Launching your dream business is both exciting and nerve-wracking. Raising capital through investors, managing your taxes, and planning for possible setbacks are just a few of the necessary tasks.
When it comes to managing a new company, equity transparency is key for both insiders and outsiders. That’s what cap tables are for. Let’s take a look at what cap tables are and why they matter to small business owners.
A capitalization (cap) table is a document that outlines ownership in a company. It shows this data by listing 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 company.
Cap tables are typically used in the early stages of growth to maximize transparency for both shareholders and potential investors. A clear cap table makes it easier to attract investors and make informed decisions regarding equity.
To be more specific, capitalization tables find their use in three major areas: fundraising, tax compliance, and equity management.
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.
In the U.S., cap tables are used as a formal, legal 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.
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.
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 quickly 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 managing it on your own, that’s hours of time you could have spent growing your business. If you’re paying a firm to manage your table, that’s a lot of billable hours for your lawyer.
To avoid these issues down the road, we recommend starting with a more scalable solution. We 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:
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.