What is a Cap Table? A Guide to Cap Table and Why You Need One

Ryan Patrick

Apr 11, 2024 • 8 min read

As you make plans to begin your business, understanding what a cap table is, how it works, and why it's needed in businesses is important.

A cap table essentially provides information about shareholders of a company, how many shares they own, prices of shares, the dilution of shares that occurred over time, and so on.

Apart from that, a cap table forms an essential document in decision-making, sourcing funds from investors, and many more. This post will expatiate all you need to know about cap tables including the importance of creating one and lots more.

What is a Cap Table?

A cap table also known as a capitalization table is an official document showing the ownership of shares in a company. It records vital information about shareholders and their shareholdings including who the shareholders are, how much they own in the company, types of shares, the dilution of shares that occurred over time, and many more.

A cap table is usually represented in a data table or spreadsheet and it contains information like stock warrants, convertible notes, share options, etc. Essentially, a cap table shows different types of company stock and the owners of these stocks. Keeping this legal document properly is important to a company because it helps keep track of the company investments and the owners making it easier for the company to make vital decisions regarding fundraising and distribution of shares in the future.

Apart from that it helps different investors understand the value of the investment they own in the company and what they should expect in return for the investment.

In the UK, keeping a cap table is not usually required by Companies House, however, a company with more than one shareholder needs to keep a record of this document. The cap table should therefore be created before or immediately after a company is formed

What Are the Information contained in a Cap Table?

A cap table should provide essential information about a company's equity structure. Below is the information contained in it.

Name of every investor and shareholder
Quantity, type, and value of shares held by every investor
Date of Issuance of each shares
Prices of shares
Equity stake ( percentage ownership of shareholders and the voting percentage held as a result of the shareholdings)
Dilution and effect of dilution on investor's shareholdings over time
The total of shares that have been issued and the outstanding shares
Entitlement of investors in case the company winds up
Equity types including the preferred and common shares as well as the rights and power that come with them.

How to Create a Cap Table

When we talk about creating a cap table, there are multiple ways to create it as there are many software and templates out there you can use.

Usually when you first form your company with few shareholders, a cap table is easy to create but as time goes on when the business starts growing, you might need to use a professional to manage your cap table. Here are the steps you should follow when creating a cap table.

1. Decide who will manage the cap table

Before you start creating a cap table, it is essential to decide on who handles and manages it. So it becomes necessary for the shareholders to come together and assign who will manage this document. Usually, as a small start-up company, the founder is most of the time responsible for creating the cap table.

This is because managing a cap table at an early stage with few investors is still quite straightforward to do. Moreover, the founder has access to the investors and potential shareholders who will be interested in partnering with the company.

As the company grows and more stakeholders join, it is important to hire professionals who will handle more sophisticated analysis with the cap table. As such an accountant or finance officer will need to be hired to fulfill this role.

2. Gather information

Once you've decided on who to create and manage the cap table, the next thing would be to gather the necessary information that would be included in the cap table. These include the shareholder's details, types and quantity of shares, equity stake, number of outstanding shares, price of shares, and so on.

3. Get software to use

The next step is to research and get a suitable software package to use. Although there are many of these packages to select, you should ensure to pick one that is simple to use, minimizes error, and ensures accuracy. Once you have the software at hand, go through the demo to understand how it's being used.

Importantly, you will need to start entering and recording all the information gathered previously into the cap table software at this stage. Recording information into the cap table marks the beginning of the company cap table management process and must be done accurately.

4. Group the stakeholders if need be

If there are different groups of investors or stakeholders within the company, then it is important to classify them. Usually, you should have investors with common and preferred shares. It is therefore crucial that you separate and group the share class into different segments in the cap table.

5. Update the cap table regularly

You would need to make some changes in your cap table regularly. This should be done effectively and recorded too. You might need to make changes relating to the ownership structure or capitalization of the business. This could be changes in the number of shares held by investors, the outstanding shares, etc.

6. Allow shareholders to access

Once you are done creating, you should allow other shareholders, investors, and employees as the case may to access it. Whenever updates are made, they should also be allowed to view it. Essentially, the cap must be done concisely and with transparency so as to ensure that the shareholders understand the ownership and capitalization structure properly.

Importance of a Cap Table

There is no doubt that keeping a cap table is important to a company. Apart from the fact it helps provide a clear tab as to the ownership of a business, it also indicates how much everyone owns and thus the type of control they could have within the company. Here are the reasons why you need a cap table for your company.

