July 14, 2022
The competitive marketplace and global economy have increased capital investment value. More companies are looking to raise funds through various sources to fuel their growth. This new trend has led to the rise in cap table templates, which can be used in several ways. The cap table is useful for keeping track of information that should be distributed to investors, and it can additionally be used as a financial statement. In this article, we will guide you on how to master the art of using a cap table template effectively to attract investors.
What is a cap table?
A cap table or capitalization table is a list of shareholders and their respective holdings in the company. Basically, it is a spreadsheet that provides an overview of the company's capital structure. A cap table is necessary as it provides investors with information regarding the company's financial information and the balance of each partner. From the dilution of shares to the increase in value of a firm, a cap table is used to track these changes.
In addition, the capital can be allocated wisely with the help of a cap table as it is used to detail the company's equity structure. As an entrepreneur, you need to create a cap table for your company, which can be used by investors to track the flow of funds, the percentage of ownership, and information regarding the overall financial operations of the company. Therefore, a cap table template for startup funding is an integral part of a financial management system.
Why should founders and businesses prepare a cap table?
A cap table is a spreadsheet that explains and tracks the ownership of the company's equity so that founders, investors, and employees can understand the company's structure. As a business grows and acquires more capital, it is important for each shareholder to have a clear understanding of the company's shares and their percentages. Having said that, the cap table is updated after each funding round to give the shareholders a clear picture of the changes made. Following are a few reasons why you should prepare a cap table:
- A well-organized cap table will have all the information potential investors may be interested in. A cap table will help investors understand the company's financial position, its capital structure, and the changes in this regard. Your cap table should have detailed information about every single shareholder.
- A cap table also allows you to keep track of any type of dilution that is caused by equity purchase agreements or convertible debt agreements, which are both commonly used methods used by companies to raise capital from investors.
- The percentage of ownership displayed on a cap table allows business owners to make decisions based on the amount each shareholder has invested and their respective shareholding after every funding round.
How does a cap table help in raising funds?
A cap table is a great tool for both investors and founders. The spreadsheet that contains information about each shareholder's share of ownership and their respective stake in the company helps them make decisions regarding their capital investments. The pitch deck that is prepared by your business will be based on a cap table, which can also be used during the fundraising process.
The money raised in the funding round will be allocated in accordance with the percentage of ownership held by each partner. This can be used as a basis for how much of the money is to be invested in the company. Overall, the cap table helps to keep track of the distribution of funds and allows you to prepare a concise financial report along with facilitating startup funding.
How a messy cap table can break the deal
It's a fact that investors want to see a well-organized cap table. However, the lack of proper structure can make it difficult for investors to comprehend each stakeholder's portion of ownership. This can lead to complications and delays in the process of fundraising. A cap table is a critical component of a startup's pitch and should be organized and updated regularly to serve its purpose effectively. If you prepare a cap table full of miscellaneous information, investors will likely lose interest in your startup.
You should ensure that each stakeholder's percentage of ownership and the investment amount is clearly outlined in the cap table. Keep in mind that there is a wide variety of investors that you can approach, and they will have varied perspectives on how their investment should be allocated. As a startup founder, you need to create a cap table that meets the needs of different types of investors in order to succeed in your funding process. Hence, choosing the right template for your cap table is essential to building a strong relationship with investors.
Identify the key terms of a cap table
In order to understand how a cap table works and make use of the information it provides, it is crucial for you to familiarize yourself with the key terms linked to the cap table. Here are some key terms that are essential to understand:
- Pre-money valuation - The pre-money value of the company is basically the valuation of the business prior to funding or before it goes public. Potential investors can use the pre-money value of the company as a basis for their investment decisions. This allows you to calculate the appropriate amount of capital that your business needs in regard to the pre-money valuation of your business.
- Post-money valuation - Post-money valuation is the value of the business after funding has taken place and new shareholders have invested in it. The post-money value is calculated by adding up the newly infused capital and the capital already in possession of the business. Hence, investors can calculate the post-money valuation and then determine the percentage of ownership that is being given to them in relation to the overall shares and capital of the business.
- Common stocks (or common shares) - Common stocks are the type of shares that are issued to founders and other investors as proof of the amount they have paid into a company. Depending on the type of share, founders and investors can receive different benefits in the form of issuance of dividends or voting rights. It is important for investors to understand the nature of their common stock so that they can make the best investment decision.
- Preferred stocks (or preferred shares) - The preferred stocks have certain attributes that can make them a better investment option than common stocks. Holders of preferred shares are entitled to a fixed dividend as well as they are the first ones to receive payment in the event of a bankruptcy or merger. It is important to analyze whether the investment in preferred shares is a feasible option.
- Options - An option simply refers to the right that an investor has to buy/sell a certain number of shares or securities in a company at a mutually agreed-upon price within a specified period of time. It is important for founders and investors to determine exactly what type of options are being offered, how long they can be traded, and how they can be traded.
