What is a Capitalization Table and why do we use it?

Capitalization Table (or, in short, Cap Table) allows an entrepreneurial company shareholders to receive an up-to-date picture of their holdings in the capital structure of the company. At the most basic stage, the Cap Table is a list of all existing securities in the company (shares, options, options, etc.) and who holds them. At a later stage, the Cap Table will includes calculations that allow to examine different investment channels (e.g., new financing, sale of the company, mergers and acquisitions, public offerings, etc.) and accordingly will present the shareholders of the company and their details, the various securities for each shareholder and the holding rate. The Cap Table should be simple and organized in a simple way, when the Y-axis will include the list of shareholders and the X-axis of the various securities.

As mentioned, a Cap Table intended for an entrepreneurial company, which is a dynamic-developing business and therefore need be updated at all times. The sale of existing securities, the issuance of a new series of securities, increasing the number of options or the granting options to employees, all of those changes the situation in the Cap Table. Since every decision of the entrepreneur is an influencing factor on the business, an updated and accurate Cap Table is required in order to make informed decisions. For example, having a new investment source for the company should take into account the pre-money value (the company’s value before the investment), the size of the round (the number of shares to be issued) and the number of options – all of these should appear in the Cap Table.

Cap Table Example

Two entrepreneurs established a company on July 1, 2010 under the name of “venture” with an issued share capital of 100,000 ordinary shares when each shareholder holding 50% of the company with a value of $1,000,000. The Cap Table on the day of construction will look like this:

Ordinary Share

Value ($)

Holding Rate

Entrepreneur 1

50,000

500,000

50%

Entrepreneur 2 50,000 500,000

50%

Total

100,000

1,000,000

100%

 

In the next stage, assuming that after a year the entrepreneurs managed to raise three new investors totaling $600,000. In order to determine the amount of shares to be issued to new investors, the pre-money value of the share need to be calculated. Since the company’s value is $1,000,000 with 100,000 shares, the share value is $10. The capital table after the round will look like this:

Ordinary Share Value ($) Holding Rate
Entrepreneur 1 50,000 500,000 31.25%
Entrepreneur 2 50,000 500,000 31.25%
Investor 1 30,000 300,000 18.75%
Investor 2 20,000 200,000 12.50%
Investor 3 10,000 100,000 6.25%
Total 160,000 1,600,000 100%

 

The above table shows that there were dilution of founders’ shares, i.e., the holding rate of a founders decreased due to the issuance of additional shares in the company.

Summary

At the end of the day, managing a Cap Table comes down to the legal right on the company’s assets. Taking shortcuts can damage the most important thing to the shareholders, which is their equity. Therefore, the establishment of a new company goes together with a proper management of its Cap Table, which is a significant factor for the wealth of the shareholders.

2017-05-18T12:42:52+00:00 18 May 2017|Blog|