A capitalization or “cap” table shows the equity capitalization of a business. Factors on the table can include convertible equity, warrants, private equity shares, and common equity shares.
A cap table reveals details about investor ownership in a company. This can include percentage of ownership, dilution long-term, and value of securities held. They help with making financial decisions dealing with market value, market capitalization, and equity ownership.
They are mostly used by businesses in their early stage, but they can be used at any maturity level. Private companies can use cap tables to help with calculating market value, new capital issuance marketing, and shareholder reporting.
A cap table example
Below is a simple example of a cap table. As you can see, the investors are listed on the y-axis, while the types of shares are listed on the x-axis. The x-axis also includes total shares and ownership percentage.
Cap table use cases
Cap tables can be used for a variety of reasons. When a company is sold, a cap table helps determine how the proceeds will be divided. Let’s pretend the company with the cap table above is bought out for $1M, and the proceeds are to be split between investors based on ownership percentage.
In this liquidation event, the founder of the company would receive $800,000. The first venture investor would receive $40,000, the second venture investor would receive $26,700, and the angel investor would get $133,300.
Having the cap table handy eliminates the need for disagreements and lawsuits between investors. It also shows the correct order that proceeds should be distributed.
In addition to liquidation events, cap tables are useful when raising funds. New investors may want to see the cap table and how company ownership is split up. This can help them determine the impact of their investment and shows them where they rank in a liquidation event. The further down the table, the less priority an investor has of getting paid compared to other investors.
Cap tables are also important for tax reasons. Tax authorities like to use a company’s cap table to ensure all investors are paying the proper amount of taxes.
When does a cap table need to be updated?
Cap table factors can change often, and it’s important to update the table as soon as these changes occur. Examples of these include changing employee stock option amounts, issuing new shares, shareholders leaving, or the transfer of shares.
Failing to update this information will not only misinform the leadership team, but it can also cause investors to pay the incorrect amount in taxes.
Cap tables are created to show a business’s equity capitalization, and they are mostly used by businesses in their early stages.
They vary, but a baseline example contains a list of the company shareholders and the types of shares held. It also includes the total number of shares and each investor’s ownership percentage.
Cap tables help companies determine how much and in what order investors receive proceeds in a liquidation event. They also help with raising funds and filing taxes.
