Whatever stage you’re at in the development of your business, understanding and making good use of a cap table will help you have a clear view of its capital structure, ownership and value, from formation right through to exit. It’s a valuable tool that will help you raise further investment and support the development of your business. Here we’ll break down the importance of cap tables in more detail, helping you to clearly record vital data and show investors that you’re ambitious and ready to quickly grow.
- What is a cap table?
- What should a cap table include?
- Why do I need a cap table?
- Cap table management for small businesses
- Three examples of cap table software
- Your Cap table checklist
What is a cap table?
A capitalisation table, or cap table for short, is a way to organise information about who owns what in your business, from equity percentages and value, to the rights that different kinds of shares give their owners. In turn, this helps you to understand the market value of your business more clearly as you progress.
What should a cap table include?
In the beginning, the data in your cap table is normally relatively simple, but it can quickly become complex if your business grows and takes on funding from new equity partners, or uses equity incentives as part of your recruitment policy.
The information it contains might include:
- Value and class of shares
- Dates of share sales
- Share dilution
- Share transfers
- Cancellations (say if an employee leaves the company)
- Conversations of debt into equity
Why do I need a cap table?
Cap tables are important for a number of reasons, though the reasons might only become clear when you want to offer equity to new recruits, high-performing staff members or as part of an equity sale to an individual or institution.
This is because your cap table is an evolving record of your business’ ownership structure. Potential investors or buyers need to understand this information so they can make an informed decision about where they are investing money.
If you’re serious about growth, then a cap table will help you make better choices, plus having an intricate record of your ownership structure could earn you superior terms in transactions with business angels, venture capital firms and private equity institutions.
At the very least, most equity investors will expect to review your cap table as a matter of course before they invest. If you can’t produce one, or it’s poorly maintained, it could raise a red flag about your ability to organise.
A cap table is also a useful indicator of performance because it creates a running total of the market value of your business. It will serve as a point of reference for major business decisions that impact value, so it’s important to keep your cap table accurate and up to date.
Legal and tax compliance is a final benefit of creating a cap table, particularly if your business operates in multiple jurisdictions and/or has a diverse ownership structure incorporating people in more than one country.
A cap table provides information on the company, its employers and the breakdown of ownership and insight into the organisation’s legal liabilities and tax exposure.
Cap table management for small businesses
Like in the case of any database, you can create your cap table in range of different ways, from pen and paper (not recommended) through spreadsheets to sophisticated software and apps.
From a visual point of view, a cap table is most often displayed as a grid with a list of founders, investors and owners on the vertical Y axis and information about the nature and value of their shares is separated out in rows along the X axis.
How you list owners is up to you; you could start with the founders at the top or list shareholders in order of the size of their stake. Either option is fairly common.
Regardless of the format you choose, there must be enough flexibility to make quick changes as your organisation changes. This is where spreadsheets trump paper and automated software beats both.
Good software helps you not only organise current structure, but also model future changes, give clear summaries, provide demographic information and, in general, make analysing your company ownership a lot easier.
Three examples of cap table software
Licensing dedicated software makes organising your cap table straightforward compared to generic ‘back of an envelope’ solutions. There is plenty of choice in the market, so it’s a good idea to shop around.
Read software reviews to create a short-list of options. Check product descriptions and ensure the software does what you need it to, plus make sure it works in your country of operation.
In some cases, you’ll have access to dummy templates and demos, while most software vendors permit no-commitment trials, which are particularly useful if you’re just getting to grips with the concept.
The following are three examples to consider as part of your research:
The scalable platform from Global Shares allows start-ups to manage their cap table, issue stocks to investors, and grant options and awards to their employees.
One of the market leaders, Capdesk is used by brands including Nutmeg, Gousto and Secret Escapes. For early stage businesses it promises to reduce legal costs by organising your compliance requirements from the start.
Ledgy provides what it calls an ‘all in one’ solution for finance teams, human resources, and investors. It encompasses equity plans, modelling, investor relations, due diligence and automated document signing.
It offers a demo page and users can sign-up initially for free.
Your Cap table checklist
Record appropriate information
First and most obvious, learn what information you are required to include in your cap table and what data would be beneficial as you grow.
Research the market and pick the most appropriate software for your particular business needs. Take a demo and learn how to use your new software, then record all of the information you have collected.
Cloud-based software lets you create a single repository of information and share it with relevant parties, such as co-founders and senior staff.
When you update the document, the changes will be reflected for everyone, meaning you don’t have to keep sending updated documents to the team. This is just one reason why a pen and paper no longer cut it.
Review and alert people to updates
The information contained in your cap table will impact key decisions about how you finance your business and the incentives you provide to staff. So, ensure key people are kept informed about any significant changes to the document.
Review it regularly and don’t forget to update it with fresh data, such as a funding round, acquisition, senior hires and any share transaction that takes place within the business. Your cap table is only as strong as the data within it, so make sure its robust.
Stay on top of compliance
Compliance varies depending on the location of your business and its shareholders. Learn which authorities require information and the various relevant tax codes that apply. Better yet, hire a team of corporate solicitors who can do the job for you.
Consider how much information to share
Sharing financial information can help to empower your team, but in some cases it’s possible to be too transparent. Work out what details will help your employees understand the context of your organisation, without giving away sensitive data on shareholders.
Be prepared to delegate
If your business is growing, it’s likely a time will come when you hand over management of your cap table to a professional executive or a legal team. Prepare for this event by keeping your records tidy, accurate and clear.