If a company has issued securities, it typically has a capitalization table providing detailed information on the securities. A key due diligence item for investors to understand, cap tables can help reveal how stakeholders are impacted by dilution from subsequent funding rounds.
Capitalization tables, commonly known as cap tables, keep a record of a company’s equity ownership – whether shares, stock, units, or interests. Typically organized in the form of a spreadsheet or a table, it lists out details of all the securities the company has issued including stock, convertible notes, warrants, equity grants, and other forms of equity ownership.
There is not a standard format for cap tables, but it can be important that it is well-organized and easy to read. Some of the main data points frequently included in cap tables are the name of the shareholder, whether individual or organization, the issuing date, and the number of shares issued. Some companies choose to organize their cap table by date, while others may choose to organize by stake size. Organization methods may differ, but can be important that it is easily understood and is updated consistently to represent all new shares issued, shares sold, and any other equity changes that occur.
Some of the components that a cap table may include:
- Authorized shares – the maximum number of shares a company is allowed to issue to investors
- Outstanding shares – the actual number of shares that have been issued or sold to investors
- Unissued shares – company shares that have been authorized for use, but have not been issued
- Shares reserved for stock options – company shares that have been authorized for use but are set aside for future issuance, like under a stock option plan for employees
- Valuation details of the last priced round – including pre-money valuation, the amount of new equity raised, the price per-share, and the number of shares
- Complete list of shareholders – the name and contact information for current shareholders
There are cap table templates and software out there for the earliest stage companies to help maintain their data, but with each equity funding round that occurs, a company’s cap table can get longer and more complicated. As a company progresses through funding rounds, it may become more difficult for the company to consistently update the cap table and a company may choose to outsource the work to a third-party lawyer instead of keeping up with it internally.
The following is an example of what a simplified early-stage cap table could look like.
Before the equity round can be pursued, the founders and investors negotiate the terms of the deal. Within these negotiations, the pre-money valuation, the post-money valuation, and the price-per-share are determined. Once the pre-money valuation is determined, the total amount of new investments coming in is added to it to determine the post-money valuation. The price-per-share is calculated by dividing the pre-money valuation by the number of pre-money shares.
- Pre-Money Valuation
- Post-Money Valuation (Pre-Money Valuation + Total Investment)
- Price-Per-Share (Pre-Money Valuation / Pre-Money Shares)
In this funding round, the company is giving 33% ownership in the form of preferred shares in exchange for $1,000,000. The 33% ownership is representative of the 4,000,00 shares that will be distributed to investors based on the number that are purchased.
As investors purchase preferred shares, their ownership percentage is calculated in proportion to their total number of shares. In this case, both founders retained 33.3% ownership while the Series A investors receive ownership percentages ranging from 1.7% to 5.0%.
With each additional equity funding round, the cap table gets longer, ownership percentages get diluted as new shares are issued, and the cap table as a whole can become increasingly complicated.
One way around the complications of cap tables is investing through a Special Purpose Vehicle (SPV). Instead of Investors 1-9 each making their own individual investments into the company, the investors would pool their money into a SPV which would then make one large investment in the company, and only take up one line on the cap table. Some of the investments through MicroVentures on the primary or secondary Regulation D offerings are investing through an SPV.
Cap tables are a key component for companies that have raised equity rounds in the past or plan to raise equity to help keep track of their current equity ownership. While there is not a universally standard format for cap tables, it can be important they are easily understood and consistently updated to help show the current equity ownership structure of the company.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.
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