the authorized shares or securities.
Common shares
The most basic type of ownership in your firm is common shares.
Preference shares
Preference shares are a type of stock with unique rights as stated in your startup. There are various kinds of preferred stock, each with a unique set of benefits:
Convertible
Participating
Non-participating
Convertible notes
A convertible note is similar to a loan in that the principal can subsequently be changed into business equity, typically through a liquidation event like the company’s acquisition. Investors convert at the lower of the convertible note cap or the valuation of the next eligible priced round.
Total share ownership
The total number of shares owned by a single person includes all of their common stock, stock options, preferred stock, and other stock categories.
Do we need a cap table?
An organization needs a cap table since it is used to make choices. The cap table, for instance, will assist you in a number of ways while conducting commercial operations like accessible options and pre-money appraisals more quickly.
This can be useful if you are hiring a COO for the business and the applicant requests a share of the company. If this option is not accessible, you can easily determine your donation amount and determine the percentage you are willing to offer. In essence, it shows who is the company’s owner.
So… was that it about cap tables? Of course not! We still have to find out how to maintain it for the investors.