What is a cap table?
A capitalization — or cap — table is a document that outlines ownership in a company.
A typical cap table shows all issued shares, their owners, and their initial cost. It also indicates each shareholder’s ownership percentage, the value of their shares, and any warrants and options in the business.
If you’re planning to get outside funding, you’ll need a cap table to keep track of equity. In this article, we’ll explain why cap tables are important and how to set one up for your business.
What are cap tables used for?
Fundraising
Whenever a startup is looking for funding, potential investors want to know how the company is structured. Cap tables allow investors to see how much ownership they will receive in exchange for their funds.
Tax/Legal compliance
In the U.S., cap tables are used as a formal record of equity ownership in a company. Tax authorities often rely on cap tables to ensure that the shareholders are paying the correct amount of taxes on their earnings.
Equity management
Finally, cap tables streamline the decision-making process when it comes to bringing on new shareholders. Having a clear record of ownership allows owners to understand how much equity they would be giving away to a potential investor.
This might not seem important in the early stages when your company only has a few shareholders. However, things will quickly get complex as you start issuing equity to employees, investors, advisors, and other stakeholders.
How do I make a cap table?
Most new companies use spreadsheets to create a basic cap table. With only a few shareholders, a simple spreadsheet can convey all the necessary information.
However, spreadsheet-based cap tables will inevitably become overwhelming as a company grows. Consider the example below.
When using a spreadsheet, you will need to constantly update data on shareholders, shareholding percentages, and equity raised (to name a few).
If you’re paying a firm to manage your table, that’s a lot of billable hours for your lawyer. If you’re managing it on your own, that’s hours of time you could have spent growing your business — not to mention the added risk of calculation mistakes or other human errors.
A better solution
To avoid these issues down the road, we recommend starting with a more scalable solution. We’ve partnered with equity management firm Carta to make cap table management easier than ever before.
At no additional cost, companies can use their Firstbase incorporation data to create and manage cap tables. A study by Carta found that their software saved startups and early-stage businesses approximately $15,000 in legal fees. Compare the spreadsheet from before to the clear, visually appealing cap table below:
Wrapping up
A cap table is a powerful equity tool that provides immense value to both business owners and investors alike. Properly tracking your company’s equity is a fundamental task for any startup founder.
Ready to start your business on the right foot? Click the button below to incorporate your business and seamlessly create a cap table through Carta.