A cap table (also known as a ‘capitalisation table’) is a spreadsheet utilised predominantly in startup companies that sets out the ownership of all the capital in the company. It is a record of the company’s securities, indicating each shareholder’s percentage of holdings in a company on a fully diluted basis. It is essential to maintain a cap table for both internal governance purposes and to attract potential investors. Your cap table should be accessible and current to reflect the capital ownership structure of your company. This article details the top five practice tips for managing your Cap Table organisation, including allocation, ownership, and clarity.
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1. Allocate Management of the Cap Table
It is essential to first establish who will manage the company’s cap table before it begins to expand. For startups, it will generally be a founder or the company secretary. Alternatively, an employee with the most connection to fundraising and investors may be the one in charge of managing the cap table, such as a chief executive officer.
As the company grows, managing the cap table will become more complex due to the varying types of shareholders. More sophisticated analysis may be conducted with the cap table by senior financial employees, such as a chief financial officer. Alternatively, instead of utilising a spreadsheet, larger companies implement equity management software for greater security, minimising the ability for human errors and running hypothetical situations.
2. Establish an Ownership Structure
A clear ownership structure should be implemented in your cap table that includes all current shareholders and holders of securities that are to be converted into shares at a later date. This structure should encompass all the various shareholder groups and include any details related to Employee Share Option Plans (ESOPs). The inclusion of the securities enables your company to utilise the cap table to assess the implications of an investment round on the dilution of existing shareholders. The cap table should contain the details of the following:
- optionholders;
- SAFE notes; and
- unallocated options.
3. Consistent, Current and Clear Information
The capital structure of your company may change frequently and expand exponentially, especially during rounds of capital raising. It is imperative that your cap table is easy to understand and has a clear structure, allowing for easy adjustment of the information, as cap tables are constantly evolving. This will enable the addition of up-to-date information as soon as possible, ensuring the cap table remains current.
Although cap tables are not required to be maintained by law like members’ registers, they are frequently required by potential investors and current investors. To provide investors with the required information for making informed decisions on investing in your company, a cap table should include the following information on your company:
- pre-money agreed valuation, which is the value before the investment round occurs;
- post-money valuation which is the value after the investment round occurs, taking the ESOP pool into consideration;
- total investment amount that has been injected into your company;
- Investment price per share, which is the price that is to be paid for one share during the investment round; and
- all of the securities that are on issue.
4. Conversion of Securities to Shares
Cap tables play a crucial role in illustrating the overall impact of converting securities on your company’s share structure. Different securities should be included in the cap table, such as:
- shares;
- options;
- SAFE notes; and
- other securities that will convert into shares.
You should display the percentage of ownership before and after the securities have been converted into shares to help potential investors decide whether to invest in your company.
5. Plan For Future Investors
Efficient management of your cap table is vital in the eyes of investors, as you will be required to present your company’s ownership structure. Potential investors will review the cap table, which may impact their decision to invest in the company.
A messy, incomplete cap table will reflect negatively on your company. The cap table should be able to display the ownership percentages of the shareholders to ensure a smooth process for the investors.
Key Takeaways
Cap table organisation is crucial for companies to implement clearly and concisely, ensuring transparency for shareholders and potential investors. Effective cap table management enables informed decisions and positively impacts the company’s image. The following are some of the best practice tips for cap table organisation:
- allocate the management of the cap table;
- establish an ownership structure;
- ensure the cap table has consistent, current and clear information;
- plan for exit events; and
- plan for future investors.
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Frequently Asked Questions
What is a cap table?
A cap table is a spreadsheet that outlines the ownership structure of all securities in a company.
Is a cap table required by law in Australia?
A cap table is not required by law in Australia. However, investors and shareholders will require the details of the company’s ownership structure, and this is an effective way to display this information. It is recommended that you implement a cap table for good corporate governance.
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