Capitalization table: What is it and how should it be used?

Legal Analysis

A-Cap table or capitalization table is a table that most start-ups or investment companies use in the early stages. In addition to specifying the percentage of each shareholder, the cap table shows the value of their securities as well as the degree to which they dilute over time. The capitalization table is one of the first documents that is created when a company is established. Usually, after several investment periods, the capitalization table becomes very complicated because all the transfers and all the decisions made up to that point will affect the numbers in the table. 

Creating a capitalization table 

Cap table also records all transactions and increases and decreases of capital through the issuance of shares, cancellation of shares, debts, etc. The role of executives is to manage these transactions and documents to ensure that the company is moving in the right direction. In the simplest case, the capitalization table contains the list of all shareholders and their percentage of shares in the company. This table is mostly used by investors and entrepreneurs to analyze and predict the state of the company’s capital at important events of the company, such as diluting stocks or considering the option of granting shares to employees, etc.

How to use the capitalization table?

The capitalization table should have a simple and understandable design and a regular structure. As mentioned earlier, one of the most important pieces of information displayed in the capitalization table is the share of shareholders. The common structure of a capitalization table is in a way that the investor’s name is written in a column and the type of securities and other information are written in the same row. 

Another common method is to write the total number of shares of the company in the first row, and the total number of shares purchased by the company’s shareholders, the number of unissued shares, and the number of shares stored for the future are displayed in the next rows. In this case, the names of the shareholders who have bought the shares, the number of shares of each of them, the benefits and share options that each shareholder has, and the total number of shares in the future (specifying the dilution rate) are written in a separate table. 

Updating the capitalization table 

In each investment period, the cap table must be updated and the resulting changes must be entered. For example, the effect of newly issued shares, increase or decrease of employee stock options, etc. should all be reflected in the capitalization table. Also, this table needs to be updated again whenever key shareholders leave the company or transfer their shares to other shareholders, or when new shareholders are added to the group or the company’s employees retire. 

Waterfall analysis 

Waterfall analysis determines the amount that each shareholder will receive if all of the company’s assets are cashed. Liquidity is usually accompanied by uncertainty making shareholders unable to know how or when it occurs. Waterfall analysis is based on a few general assumptions that determine the true percentage of shareholder ownership. 

Applying the capitalization table 

Capital raising: When an entrepreneur is looking to raise capital and enters into negotiations with various investors, the capitalization table can provide them with important company figures. This table attracts more investor confidence because it assumes the company structure to be systematic. This table also shows all the financial and economic changes that have taken place in the company answering many unasked questions. For example, the situation of the other investors and the number of them may be important for your investor to be able to better predict the future of his investment or to avoid possible tensions with other investors. Investors are also interested in knowing their position and status in case of liquidation of the company’s assets; for this, they use the capitalization table. 

Recruitment of employees: Most of the time, the capitalization table and the description and information of the company are provided by investors and managers. But some companies prefer to have the same kind of relationship with their employees and keep them informed about everything so that transparency is maximized. This not only increases the productivity of the employees but also motivates them. For example, company managers and executives may want to know how much they are being paid when they are being recruited. Bear in mind that highly transparent and trustworthy companies are better able to retain their employees in stressful situations. 

Tax: In most countries, the cap table is used as an official and legal document to determine the ownership level of investors. Tax centers employ the capitalization table to calculate the taxes of companies, employees, investors, etc. If the capitalization table is not up-to-date, the tax office may overcharge them. Also, if the company is found to have paid less than it should have, it usually faces heavy fines. 

Company sale: When a company intends to transfer its shares or assets to another person or company, the proceeds from the sale must be distributed among the shareholders. The capitalization table specifies what priority each shareholder has and what part of this amount should be allocated to him. Again, if the capitalization table is not up-to-date, a stock payment is likely to result in disagreement and conflict among shareholders. 

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