Every company has a system of determining company valuations, equity dilutions, ownership stakes and similar considerations. This is usually called cap table management. It gets complicated as a company grows especially if the owner does not find a stable and convenient method to carry it all out. We can define a capitalization table as a ledger, which acts as a tracking tool of all the business transactions in your company. It is a way to monitor all your financial rounds and to record debt, derivatives holders, options and warrants among many other things.
Understanding What a Cap Table is
A capable in full is a capital or a capitalization table that sets out the ownership of the shareholders in a company. Shareholders in a company are inclusive of the investors and funders who are employees having options in the company. A company valuation lists the names of shareholders as well as the potions of ownership they have on the company. It also includes distributed securities to different individuals in the startup. It is therefore an all-round management tool that helps you to conveniently monitor your commonly to ensure it only experiences positive growth.
Investors usually need the cap table management to see their ownership of the company as fully diluted shares. Fully diluted shares include the value of existing shares in addition to other kinds of securities for example unissued options, warrants, options that may be converted to shares finally.
Having a company valuation will be advantageous to you in so many ways. You only needed to be consistent and keep updating it very time there is a new development in your business. It will help you make important decisions for example concerning option pool and modeling new rounds of capital. It will also help you to accurately monitor ownership of the company and the transactions between the company and its shareholders. For you to improve your company, you need to be aware of every detail that make it what it is and keeping record of every transaction will help you at every stage.
Cap Table Management Issues
As much as cap table management is a reliable tool and convenient for your company’s operations, there are some problems that you should take note of so as not to be taken by surprise.
The Following Are Some Of These Issues:
– Failing to use a centralized system
Many people both inside and outside your company will need to access your cap table. They include invested parties or investors, the accounting department, central leadership and directors, attorneys and other people of interest. These people are all vested in your system therefore; you need to make it centralized and easily accessible to them. It will help with the communication between you and hem if they can easily access important information when they want to. This is probably impossible if you are still using the Excel spreadsheet, consider upgrading to online platforms like shares because apart from being secure, it is available to everybody vested, and it is an online platform that is cloud based and can be easily updated.
– Inconsistent Tracking
A company valuation is only functional if it is accurate and inconsistent tracking interferes with this process. When using an excel spreadsheet, it means you will have to add lines, columns and rows each time you ought to bring in something new and this can be very confusing to your team members. You are also likely to make mistakes when doing calculations this way.
– Not Documenting New Changes
Having a cap table means that you will always need to update new operations, details and transactions, but sometimes people tend to remember to update big changes like getting a new round of funds but they forget the smaller changes, yet these still make up the activities of the company. One may forget updating total share counts after introducing new partners or employees. To avoid overlooking some details and operations, consider having a system in place that does regular reviews of the information on our cap table. You can also have formal system to update the cap table after every event in the company.
– Manual Entry
This is when you give one person the obligation to update the ledger after creating it. Manual entry might work in the beginning when your company is still a startup but later as it grows, the person may need to take more time updating the ledger and they will make errors because they are only human. It is important that you begin using automated calculations to avoid having errors in your cap table. Use manual entry minimally and rely on automated formulas and calculations more.
– Liquidity and Waterfall Calculations
Company valuation usually begin by calculating the percentages of ownership of each shareholder on your company. Either when the percentages are converted to actual proceeds partially or fully they are called a liquidity event. Doing this can be complicated so some companies do a waterfall analysis to determine distribution of the proceeds.
To avoid having to deal with a very complicated cap table that will just kill your morale, try keeping it simple for as long as you can provided you record everything that needs to be recorded. Add fewer variables with time.