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What is a Capitalization Table
The capitalization table (or cap table) tracks the equity stakes of a company's shareholders during a series of financing rounds. Shareholders normally include the founders and investors but can also include employees or even holders of convertible debt. If new equity capital is injected, it will lead to the dilution of the equity stakes of existing shareholders and the % ownership changes. Same is true also for stock options, once exercised, they will affect the % ownership of the company's equity capital. Capitalization tables can be demanded by investors as they also want to anticipate future financing rounds and have a clear view what their equity stake will be at the time of their planned exit. Startups, therefore, should prepare a cap table to answer those questions.
A basic capitalization table usually lists down the names of stockholders, the percentage of every stockholder’s ownership, how much capital invested, warrants, options, and other investments in a startup. A much more complex cap table will be needed later on as one updates their cap table after a couple of rounds of funding injected in the business. The cap table would then include a listing of new funding sources, mergers and acquisitions, public offerings, and many more transactions that involves the shares of a business. All data is compiled in a neat list which is designed in an organized way that’s easy to read and understand. Basically, the cap table should be able to easily answer the questions: who owns which securities, for how much (price), and which securities are outstanding.
It is best for startup businesses to create a cap table at their starting period to be transparent to their shareholders’ stake in the business and also to manage the securities outstanding of the business. Proper management is needed to ensure that the founder/s stake in the business the highest and to not sell away more than the business can handle.
How to Create a Cap Table
As you already know, a cap table is a list of who owns what in a startup business, basically, listing the business’ shareholders and their respective shares in the business. To make your own cap table for your business, you can simply make a spreadsheet and input all the data needed to be recorded in an organized manner, or you can simply follow the basic steps on how to create a cap table.
- In a spreadsheet, list down in a column the five basic categories needed to be taken note of: Name, Shares, Investment, Ownership, and Value.
- Next would be to fill out the first column by listing out all the names of the starting founders and leave a couple of empty slots for future investors. You can also group up investors if they came in waves or groups and you can name it as a “Round of Investment” where the last or most recent investor should be at the bottom of the list. If ever the same entity invested more than once, each purchase should be separated in a new row.
- Right next to the first column is the respective shares of each shareholder. Then record according to the total number of shares each entity bought.
- Then do the same for the amount of capital invested in the business, recorded under the Investment column. After that, at the bottom of the columns, total up the number of shares and dollars.
- Next would be the Ownership column, where you’ll calculate the percentage of each shareholder’s stake in the business. Just simply calculate it by dividing the number of shares each entity owns by the total number of shares held by everyone on the list.
Share % = Shareholder Share / Total Shareholders’ Shares
- The last column is a bit trickier. Since the value changes every time someone invests, you will have to ensure that you will refer to the last or most recent investor. To calculate the value of the share that each investor owns, you will need to calculate how much an entity paid per share. This can be calculated by dividing the total dollars invested in the total shares purchased by the corresponding investor.
Price per Share = Dollars Invested / Shares Purchased
And that’s it! With these basic steps, you’ll be able to create the most basic cap table which represents the business’ current ownership structure. Just by looking at the report, one should be able to tell who owns the business and how much is each ownership worth in the present. But of course, this is just the most basic cap table.
Capitalization tables can get really complex as it gets bigger and especially if there are major changes in ownership and different voting rights. You would need to extend more your cap table to ensure that you will take note every data needed to be calculated. You will also need to continuously update the cap table too since a startup company is constantly evolving as it slowly grows. This can happen when your business will decide to issue more shares, option pools, selling existing shares, granting programmes for employees to raise benefits, investors redeeming their shares, terminating and expiring options, transfers, and selling of shares, etc., which could greatly impact the capitalization table. Thus, you must always keep it up to date to help you make informed decisions for your business.
Cap Table Financial Model Templates
Creating a cap table is simple and complex at the same time. However, it is simple enough for every startup to create their very own cap table for their business. To help you create a cap table more efficiently without having to spend too much time creating from scratch, you can take advantage and use the cap table financial model templates listed above instead.
The cap table example financial models include the following:
- Capital Raisings from Seed to Series A – C until Exit
- % of share ownership and equity ownership calculation
- Stock option pool
- Pre-/Post money valuation
- IRR calculation for shares of the management and the different investors