Cap Table Basics for Startup Companies

When is the last time you checked on your capitalization table?

A startup company’s cap table typically is constantly evolving. If your cap table doesn’t already accurately and effectively depict the current ownership structure of your business, there are several reasons why it’s important to get it up to speed: 

Benefits of an Organized Cap Table

• Growth: When you’re looking to make a PE deal or raise funds, the first document that potential investors will consider is your cap table. Keeping it organized and updated will help ensure a smooth fundraising process.
• Transparency: Your employees want to know the precise percentage of ownership they have in your company. Those answers can get complicated, especially if you issue options or warrants to outside parties. An organized cap table gives everyone an accurate understanding of their equity incentives.
• Clarity: Truly sound business decisions (i.e. granting options to employees or compensating outside vendors with warrants) require an understanding of exactly how your company is structured.
• Simplicity: As you get closer to a full valuation of your company or are looking to execute a series raise, an organized cap table will simplify the process of offering and negotiating term sheets. 

As much as an organized cap table can make your life easier, an unruly one can create unnecessary headaches and inefficiencies. Once you do get your cap table in order, there are certain steps you should take to keep it that way:

Best Practices for Your Cap Table

• Assign Ownership: Right off the bat, you should select one person will take ownership of maintaining the cap table. Ideally, the lucky party will be knowledgeable about board minutes, board approvals, equity transactions, etc. We’ve found that it’s usually better when someone in the finance and accounting (rather than HR) department takes the lead.
• Review and Update Consistently: Not all adjustments are created equal. Being proactive about updating your cap table will save you a good deal of time and money in the long run. Late fixes, on the other hand, require that you reach out to your lawyers and accountants to find documents that might be years old. That won’t be a quick or cheap process.
• Utilize Software: As your cap structure gets more complex, there’s only so much Excel can do. If you’re at a point where you have different categories and classes of shares, cap table software (the one we see most often is Carta) can help keep things simple. In addition, software like Carta can store shareholder information and can speed up the process of obtaining shareholder approval for equity raises.
• Consider How Much Information to Share: The level of information you want to share with potential investors will vary with each transaction. It’s important to decide how much detail of your cap table you want investors to have. Is it a high-level view of the overall number of shares? Or do you want investors to have access to everyone who has an ownership in the company? (Another benefit of utilizing cap table software is the ability to generate reports with different levels of detail).

With a bit of planning, keeping an organized cap table can be a simple task. And, if you’re ready to take a deeper dive into some more accounting considerations relevant to your cap table, including equity, capital raising and revenue recognition, I recently presented on all of these on Audit Day of our CPE webinar series in December, which you can watch on-demand here. 

About Schneider Downs Emerging Technology Services

Schneider Downs understands the ever-changing landscape and business challenges facing companies focused on emerging technologies and software. Our clients represent a wide range of organizations, from emerging growth companies to large mature companies, and we are well-versed in the unique challenges they face. Our team of seasoned professionals has experience working with emerging technology companies in all phases of their evolution.  

To learn more, visit our Emerging Technology page.