Cap Tables and Why They Exist

Essentially a “cap table” is a list of a company’s securities (in the form of stocks, warrants, options, etc.) and the holders of such securities. At the most basic level, a cap table shows who has an ownership interest in, or rights to an ownership interest in, the company. Many cap tables provide further detail as to the nature of such interests (e.g. whether the stock at issue is common, preferred, detailed by class or series, etc., or whether the stock belongs to an “investor,” “employee” or “founder,” etc.). Cap tables range in size from one shareholder to many thousands of shareholders. If the company has a more complex capital structure, having a good cap table can help an entity make decisions faster and more accurately. Here are the basic elements of a good cap table:

Accessibility: Because your company may have to provide a cap table to myriad different entities or investors, it should be in a format that is easily accessible (e.g. Microsoft Excel). Not everyone uses Microsoft Excel but many businesses do and probably more so than most other options.

Centralized: All security interests should be in one document (if possible). How inconvenient would it be if you were in a hurry and needed to search one document for Series A preferred interests and another for Series C?

Organized: Many cap tables are organized with a list of security holders along the Y axis with the various types of securities held along the X axis (some companies also include comments or notes related to securities or securities holders).

Detailed: The level of detail necessary for a cap table depends on the way the cap table will be used, and to some extent, the size of the organization.

Accurate: Who is responsible for keeping the cap table up to date? Someone within your organization? An outside professional or provider? Without a current/accurate cap table, the utility of the cap table for decision-making is decreased.

Why does all this matter? A few examples: (i)if your company is considering hiring a new executive or skilled employee or contractor that wants equity (or at least options) the company needs to have the ability to quickly determine (a) whether sufficient equity exists to accommodate the request, (b) the dilutive properties of fulfilling the request in regard to other shareholders, (c)how the percentage requested translates to a certain number of shares, and (d) how all of these impact the company, (ii) if your company is considering a new round of financing, you will need a cap table to quickly and correctly analyze the available proposals and options (e.g. for size, pre-money valuation, etc.), (iii) if your entity needs to engage in a certain transaction that may be restricted by governing documents or agreements, a cap table will often help your company (often a venture backed company with various protective provisions) determine how it can obtain the necessary authority (and which shareholders to target for consent) for such transactions (in the most efficient manner possible), or (iv) if your company has potential suitors, those potential purchasers will likely request a cap table as part of their due diligence process (an incorrect or sloppy cap table might leave a bad impression or leave the buyer wondering what problems may exist down the road).

No matter whether your company is using a cap table for your company’s Series A round of financing or is just beginning to look at VC (Venture Capital) term sheets, your company’s cap table should be accessible, centralized, detailed, organized and accurate.