Saturday, March 2, 2024

Top 5 This Week

Related Posts

What Is Cap Table Management and Why Is It Important?

A cap table (capitalisation table) is a spreadsheet that provides an in-depth perspective of a company’s equity and shows who owns what, including:

  • Stock 
  • Warrants
  • Convertible notes
  • Employee equity grants. 

Cap tables serve as a single source of truth for private companies and their investors, helping them understand their capital structure. Managing them is an important task to set up from a start-up’s beginning, yet first-time entrepreneurs sometimes need to pay more attention to this crucial aspect. And as enterprises mature, cap tables record additional essential elements such as future rights to purchase additional equity, voting percentages, option vesting schedules, and other equity management information.

If you’re an aspiring entrepreneur or want to improve your detail management processes, the following information may be useful. 

Cap table and start-ups 

A cap table is a critical document that helps investors and founders make more informed decisions and details a start-up’s ownership breakdown. This legal document spells out your start-up’s equity structure and reveals much about the company owner and the enterprise, including who’s in charge, the type of business expertise implicated, and the trusted partners

Getting things right the first time and correcting errors as soon as possible can help impress key recruits and potential financial partners while saving a lot of later trouble. Cap tabs are an important part of any successful enterprise, so take notice of them if you plan to do some startup fundraising. Investors respond well to preparedness and expect clarity, efficiency, and organisation within the projects they’re putting their money in. 

Here’s what a capitalisation table usually includes: 

  • Shareholders. A list of all shareholders and founders and an individual breakdown of the amount of capital each one holds, as well as the type of equity owned, the number of shares held, and each shareholder’s percentage ownership of the company. 
  • Employee stock options. As your team grows and you possibly offer stock option grants, your capitalisation table should incorporate the total number of options in your employee pool as part of any ESOPs (employee stock option plans).
  • Pre-money, post-money, and total company valuation. Including your business’ valuation before the fundraising round, the valuation post-raise, and the total equity value and per-share prices.

What you should know as a first-time founder 

If you’re not used to capitalisation tabs, you should know that they usually become more complicated over time. Hopefully, you get new venture capital funding rounds, for which cap table management is helpful. 

Your shareholders must be updated and informed in real time on your business’ evolution and financials. Employees who want to own a share of the company at a low cost must also be engaged, which is where an ESOP feature helps. 

Setting up and projecting the capitalisation table must be prioritised when the start-up is in its early stages. Luckily, good cap table management for startups can make the job incredibly easy, as it saves time and manual effort. 

Otherwise, an inaccurate cap table can lead to misalignment and disputes around accounting and other vital details the finance team needs. 

When should your start-up formally start managing its cap table 

It’s best to have an accurate cap table on-hand from your start-up’s beginning. In its early days, when you don’t have outside investors, you might get away with a basic Excel spreadsheet. However, once the project matures, it’s best to use a cap table management platform.

Spreadsheets quickly get cumbersome when you must monitor your ownership interests alongside investor stakes. 

How to manage the start-up cap table effectively

As you prepare to raise a round of equity financing, ensure that you deeply understand your current capital structure. To understand how each stakeholder’s ownership percentage changes when the fundraising is over, you should also be able to estimate the impact of a potential financing round on your capital structure. 

Here are two critical tips for each new round:

  • Upload relevant materials like term sheets, investor rights agreements, and investor sustainability questionnaires to your cap table platform. 
  • Update your cap table to reflect the new valuation, ownership interests, and share issues. 
  • Sign and distribute ownership interest.

How to share it with investors and employees

Investors usually request summary-level cap tables to add your enterprise to their portfolio, which is a fairly routine practice that should be fine for your team. Employees may be implicated and want further information, or they may be indifferent. 

The level of openness you’re offering your team depends on your comfort level and the comfort levels of your legal and finance teams

Cap table management don’ts

To go into a negotiation blind may require you to fix your broken cap table, but the costs can be high, and the efforts of reconstructing past transactions can be overwhelming. Instead of rebuilding the integrity of your cap table, ensure you don’t neglect the following aspects: 

  • Don’t make an incorrect and poorly-designed cap table with the intention of fixing it later. The issues can only compound, and repairing what’s been messed up can be more expensive and difficult to manage. 
  • Only delegate the responsibility for managing the cap table if the role is clearly defined, because the founder is ultimately responsible for all the business aspects.
  • Last but not least, keep track of your stakeholders’ information and ensure it’s clear to investors and employees that they have to inform you of address changes. In a merger or IPO (initial public offering), losing information might create significant delays and even ruin the entire transaction.

Finally, a correct cap table can play a significant role during liquidation.

Liquidation isn’t a thrilling scenario, but remember that it’s possible. However, cap tables show the total ownership of private companies across different shareholders, so it’s clear why it’s important. In the event of a liquidation, when owners decide to wind down a firm and sell off the assets, the cap table proves helpful throughout the process. 

The aforementioned liquidation preference is, therefore, an item that you should record in your documents. Liquidation preference is a standard clause for preferred stakeholders, assuring they get paid first because they have priority over the common stakeholders, who get whatever is left afterwards, and easing the burdensome liquidation process.

20 COMMENTS

  1. Very nice post. I just stumbled upon your blog and wanted to say that I’ve really enjoyed browsing your blog posts. In any case I’ll be subscribing to your feed and I hope you write again soon!

  2. Thank you for your sharing. I am worried that I lack creative ideas. It is your article that makes me full of hope. Thank you. But, I have a question, can you help me?

  3. I am an investor of gate io, I have consulted a lot of information, I hope to upgrade my investment strategy with a new model. Your article creation ideas have given me a lot of inspiration, but I still have some doubts. I wonder if you can help me? Thanks.

  4. Não acho que o título do seu artigo corresponda ao conteúdo lol. Brincadeira, principalmente porque fiquei com algumas dúvidas depois de ler o artigo.

  5. Sou Ph.D. em ciências financeiras e atualmente estou estudando criptomoedas e seu artigo me deu uma boa ideia. Acho que sua forma de escrever é muito útil para minha tese criptomoedas, obrigado. No entanto, tenho algumas dúvidas e gostaria de saber se você pode me ajudar. Obrigado.

  6. I may need your help. I tried many ways but couldn’t solve it, but after reading your article, I think you have a way to help me. I’m looking forward for your reply. Thanks.

  7. I have read your article carefully and I agree with you very much. This has provided a great help for my thesis writing, and I will seriously improve it. However, I don’t know much about a certain place. Can you help me?

LEAVE A REPLY

Please enter your comment!
Please enter your name here

Popular Articles