In business, there are tools that will make a significant impact on your operations and decisions. One of those tools is a capitalization table. Yeah, it’s possible you are sitting there wondering just what that is, right? So, let’s dive in.
A capitalization table labels everything and tells us who owns what part of the company and its assets. It helps us proportionate a list of all of your company’s securities and its variables. It doesn’t matter what stage you’re at in your business, understanding a capitalization table and making it work will help you give a crystal-clear view on the entire timeline of your business’ capital structure, ownership, and value.
In simple words, a capitalization table is an easy way to organize information regarding who owns what in your business; ranging from the equity percentages to the value and rights, different shares give their owners. It is a very valuable tool and if used correctly, can help you raise more investment capital for your startup venture.
Benefits of a Capitalization Table
Apart from listing the shares and recording every transaction, a capitalization table also helps you comprise all the legal documents and agreements. The table lists all the documents to accurately show all the events that have occurred since the company’s formation. A capitalization table helps your company to list all the:
- Stock issuances
- Stock transfers
- Share cancellations
- Share ownership
- Employee stock options
- Ownership dilution
- Issuance of new securities
How to Make a Capitalization Table?
A regular capitalization table includes the names of the people on one axis and the details of what they own on the other axis. There are many methods to create a capitalization table for your business.
- You can download a template for your cap table spreadsheet
- You can use a free/premium cap table software
- You can hire an equity management platform
If your capitalization table is based on a spreadsheet, then you will have to update it regularly, which means you will have to change the information in it whenever an event occurs. After updating, you will also have to send it to the relevant stakeholders. This is what makes a spreadsheet so difficult to use. To save you from future trouble, I have listed out two other options as well, that you can consider.
At the start, the data in your capitalization table is relatively simpler. But as time goes on and your business starts getting funds, it gets more and more complex. When making a capitalization table, you must list out all the following resources in the table:
- Shareholders
- Investments
- Dates of all the share sales
- Value of the shares
- Share transfers
- Share dilutions
How to Manage Your Capitalization Tables?
After getting to know about the capitalization tables, you must have realized how complicated and time-consuming this process is. Making and updating capitalization tables requires more than just spreadsheets. Managing the tables is a complex process that involves:
- Working out all the possible exit scenarios
- Running a waterfall analysis for prospective investors
- Sending all the up-to-date data to the stakeholders
- Addressing all the compliance needs
Things to Keep in Mind:
Once you’re familiar with all the ins and outs of creating and updating a capitalization table, you will have to figure out how to use it. So, to maintain your tables, you will have to keep the following things in mind:
1) Keep the Table Available at all times:
Once you’re done with the table, you will need to share it with all the stakeholders a countless number of times. That is why you should always keep the table up-to-date and ready. It must be in soft form so that it can be shared with everyone conveniently.
2) Keep Track of Everyone:
Once things start getting complex and more investments start knocking your door, you’ll be unable to account for each and every person. That is why it is smart to keep all the contacts in your capitalization table. Having their email and physical addresses will make it easy for you to deliver notices and reports.
3) Make it Simple:
Sometimes a single person may hold different types of security shares in the same company. To make the accounting simple, it’s better to group the different types of shares. Use the names of the shareholders consistently throughout the table to omit any kind of discrepancy.
4) Ensure Legal Procedures:
The capitalization tables of your company hold a legal value. And can be challenged in the court in sort of any conflict. This is why you should always ensure that all of your tables are according to the law. In this situation, you can talk to your lawyer and get all the information you need.
If you’re looking to work on a startup program from scratch, then you would already have all your plates full in no time. A capitalization table is an essential requirement for getting that seed investment. In this scenario, it is better if you give the responsibility of making a capitalization table to an accounting pro. In this way, you wouldn’t mess it up by taking everything in your own hands.
