Posted by Early Growth
January 24, 2018 | 3-minute read (527 words)
A capitalization table (commonly referred to as a “cap table”) is a spreadsheet that shows the ownership and overall capital structure of a company. It usually lists founders first, but can include executives, key employees who have equity, and investors.
A well-managed cap table can help your company attract investment and prevent diluting your stake.
Maintaining a cap table can be tedious, but it’s important for a few reasons:
- Current investors want to see who has control and to forecast potential payouts and dilution under specific scenarios.
- Potential investors can evaluate how much control and leverage could be maintained during negotiations.
- Employees with options or equity stakes can see their real-time value.
- Historical insight provided can affect negotiating current valuation for new funding raises.
- In the event of an audit, a well-managed cap can allow your legal team to present your company’s history and holdings with accurate and well-organized information.
- An existing shareholder can easily determine what percentage of the company to give to the new investors in exchange for the capital contributed.
Strategic company founders should invest some time setting up cap table, including the various intricacies involved.
Cap Table Management Options
If you’re part of a startup, you probably won’t be surprised to learn that one option for managing your cap table is to handle it yourself. Several software solutions (like CapShare) are available to streamline stock issuance, equity management, and record integration. Most software solutions allow for online access and easy visualization to stakeholders, enabling transparency.
Self-managing has its risks: Too often, those who self-manage their cap tables miscalculate valuation and give up too much equity during fundraising. They can find their shares of their hard-earned company diluted needlessly.
Other risks are unintended tax consequences or lawsuits—for the company or the employees who’ve been given options. Poorly managed cap tables can be unattractive to potential investors or upsetting to existing investors, causing your company to lose fundraising or an acquisition.
More often, companies choose to outsource the management of their cap tables to a legal team, which ensures accuracy and compliance consistently. Of course, this avenue is costlier, and you won’t always be able to control the timeline for requested changes.
Because the work is outsourced to legal teams, it won’t easily model potential exit or raise scenarios—the legal team’s expertise won’t be in forecasting.
Utilizing an outsourced CFO as well as leveraging a streamlined software solution will provide strategic oversight as well as maximize the benefits of each solution. EGFS routinely provides experienced CFOs to maximize independent control while providing dedicated and focused oversight. A hybrid approach allows you to save money while maintaining a strong financial structure to attract investors and key employees and to enable you to accurate value your company and future scenarios—without diluting your ownership.
Our CFOs offer robust reporting, transparency, and real-time summarizations. They can model various fundraising possibilities and impacts, improving your overall strategy.
To learn how your company could benefit from cap table management, contact EGFS.
What Are the Tricks to Raising Investment Capital?
Startup Accounting Essentials Recap