A cap table is a dataset often started in a spreadsheet containing detailed information about the different people who own a company. The cap table includes a detailed breakdown of a company’s ownership or capitalization structure. It usually contains a list of the persons who own shares of stock in a company. It also indicates how many stocks are owned by each person or shareholder on the list.
The cap table contains other data aside from the list of shareholders and their capital stock. It includes data about any grants the company may have received, such as liquidation rights and classifying shares into preferred, common, convertible, and warrants. The cap table also includes entries about debts incurred by the company. Here are some suggestions on managing your cap table after a round of fundraising.
How To Manage Your Cap Table
Update Your Cap Table
One of the first few things you have to do after fundraising is to put all the relevant information about those who put up the money. It would be best to put in the new or updated information on your shares of stock as soon as possible, so you don’t forget or lose the data.
Since you’ve recently conducted a round of fundraising, there might have been changes or transactions which would affect your existing shareholders. If they’re all new investors, you’ll have to input the investments they brought in during the fundraising.
Compare Post-Money Results With Your Fundraising Action Plan
It would be best to have a fundraising action plan before executing any fundraising round. This will enable you to manage the fundraising to meet your immediate funding requirements yet stay aligned with your strategic business goals. After the fundraising, it’s best to compare the results of your company’s post-money situation with the goals and forecasted scenarios in your fundraising action plan.
Among the things in your checklist should be the overall ownership and capitalization structure. The post-money structure should be well within the range envisioned before the fundraising. Venture Capital (VC) specialists suggest that the founders maintain majority ownership during the seed and early financing rounds.
Some VC professionals suggest founder shares should be somewhere between two-thirds (67%) up to ideally 80% of the total capitalization. This would ensure the founders would have enough stake and motivation to make the startup fly. This also leaves them enough shares to unload for future rounds of financing. The suggested share of early angel investors should be not more than a fifth (20%) to give room for subsequent investors. Some startups also allocate around 10-12% for Employee Stock Option Programs (ESOP).
Check For Rounding Up Errors
Rounding up decimal numbers is one of the most common errors after a company goes through a financing round. This is expected in all mathematical computations involving decimal numbers. It also happens in preparing accounting reports and statements and engineering computations.
It’s specifically relevant in managing cap tables because the Price Per Share (PPS) can be in real numbers (numbers in fractions or with decimal points). In contrast, the shares will always be integers (whole numbers without decimal numbers, i.e., 300, 367, 521 shares, etc.).
The typical error that occurs when the PPS of an investor is rounded is that it will affect the total number of shares owned by that shareholder. For example, a PPS of USD$7.33033129 won’t be equivalent to the same number of shares if the PPS was rounded to USD$7.33. The difference could run up to more than a hundred additional shares of stock. This will impact the overall capitalization structure and the ownership percentage of other shareholders across the board.
Check Transactions Involving Existing Shareholders
It’s also possible that some of the transactions involved a transfer of shares between some of your shareholders and other external incoming shareholders. There could have been a transfer of shares among your existing shareholders. These types of changes will most likely require adjustments in the data entries of those shareholders who were parties to the transactions.
Some of these things can be easily adjusted using popular spreadsheet software applications. But there are changes that you have to keep track of almost every day. This is why some businesses prefer to use special software applications to create their cap tables rather than do it using popular spreadsheet applications.
Avoid Over Dilution After A Fundraising
You should review your capitalization structure after high-resolution fundraising. This happens when the business puts out a variety of offers for Simple Agreement for Future Equity (SAFEs) and convertible notes containing different terms. Startups usually do this to entice specific investors to buy in. They’re hoping these investors would greatly help the venture, especially in the early stages.
High-resolution fundraising gives the startup founders a lot of room for flexibility, especially during the early rounds of pre-seed and seed. The problems come up when the business loses track of what they offer. The variety of discounts and valuation caps, combined with pre-and post-money valuations, can result in so many messed-up values that would be difficult to track manually with your usual spreadsheet.
Consider Using Cap Table Software
This can happen when you’re not using advanced software for managing cap tables. After sorting the cap tables, you might find out that you’ve given away an ownership portion of your company way beyond what you had in mind. It might also dilute the stock shares of other investors who wouldn’t know any better if they don’t have real-time access to updates to your cap table.
Stock dilution happens when the company authorizes the issue of new stocks and offers them to investors. The influx of the new shares brings down the value of the existing stock because it reduces their share in the overall ownership of the company.
Review Alignment Of Legal Documents With Cap Table
Keep in mind that stock certificates are also legal documents. They’re proof that the investor owns the number of shares in the company specified in the certificate. Aside from that, it entitles the shareholder to a bundle of other rights. It means they can access the financial documents. They can sell or assign their rights to other shareholders or even use them as collateral to get bank loans. Additionally, they can team up with other shareholders to form a new majority.
This makes it essential for the founders to ensure that all these legal documents and agreements align with your cap table data. You should include a review of all the discounts and convertible securities. You should hire someone who understands cap table mathematics. It would help if you also asked for help from a corporate lawyer who has experience in equities and securities transactions.
There will be numerous and sometimes sweeping changes in your capital structure after a round of fundraising. The issue of new stocks will dilute the ownership share of the existing stockholders. Some shareholders may transfer or exchange their stocks to another existing shareholder. They may also sell to the incoming investors. All these changes have to be managed so that your cap table will accurately reflect the ownership structure of your company.
I am Tristan who loves to ride and spend time with my jenny (horse) and my love Mark. After completing my graduation, I have been working as an accountant in a private firm in Cologne.