A quick guide to understanding the role of cap tables.
For any startup, it is extremely important to know about certain business aspects. One such necessary aspect is a cap table or a capitalization table.
However, many people, including startup owners may not know what exactly is a cap table. Even if they do know, they may not have the exact idea about what it is.
So, let’s understand what is a cap table and why your business needs it.
What is a Capitalization or Cap Table?
A cap or capitalization table is basically a record or spreadsheet of your business’ ownership.
When we talk about it in the wide sense, a capitalization table includes almost all of the information related to the ownership of your business.
For example, it provides an analysis of the percentage of ownership of each founder and investor in the business. It also lists the executives of the company, along with the key employees with an equity share.
What Does a Cap Table Consist Of?
If we talk about the components of a cap table, then here’s what you need to know.
A cap table comprises various legal information apart from the ownership one, such as the conversion of debt to equity, stock issuances, sales, transfers, cancellations, and many more.
Thus, a cap table comprises important information that can help your company in many ways.
Importance of Cap Tables for Businesses
For any startup business, a cap table is an important requirement. Initially, you may not have any investors and are totally self-funded. However, there is a good chance that you may find investors in the near future. Thus, this is where the importance of cap tables set in.
Moreover, some other reasons why you need to go for cap tables are:
Raising Money On Better Terms
Whenever you get a new investor, you need to keep in mind the impact it may have on the existing or current shareholders.
For this, you need a cap table that can help you analyze, along with staying updated about the company’s shareholdings. Thus, a cap table will help you negotiate properly with any potential investors.
Hiring Quality Employees and Motivating Them
If you have got a startup, you may find it difficult to hire quality employees and to also keep them motivated.
In such a situation, you can definitely offer them a piece of the company’s share, in the form of the company’s equity.
However, without a cap table, you can only provide a few details and your employees may want to know more. So, with the help of a cap table, you can easily disclose all the details to them with full transparency.
Once they are sure about their equity share in the company, they will stay motivated and this will help in increasing the overall team morale.
Cap tables can help you and your startup stay compliant.
Apart from ownership, your company’s cap table can also help in maintaining the tax and other regulatory compliance. Thus, allowing your startup to work truthfully and with full transparency.
Keep in mind that if you fail to remain compliant, you may be subjected to higher taxes and penalties too, in certain situations.
So, maintain a cap table and work in full compliance.
Selling the Company/Business
Lastly, if you want to sell away your company, you will have to involve a lot of lawyers and go through many legal procedures.
In such a situation, the lawyers will have to assess every aspect of your business, including a cap table. If the cap table is proper and well-maintained, the legal procedure will be easy-going. On the other hand, a messy spreadsheet may cause a legal conflict.
In conclusion, a cap table may get tiresome to maintain but it will yield plenty of benefits in the near future. Moreover, it will also help your business expand with an increased number of official investors.