If you are an entrepreneur, then you know or at least heard about cap tables. Imagine a scenario where there is constant confusion as to who owns what percentage and how to manage funds. It gets even tougher to make key decisions in the company. Not much is needed in the early stages of the startup of a company. Common shares are distributed according to the founders' agreement. However, as time goes by, certain things change and become more complex. A company requires a platform that allows it to know what percentage of the company is owned and by whom. This is well stipulated in cap tables.
What is Cap Table?
A cap table is a database or spreadsheet that evaluates a company’s parity capitalization. Capitalization table, as it is formally known, contain things like:
§ Ownership percentages of the company
§ Proprietorship dilution
§ Ownership value per round of investment by creators, shareholders, and others in the company
In simpler terms, a cap table shows all the company's assets and securities that have been granted in the form of stocks, warrants, and equity grants. It also shows each person and the percentage they own. With this, it gets easier to keep track of ownership in the company. The information can be used to eliminate misperceptions and aid in deciding how to achieve capital rounds as well as make chief decisions. Knowing what a cap table is, you also need to understand how to manage it to traverse the expedition from commencement to exit.
Cap Table Management
As an entrepreneur, you already know what cap tables are. But do you understand what it fully entails? Most people know it as a spreadsheet that represents all transactions of a company since its inception. While that may be true, it includes legal documentation as well. Stock allocations, handovers, transactions, annulment, and exchange of debt to equity are a few examples of what a cap table entails.
Handling this may get complex with time, and as the company grows. Therefore, you need to know exactly what to expect. Cap table management is handling all the complexities with utmost accuracy and efficiency. This includes drafting and validating legal documents, collaborating with stakeholders, noting transactions, fulfilling regulations, among others. Cap tables get intricate with a progressive company.
Importance of Cap Table Management
When you know the state in which your company is in, you are in a good position to raise funds on better terms. After you analyze what each shareholder brings to the table, you can use it to negotiate with investors. This way, you can keep a significant stake for both proprietors and employees. An up-to-date cap table eliminates exorbitant errors during negotiations, hence, getting the upper hand.
Cap table management helps in keeping track of the shares assigned in every option funding. So, when a shareholder leaves, the unassigned options are stripped off. There is stipulated time for exercising the vested options if any, so as not to be forfeited as well.
When employees know what they hold in a company, they become motivated to stay even in hardship. An organized cap table can make this possible if you are honest with it while hiring.
When everything is in order in the company, it gets easier to remain compliant. An organized cap table prevents you and your employees from excessive taxation. Your cap table will show who gets what when dissolving or selling the company. Therefore, having it in order will determine funds distributions.
Conclusion
In summation, cap tables are all about permissible entitlements to the company’s assets. Therefore, you have to keep everything straightforward and avoid crosscuts in your business. With the right tools at hand, you can keep abreast of things and make intelligent resolutions when it comes to your company.