- Convertible notes - A convertible note is basically a debt instrument often used by angel or seed investors that allows them to invest in startups where value is not yet known. The note gives the holder the right to receive a set amount of common stock at a later stage when they are more valuable. The note's value can be easily converted into equity if the business starts generating good value.
- SAFE - The Simple Agreement for Future Equity (SAFE) is basically used by investors as a financing contract for their investment in a company and allows them to receive common stock at a later date in exchange for their investment. The SAFE is ideal for those startups which don’t have the right to issue or transfer stock. Investing in a startup using SAFE is a great option for those who want to have equity in the company without selling their stake to the public.
- Warrants - Warrants are essentially a security that gives the holder the right to purchase or sell the underlying security at a later stage at a predetermined price. In order to provide an incentive to the investors, startups can provide them with warrants with a price below the market or at an agreed-upon rate. The provisions of the contract can decide the way in which investors use warrants.
- Outstanding ownership (or outstanding shares) - Outstanding ownership is basically the number of shares that all shareholders of a business hold. A company can have different types of investors, with each class holding a different proportion of the outstanding ownership.
- Fully diluted ownership - The fully diluted ownership is basically determined by deducting all outstanding securities that are out there in public from a company’s total outstanding shares. This allows investors to analyze whether they will be able to exercise their warrants, convertible notes, or options without reducing the stake of other existing shareholders.
Use the right order to list the shareholders
It is important to list the shareholders of a company in the correct order so that you can accurately understand the flow of capital and the relationship between different stakeholders. With the help of a cap table, you can easily determine the shareholders and the different classes of shares that they hold. The right order of listing the shareholders can be determined by analyzing the type of capital that each shareholder has invested, how much of the total capital they own, and how long they have been invested in the business.
Include types of shares
A company’s shareholders will typically have different types of shares, such as common shares, preferred shares, warrants, or options. To make things simpler for investors, it is important to list all the shares held by the shareholders and their respective cash values. This would help the investors make decisions regarding the amount of equity they have invested, voting rights, and dividend claims. Thus, the founders should ensure that every type of shareholder is categorized correctly.
Include shareholder’s details
A cap table is a great way to include the details of each company shareholder, so they can be easily traced. It is very important for founders to include personal details such as name, date of joining, and even the number of shares that each person holds. This will make it easier for future investors and third parties who are interested in knowing more about shareholders.
Use cap table software
Technology has made it possible for companies to easily create and update a cap table. With the help of cap table software, like that of Eqvista’s, the integration of an automated system will speed up the process of listing shareholders, classifying the type of shares held by each shareholder and the number of shares held by them. As a result, reducing errors, generation of updates in real-time, and access to a larger database of shareholders can help business owners make quicker decisions. It is important to make sure that the cap table software is easy to navigate, has the best features, and is accessible on a wide range of devices. Hence, you can raise funding for your startup with cap table software in a streamlined manner.
Additional uses of a cap table
Apart from the standard uses of a cap table, it can also be used for other purposes. It can be used for multi-class share structures, conversion of debt into equity, making and managing stock options, tracking employee stock ownership plans, and much more. The cap table can help you to design an ideal structure for your business and keep track of all the important information. Thus, manage your shareholder’s data in the best possible way.
Why should you choose cap table software over excel template?
In today’s era, digitalization has completely changed the way in which business is conducted. Due to this change, it has become much easier for companies to make informed decisions by using digital platforms. The traditional methods to manage shareholder data have been very time-consuming and tedious. Excel templates have limited features that make it quite difficult to categorize the data and distinguish between different shareholders.
A cap table software is one of the best ways through which a startup can easily manage its shareholder’s data. It has made it possible for companies to collect, analyze and control their data more easily. This will help to improve their efficiency and the growth of their business as it helps to eliminate errors and speed up the process of listing shareholders so that you can get insights into your business in the best possible way. Therefore, preferring a cap table software over an Excel template is the perfect choice for startups.
Difference between cap table software and excel
While the cap table software is designed exclusively to manage shareholder data, the technical features of the software work in a very efficient manner and are easy to use for all kinds of users. It has an advanced database handling and analysis feature that can be used effectively for data tracking, decision-making, and various other purposes. Cap table software is designed by experts and is highly accurate in terms of data collection.
Furthermore, the errors that are usually observed in excel templates are eliminated with the help of cap table software. Excel is a basic document preparation program that can be used for various purposes. The use of excel templates can be very time-consuming and tedious. The errors that are generated while making changes in excel templates can always be identified. Due to this, the cap table software is highly recommended as it helps to minimize risks and errors.
Time to get your startup’s cap table in order!
Cap tables provide all the information that is required to keep track of shareholders and their respective details. From securing the funding of a startup to decision-making and ensuring transparency, cap tables play a key role in each and every business. Cap table software is the best way through which a startup can easily manage shareholder data. If you are looking for ways to get funding for your startup, you should consider choosing cap table software.