1. Ascertaining ownership and planning investment

Apart from the fact that a cap table shows the ownership of a business, it could also provide insights into what the company currently owns. As such it indicates to business start-ups how much investments they have within the company and how much they still need.

So it becomes easier for the startup to come up with accurate investment sourcing plans. Moreover, the cap table would help the fundraisers understand the ownership structure and possible dilution that could occur in the future.

2. Valuing the Company

Using a cap table could also help ascertain the value of a company. With it, you can determine the number and value of stocks a company owns. As such it becomes easier to determine the financial strength and health of a company so as to make better financial plans in the future.

3. Helpful in planning taxes

Since a cap table shows the equity within a company, it could be a good way for the company to ensure that they are making all their tax payments as required. With that, they could ensure that the company is staying in compliance with the tax regulations.

Apart from that the cap table can be used by the tax authority to determine if a company is meeting up with all their tax requirements based on the equity they have on the cap table.

4. Effective in business management

If there is a potential problem with the ownership structure of a business in the future, a cap table can easily help diagnose that. Since this document shows every investor and how much they own within the company, it becomes easier to trace if a shareholder owns a very high percentage within the company.

In a situation where such an investor decides to leave the company or sell off their shares, it could be a problem for the business to continue thriving. So if an investor owns an outrageously high percentage of shares within a company, a cap table will indicate this so that amendments can be made.

5. Useful in merging and Acquisition

When companies consider merging and acquisition, it is important for the acquiring company and the company to be acquired to understand the ownership structure of their businesses.

As such a cap table could help both parties to better understand how their business ownership works and the potential dilution that could occur later.

It could also help the companies decide on the terms and conditions of the transaction taking into consideration the ownership structures they have beforehand.

Dilution involves the process of allocating new shares to new shareholders by reducing the ownership percentage of previous shareholders. With the cap table, a company could determine when dilution is necessary when new shares are distributed, to whom they are distributed and the amount and value of shares allocated.

Moreover, it’ll help the company understand how many shares have been sold and to whom. All of these are thus important in comprehending the company ownership structure.

Difference Between a Cap Table and a Register of Shareholders

Oftentimes, people confuse the cap table and the register of shareholders. Although the two legal documents offer similar functions, they are quite different documents. The details contained in a register of shareholders are similar to that of a cap table as both documents show the shareholders of a company and the number and value of shares that they own.

In the UK, the register of shareholders is a public document that is made available in the Companies register for everyone to see. Apart from that it must be stored at the company registered office and be readily available for inspection when needed.

For the cap table, it is a private document that doesn’t need to be submitted in the Companies House. However, it can be viewed by shareholders of the company and other potential investors.

Apart from that a cap table provides more information than the share ownership. These include information about future ownership options, dilution, share allocation forecast, etc.

How to Keep Your Cap Table Up to Date

Usually, you will be required to update your company cap table as your company grows and expands. The more you allocate new shares to new shareholders, you will be required to keep this document updated and accurate. As such there is some information you would always need to update. Here are they:

Issuance of new shares
Names of shareholders
Transfer of shares
Splitting of shares

In most cases, as new investors or shareholders join your company, the shareholding percentage of your current investors will be diluted to accommodate these new investors. So you have to record these changes and ensure that your cap table is accurate and clear every time.

Mistakes to Avoid when Creating and Managing a Cap Table

Creating and managing a cap table must be done effectively so it can perfectly serve its purpose. Here are the mistakes to avoid when managing a cap table.

Be sure to gather accurate information. Gathering information especially when many shareholders join the company can be challenging, however, you must ensure this is done perfectly to avoid errors and future problems.
Also, you would want to ensure that updates are made regularly as changes in ownership structure occur. Failure to update at one point or the other could make the cap table inaccurate and so must be avoided.
Importantly, you should also understand how dilution of shares works and the impact it could have on the company's shares and the shareholdings of existing and incoming investors.
Another mistake to avoid is choosing irrelevant cap table software to use. Although there are many types that can be used, you should consider the ease of use, the likelihood of managing complex equity structures, and error-free features before selecting one.

Conclusion

Creating and managing a healthy cap table is important to your business's growth and development. While it can potentially help you source good investors for your business, it is key to note that you must manage it effectively for it to be relevant. Do you have any questions about how to create and manage a cap table? Kindly contact one of our experts here.