While your company is growing, you’ll need more investments to generate capital which will cater to all business activities and operations. Besides sourcing capital from investors, you have to know how to self-raise it. A great way to effectively do this is by organizing the company ownership structure and drawing the company’s capitalization table (cap table).
What Is A Cap Table?
Essentially, a cap table management is a brief version of your investor and founder shareholder details as well as their ownership percentage in the company. Also, it comprises the company’s equity dilution and valuation at every investment interval.
Introduction to Cap Table
You need a better understanding of a cap table since it’s a crucial part of any entrepreneur’s life. It’s not just a mere spreadsheet containing shares held by every shareholder in the company. The cap table contains much more information than the representation of every transaction in the company from when it started. It goes way beyond a representation of a company’s transactions since it comprises several legal documents.
Here’s a brief lowdown of things that make up the cap table:
- Stock Issuances
- Exercises Of Options
- Conversions Of Debt To Equity
It would be cumbersome to include all this information meant for a cap table in a spreadsheet.
Why Is It Important To Have A Cap Table Management?
A lot is going on in companies every day. As a management tool, a company valuation offers much in ensuring the smooth running of all organizational operations. Also, a cap table accurately and adequately deals with the numerous business complexities. The Cap table management involves several activities such as communicating with shareholders, drafting and signing of legal documents, recording transactions, complying with regulations, etc.
Typically, every growing company has a complicated cap table management. A growing company will eventually have a complex capitalization structure. Such companies have more employees, investors and numerous transactions. Although company growth is good-sounding, you should up your administrative game as an owner. If you cannot manage everything well and effectively, things can become very overwhelming.
Developing your business and managing your cap table sometimes go hand in hand. So, remember to personally manage the cap table to be in control of the business happenings. You shouldn’t hand it over to someone else because you’ll make better decisions if you have a deep understanding of your company’s position. Since using an excel spreadsheet is challenging, a great way to maintain a cap table is by using cap table software.
Why Is It Important To Have a Cap Table Software?
Here are some reasons why a cap table software is vital in managing your company:
- Raising Money on Better Terms
An effective, clear and reliable cap table management approachwill help you while selecting investments. An accurate and up-to-date table offers very much in the way of negotiation. Immediately your business starts up, it’s important to start managing it with a cap table. It’s easier to do this early on because things will get increasingly difficult to start preparing it when you’re about to select an investment. Make sure that all the recorded information in the cap table is accurate and truthful to avoid complications that stem from wrong information input in the cap table.
- Issuing Options
To effectively manage your company, you need to keep pulses with vested shares for all option grants because of stock options vest over time. Since an option holder may sometimes decide to leave the company before time, which means that their unvested options are finally returned to the company, it’s not as straightforward as it sounds. When it comes to the equity loans that your company offers to employees, there is a certain amount of time given to the employees to exercise their options before returning.
- Selling the Company
Sometimes, companies can either choose to go public or get sold. In case of such events, the cap table is essential since it will direct you on a particular amount to hand each person. Also, while casing out during acquisition, a cap table must be available because lawyers can use it to finish the deal. Since such lawyers won’t use a spreadsheet, they require you to organize the information in one accessible place. They need the valuations over the years, transactions, option agreements, sales agreements and shareholder agreements, etc.
- Get a Cap Table Software
With a growing company, you will notice that you need something more convenient and organized than a spreadsheet for a cap table management to work. This is evident especially when the company starts offering equity compensation when the spreadsheet automatically becomes complicated and cannot allow you to organize everything. When you gain more investors and employees in the option pool, the cap table becomes more complicated. Thus, cap table software is vital.