There were over 5 million applications for new startup businesses in 2021. Many of these new businesses rely on startup investors before gaining series funding.
But keeping track of investor funding without a cap table can be challenging for new business owners. But what is a cap table and how do they work?
The following guide will explain everything you need to know about using a capitalization table and why they’re crucial.
What Is a Cap Table?
A capitalization table is a type of spreadsheet that documents all of a business’s securities. Examples of securities include things like common shares, preferred shares, and warrants.
Cap tables show who owns shares and the exact amount that each stakeholder paid to obtain them. It’s important information to have, especially for fundraising purposes.
How Are Cap Tables Used?
Entrepreneurs, venture capitalists, investment analysts, and investors all use cap tables to help with tough financial decisions. They also help evaluate the market value of a company.
Cap tables help find out how much the founding team of a company still owns. They can show how much personal stakes might be diluted during a funding round as well.
The handy tables note who the main stakeholders are and if employees receive stock options. Cap tables might also include legal documents like transfers, stock issuances, conversions of debt-equity, and cancellations.
Why Are Cap Tables Necessary?
Cap tables are important because they outline precisely who owns what in a company. In the beginning that might be very simple, but as a startup grows into a larger company via funding rounds the list gets much more complex.
There are multiple ways for a person or organization to get included on the cap table of a startup company. Typically, companies offer a few points to influential advisors for donating their time and knowledge.
It’s not uncommon for startups to offer new workers stock in the company as motivation to take the job. The more employees that join the company, the more there is to keep track of.
Venture capital firms usually invest in a startup by purchasing preferred shares of the business. Preferred shares come with unique privileges such as voting rights or seats on the board of the company.
Cap tables keep track of who has preferred shares in the company and who can affect business decisions. Majority shareholders might also have the ability to authorize or deny further funding and elect new members of the board.
The Board of Directors serves as the boss of startup CEOs and can vote to fire a CEO if needed. Also, there must be a two-thirds vote among majority shareholders of approval in order to sell a company. You can learn here how to develop your own cap table.
Ready for a Cap Table?
Now you know how having a cap table helps document who owns what in a company and why it’s beneficial. Keep in mind that new investors also appreciate companies using cap tables because it lets them know what to expect.
Remember this guide and consider drafting your own cap table today and prepare for your startup to grow. Check out our finances category for more helpful tips to get your new business off and running.