What is a Capitalization Table?
A capitalization table, commonly referred to as a cap table, is a pivotal document for any company. It’s a detailed spreadsheet that meticulously outlines the equity capitalization of a business. While cap tables are indispensable for startups and early-stage companies, they hold value across all corporate stages. In essence, a cap table offers an intricate breakdown of a company’s shareholders’ equity.
Cap tables typically feature components such as common equity shares, preferred equity shares, warrants, and convertible equity.
Key Takeaways
- A cap table is a document detailing the equity ownership capitalization for a company.
- Understanding and maintaining a cap table is critical for making informed financial decisions surrounding equity, market capitalization, and overall market value.
- Cap tables aid private firms in maintaining their market valuation calculations and play a crucial role in shareholder reporting and new capital issuance.
How a Capitalization Table Works
A basic cap table lists each type of equity ownership capital, the investors involved, and the share prices. On the other hand, a more nuanced table may encompass potential new funding sources, mergers, acquisitions, public offerings, or other speculative transactions.
Cap tables serve as a private gauge for a company’s investor landscape and market valuation. Below is a fictional example to illustrate a cap table.
Overall, a cap table is a valuable document that presents the total market value of a business and its various components. Business managers frequently consult the cap table for making pivotal financial decisions that impact the company’s market value and capitalization. Thus, ensuring the cap table’s accuracy, alignment with business requirements, and timely updates is crucial.
Creating and Maintaining a Capitalization Table
When plotted together with the shareholders’ equity section of the balance sheet, a capitalization table becomes an insightful instrument for understanding a firm’s equity capital structuring. The names of the security owners are generally listed on the Y-axis, and the types of securities are marked along the X-axis. Typically, all holdings for each investor are summarized in a single row.
Investors can be listed in myriad ways, depending on the audience. Some cap tables may prioritize founders, followed by executives and critical employees, then further extending to other stakeholders like angel investors, venture capitalists, etc. Alternatively, the table might prioritize investors based on descending order of ownership, emphasizing largest holders first.
Special Considerations
As businesses evolve, regular updates to their capitalization tables become paramount. Startups undergo multiple funding rounds to meet capital requirements and grant stock options to attract top talent. Each of these activities necessitates timely updates to the cap table.
Additionally, events such as terminating stock options due to employee exit, the expiration of options, buyback, sale, or transfer of shares could necessitate revisions to the cap table.
Why Startups Need Cap Tables
For startup companies, keeping an accurate track of equity ownership is essential as they generally have limited equity owners. These typically include founders, friends and family, and early-stage angel investors. With each funding round, the equity ownership is spread thinner across new investors, such as venture capitalists, until an IPO. Hence, cap tables consistently evolve post each funding round, documenting the shifting landscape of ownership amidst growth.
What Information Does the Cap Table Track?
A comprehensive cap table captures details about stock ownership, convertible securities, warrants, options, and stock compensation awards, presenting a fully-diluted picture of equity ownership. It details the share count (or rights), market value, and percentage representation of each ownership block.
Is a Cap Table Public Information?
In the U.S., there is no regulatory mandate for private companies to disclose their cap tables. As a consequence, startups during their private phase may restrict visibility of cap tables, revealing them only to serious investors. Conversely, once a company goes public, a list of major insiders and institutional shareholders becomes publicly accessible.
Related Terms: equity capitalization, market capitalization, shareholders’ equity, financial decisions, market value.
References
- U.S. Securities and Exchange Commission. “Capitalization Table”.
- TechCrunch. “6 Considerations for Managing Your Cap Table”.
- AngelList Venture. “What Is a Cap Table?”
- Crunchbase. “Glossary of Funding Types”.
