MSG Team's other articles

11962 Why Do Sponsors Fund Teams in Sports Leagues?

In the previous articles, we have already seen that the sponsorship of sports teams can happen at multiple levels. We have also seen how the sponsoring of individual athletes works and how it provides benefits to the sponsor as well as the athlete. It is important to note that sponsorship can happen at levels which […]

11362 Sports League Sponsorships: A Primer

Sports league sponsorships are a very important source of financing for many leagues across the world. The revenue derived from sponsorship deals is the second biggest source of financing for most sports leagues after the sale of media rights. However, many people are still not aware of the economics of sponsorships. This is because of […]

12520 Bretton Woods Agreement and Smithsonian Agreement

The transition of the world monetary system from gold standard to the modern Forex markets was anything but smooth. Governments from all over the world collaborated to make two pacts which would form the basis of the modern monetary system. However, both the arrangements failed. In this article, we will have a closer look at […]

10910 Recency Bias

There is a common saying in the investment markets that “In the short run, the markets are a voting machine whereas, in the long run, they are a weighing machine.” This saying is often said in order to emphasize the role of long term investment. People with short term goals often fail to perform well […]

9214 Estimating Project Cash Flows: Part 2

We have seen in the previous article that estimating cash flows can be quite confusing and counterintuitive. This is not because they are difficult to calculate. It is just because the course of action taken is opposite to what would have been taken in the case of accounting. Accounting is concerned with matching expenses to […]

Search with tags

  • No tags available.

The capitalization table is a very important record for any startup company. These tables provide a clear and unambiguous report of who owns and controls what percentage of the startup’s shares. It is considered to be the final and irrefutable record that provides details about the ownership of the company.

Since decisions involving financing, sale, or restructuring of a startup tend to be complex and require several parties to sign off, the capitalization table proves to be an important source of information. The study of these tables can help investors realize which stakeholders they need to convince in order to obtain a sign-off.

In this article, we will understand what capitalization tables are and why they are considered to be so important in the context of a startup organization.

Components of a Cap Table

The cap table of any startup company has several key components. The details of some of these components are mentioned below:

  1. List of Investors: A cap table generally provides a list of investors in the rows of the table. It is advisable to break down this list to the most granular level. For instance, instead of mentioning that all the founders have a 30% stake in the company, the cap table should enumerate the individual stake that each of the shareholders has. The same should be done for employees as well. Investors always have to be listed separately since they are different legal entities and cannot be grouped together

  2. Details about the Shareholding: The cap table is supposed to mention details about the number and type of shares which are being held by each stakeholder. The type of shares being held by each of the stakeholders is very important. The details of how different types of shares affect decision-making are mentioned below. The date of issuance of shares can also be considered to be important in some cases.

  3. Valuation of Shares: Since the shares of the startup company are not publically traded, their valuation is not available on an everyday basis. However, whenever there is any transaction that affects the valuation of shares, the new value must be updated into the cap table.

Different Types of Shares in a Startup Company

Normally, the number of shares which exist for a company should be fairly easy to calculate. However, when it comes to startup companies, this calculation is not so simple. Startup companies tend to use different types of stocks and individual investors may have the capability to completely change the shareholding pattern of the company.

  • The cap table needs to have explicit details of the number of shares that have been authorized by the company. All of these shares may not be issued. Some of these shares may be pending for future issuance

  • Outstanding shares refers to all the common stock and preferred stock which the company has issued until now

  • Preferred shares need to be listed separately since they may have several features. For instance, participating preferred stockholders may be entitled to more dividends than regular stockholders

  • All types of securities which can be converted to common stock with voting rights also need to be listed. The cap table must clearly mention the number of shares that may come into existence tomorrow. There are several types of debt and preferred shares issued by startups that can be converted to equity. Once this conversion happens, the voting power within the startup may witness a significant change

  • Options and warrants which are issued to employees, as well as other stakeholders, also need to be taken into account while preparing the cap table

The presence or absence of voting rights for each of these categories should be clearly mentioned. The cap table should show what the fully-diluted shareholding pattern of the startup company would look like.

Advantages of Cap Table

Cap tables are considered to be an important document because they are used by several different stakeholders for different purposes.

  • The founders can use the cap table to conduct a what-if analysis when they go for funding rounds. They can see the impact that different valuation levels will have on the ownership and control of the firm. The cap table acts as a ready-reckoner which aids in quick decision making.

  • Existing investors use the cap table to understand the extent of dilution that their holdings will undergo if the company issues more stock in the option pool or if they go for another round of funding at a different valuation

  • The cap table is also used by the founders when they are hiring new employees. This is because offering stock options is a routine part of hiring in a start-up company. However, the founder must be aware of the exact number of stocks that are authorized and available in the option pool before they can offer them

Maintaining the Cap Table

The preparation of the cap table is not a one-time activity. In the case of start-up companies, employee options, and the founder’s stock keep on vesting over a period of time. Also, the valuation of the company may change from time to time. Hence, the founders must ensure that the cap tables are maintained with up-to-date information to enable quick and accurate decision-making.

The bottom line is that cap tables are important for several reasons. They can be considered to be proof of ownership and provide a dashboard-type view of the different stakeholders of the company.

Article Written by

MSG Team

An insightful writer passionate about sharing expertise, trends, and tips, dedicated to inspiring and informing readers through engaging and thoughtful content.

Leave a reply

Your email address will not be published. Required fields are marked *

Related Articles

Convertible Notes and Startup Funding

MSG Team

Cash Burn Rate: The Basics

MSG Team