How to Create and Use a Cap Table
Your cap table (capitalization table) provides information that helps you understand your company’s ownership. A cap table is a beneficial tool for startups or new businesses that are still in their early stages.
Basically, a cap table is a spreadsheet that shows your company’s equity-based transactions and provides details on who owns what stake in your business. In addition, it shows your company’s securities, equity shares, prices paid by stakeholders, and other details. In this article, we’ll briefly outline how to create a cap table and offer ways of using a cap table.
Creating a Cap Table
To create a cap table, there’s no need to reinvent the wheel. You can find basic templates like this one that you can expand and tailor to your company’s needs. You can also customize them for different members of your organization. Whatever template or format you choose, be sure it has a simple, organized layout that clearly shows all the relevant details. A few essential pieces of information include:
- Each shareholder’s name exactly as it appears on the security
- Date of security issuance
- Number of shares or units issued to the shareholder
Practical Ways to Use a Cap Table
Apart from clearly delivering information, cap tables are useful for a number of things, some of which are listed below:
Understanding Your Equity
How do your business decisions affect the company structure? With your cap table, you can see how these decisions impact your shareholders. Because it shows exactly what stake new investors will have in the company, a cap table is especially helpful if you’re planning to raise more funds.
Since cap tables show equity ownership, tax agents use them to determine whether everyone (the company, employees, and investors) is paying the correct taxes. Maintaining current cap tables keeps everyone up-to-date on their tax liabilities. Otherwise, everyone could end up not paying the correct taxes. And no one wants to pay more taxes because your cap table isn’t up-to-date.
Initial Equity Distributions
As a young company, you need to have the distributions in writing. This way, there’s no confusion about who gets what. Your cap table makes it clear what stake each stakeholder has in the company.
Employee Hiring and Employee Options
New employees should know what their incentives are. By using the cap table, you give them a clear picture of these incentives. You can match their contributions with the appropriate stock. In addition, seeing how the company’s performance relates their performance is motivation to do good work. Also, employees can easily know things like payouts in the event that you sell your company.
Using Your Cap Table as a Business Guide
Cap tables may not be legally binding documents, but they are is useful in many ways. As a snapshot of ownership information, you can use your cap table to make all sorts of decisions. It can help you decide the future of your company, especially regarding new investors or hiring new employees.