Cap Table Management 101+Downloadable Excel Template

A capitalization table, more commonly referred to as a “cap table,” provides a detailed record of the ownership stakes held by various investors, employees, and others who own shares in your company. The cap table documents who owns what, when it was acquired, what conditions may apply to ownership of specific shares, and more.

On a practical level, the cap table serves a fairly obvious purpose; after all, you can’t effectively manage your company’s ownership shares without knowing who owns them. From a more strategic perspective, though, the cap table helps managers and investors understand the company’s capital structure, which guides important decisions about pricing, dilution, and stock allocation.

Why Your Cap Table Is Important

From a legal perspective, your cap table serves as the system of record for company ownership. It also provides important information that your accountants need to prepare accurate filings and up-to-date information for investors. Investors naturally want to review their investment in the company periodically, forecast potential payouts, and calculate dilution under various scenarios in which the company may take on future investors. The cap table also helps employees, officers, and other internal stakeholders to assess the value of their shares or options.

Management typically consults the cap table before determining how much of the company to offer an investor for a given amount of new capital without excessively diluting holdings. An accurate, up-to-date cap table also serves an important purpose for any prospective new investors by helping them understand the value of their potential shares and how much control they might have under various scenarios.

In small startups, equity compensation is frequently a key factor in attracting and retaining talent. An up-to-date cap table can be critical in informing as to how much equity is available in the option pool, and how much they can afford to allocate as part of the offer.

Start Simple: Managing Your Cap Table in Excel

In the very early stages of a startup company’s lifecycle, it’s fairly common to manage the cap table using Microsoft Excel. This generally works well, provided that there are only a few shareholders and relatively little complexity in the types of ownership stakes. This statement does come with a caveat, however; many startup companies continue to use Excel even as the complexity of their ownership structure increases. That can be risky, and it’s advisable to consider a more scalable approach as your company grows.

Your cap table should list all existing equity stakes in your company. This may include common stock, preferred stock, and stock options. Furthermore, it will outline details about each stake, including that date shares were acquired, sold, or transferred, as well as any legal restrictions associated with the securities. Options, for example, typically come with a vesting date, a strike price, and an expiration date. You should also include any other conditions that restrict the exercise of options or the sale of associated shares.

The cap also table should provide an easily digestible view of the company’s overall capital structure. That will often include summary information for each class of securities as well.

Your cap table needs to be accurate and up-to-date at all times. If your company intends to hire a key employee and equity compensation will be part of the offer, then HR needs to know how much equity is available in the option pool before the offer is made. A new round of funding, likewise, can only proceed if your prospective investors have a clear picture of the company’s current capital structure. An up-to-date cap table means you won’t be playing catch-up when it’s time to prepare your company’s tax returns or submit other legally required filings.

Adapt for Growth: Preparing Ahead for Complexity

An Excel cap table template can be a very useful starting point, especially for small startups. As your company grows, however, you’ll eventually need to step up to something more robust. In fact, one of the key mistakes rapidly growing startups make is the tendency to rely on Excel for just a bit too long. As the complexity of your capital structure increases, it becomes more and more difficult to manage Excel-based cap tables effectively.

As your company takes on new investors and employees, the cap table that started out as a simple spreadsheet can quickly morph into a complicated web of formulas and stakeholder details. Keeping that information up-to-date can quickly become overwhelming. The likelihood of errors increases as the volume of transactions grows.

Liquidity events such as mergers, acquisitions, or initial public offerings can be especially challenging. In these cases, founders and early investors may choose to cash out part or all of their ownership stake in the company. Different shareholders may be entitled to different payouts, resulting in a need to recalculate shares and percentages accordingly. This may require a technique known as “waterfall analysis” to figure the amount of proceeds and the resulting ownership stakes for each investor.

When employees leave voluntarily or otherwise, you’ll need to manage their remaining options issued under an employee stock ownership plan (ESOP) plan. Typically, in those scenarios, employees have 90 days to exercise any fully vested options.

On a quarterly basis, you’ll want to revisit the option pool and potentially allocate additional shares for future employees.

You’ll need to perform routine 409a valuations annually, or whenever there is a “material event” (such as a round of funding) that could affect your company’s valuation. That calls for an accurate, up-to-date cap table; and the implications of getting it wrong can be significant.

Graduating to a Robust Cap Table Solution

All of this may sound a bit overwhelming. That’s why startups are strongly advised to move to a dedicated cap table management solution or service as they begin to hit their stride. The time to bring equity management under control is when things are still working well, not after they have already grown in complexity.

Certent Capitalization and Equity Management provides private companies with complete and accurate control over the capital management process. As your company grows through various rounds of funding, through IPO and potentially even the complex world of public company equity and reporting management, Certent can scale with you. To learn more, contact insightsoftware today to request a demo, or download our free Excel cap table template now.