Basics of a cap- table & Importance of having a right cap-table

Basics of a cap- table & Importance of having a right cap-table

The capitalisation table is often referred as cap- table in the general terms. It is a systematic arranged equity of a company usually used by the start-up companies. The cap- table comprises of all the information about equity, their nature and quantity. Basically, capitalization table is an elaborated breakdown of a company’s shareholders’ equity.  It will be beneficial for the investors and founders in one and another way.

What is included in the capitalisation table?

Capitalisation table lists the holdings of equity

  • Preferential share
  • Convertible Notes
  • Common shares

Why it is important to prepare Cap Tab?

Cap- Table plays a significant role in raising funds from the investors at different levels. Also, it is beneficial on the part of investors at it gives the basic information regarding the company’s dilluted ownership structure.

The cap table is important for the investors as-

  1. Shows them how motivated the start-up founder are: The founders who hold some equity in the company gives a green signal to the investors about their motivation to take the companies on the sky by putting efforts in the company.
  2. Make them aware about the distribution of equity: A well prepared cap-table will let the investors know about the other investors who are holding share in the company. And, it will give motivation to the investors to invest in that particular company whose shares are vested in some trust worthy investors.
  3. Helps in deciding the quantum of investment they need to do: On the basis of cap-table investors can study the various aspects of company like their estimated pay back when they decide to withdraw the investment. So, according they can plan the amount they are going to invest in a particular company.
  4. Can pin point their dilution: By studying the types of shares in which the other investors have invested; investors can get an idea of dilution of shares. For instance, if the company have more equity in the preferential share then there is a chance that the company will dilute its equity in coming days.
  5. Helps in finding the details of co-investors: As the cap table is well acquainted with the details of other investors, the investor finds it helpful for boosting their confidence. The study of co-investors investment makes them feel positive that the founder has spent a good time on his project.
  6. Helps in evaluating the exit scenarios: The cap table enables the investors to gather information regarding the exit scenario by evaluating the co- investors’ record. That evaluation makes them understand about the company and clarifies their basic doubts.

The cap table is important for the founders as:

  1. Helpful in raising investment: A detailed cap table document will help the founder in raising funds from investors as it will attract the investors by giving a brief introduction of the company about their equity, their owners etc. Additionally, an updated cap table will help the founders to organise companies structure in a particular format that will eventually helps in the other round of fund raising and also to avoid the legal calamities in future.
  2. Helps in managing employees share: An organised cap table helps in providing the maintained data of employees share detail and the various options provided to them under employees stock option with respect to the date by which they can sell or purchase shares in the company at provided price.
  3. Helps in evaluating equity dilution at the time of ESOP Vesting: The cap table helps the founders to study the equity dilution when the company shares are issued in ESOP scheme. Accordingly, founder can plan the ESOP scheme for the talented employees of the company.
  4. Helps to trigger out the investor updates and gain clarity in ownership structure: As the cap table is detailed with the company’s equity, it is easy to extract the ownership structure, the amount of investment raised in the form of equity and other shares.
  5. Helps in evaluating the control retention in the company: The equity holders of the company have direct control over the company as they have decision making powers that eventually mean that they have the indirect control over the company. The cap table enables the founder to evaluate the control retention in the company.

The cap table is a key due diligence document that provides the basic information to the investors that makes it easy for them to decide whether to invest in a particular start-up or not. Therefore, it is essential to create a well organised cap- table in the company. There are many ways to create a cap- table depending on the stage of company i.e. some prefers to organise in the excel sheets, some companies use software for creating and updating cap- table.

– Surbhi Singla

Associate at Aggarwals & Associates, S.A.S Nagar, Mohali.