A stock investor who prefers firms with excellent fundamentals would first consider looking at the financial and equity performance of the target company. Also, a start-up company that wants to keep track of its company shares needs a reliable reference. These companies use a capitalization table or cap table to reference the required statistics.
Finance experts generally use the data in capitalization tables to do their financial analyses. The data presented on a cap table are the primary basis of investors and management when assessing a business’ status.
What’s a Cap Table
A capitalization table, often known as a cap table, is a spreadsheet or table that displays a company’s equity capitalization. It’s a guide used by start-up companies, which can be handy during the early stages of business operation. A detailed analysis of a company’s shareholders’ equity is typically included in the capitalization table.
Components of a Cap Table
Data about ordinary stock, preferred stock, warrants, and convertible equity are elaborately presented in a cap table. These data are used mainly by entrepreneurs for start-up businesses when they do cap table planning for their periodic projections.
Here are the components as mentioned.
Ordinary Shares
Ordinary shares, also known as common shares, are equities traded in a public stock market. These shares represent proportional ownership of a particular company, but it doesn’t guarantee dividends to its shareholders. Shareholders with ordinary shares are only given voting rights during periodic meetings.
Preferred Stock
Preferred stock or shares are owned by business owners and other investors whose interest is on guaranteed dividends during profit sharing. The shareholders of this type of share don’t have voting rights. They’re not considered co-owners of the company who may take part in its business decisions during shareholder’s meetings.
Stock Options
Stock options are a type of remuneration. Employees, contractors, consultants, and investors of a particular company may be given a stock option. These contracts or ‘options’ offer an employee the right to buy a certain number of shares of company stocks at a predetermined price.
Stock options don’t give a proportional right of company ownership, but it provides the holder the right to buy and sell company shares as a form of compensation.
Convertible Equities
A convertible security is a financial instrument, typically a bond or a preferred stock. It can be converted into another security like its common stock. Generally, the owner of such convertible equity decides whether to convert and when to convert. In other instances, the company retains the right to determine the timing of the conversion.
When Do You Need a Cap Table?
The cap table may be used for various purposes other than determining the company’s total share count. You need the advantage of having a well-organized cap table when faced with the scenarios present in these circumstances.
When You Need to Market Your Company to Investors
Investors want to see how your company’s ownership structure is arranged when you propose an investment. They need to know the existing ownership composition, previous financing rounds, and the impact of their investment on shareholding and capitalization.
The capitalization table will show them where they stand regarding shares and how much they need to improve their position.
When You Need to Keep Track of Company Shares
A cap table is ideal for managing the records of your firm’s shareholders. It’ll show how many shares they own and what percentage of the company they own. You’ll also view the vesting schedule, which will tell you when more shares will be distributed to your shareholders.
And if the corporation decides to sell the business, the proceeds will be divided among the shareholders. The cap table would detail how much each shareholder would get. And such information will be disclosed to each shareholder in the event of any distribution issue.
When You Need to Keep Track of Your Legal Documentations
The capitalization table tracks the number of shares and, at the same time, the legal paperwork associated with each transaction. It’s a valuable tool for keeping track of vital legal papers and determining which legal form has been recorded.
When You Need to Record Critical Dates
Aside from the updated list of present owners and investors, the cap table also alerts you on critical dates when your options, warrants, and convertible bonds can be converted into company shares. It may significantly impact your future hiring selections and business goals.
To Wrap It All Up
The contents of the cap table are critical to keeping all of the company’s share and owner information up to date. The cap table is your marketing tool to promote your business and ensure proper legal documentation and compliance.
Your cap table will also help you maintain smooth relations with your investors and shareholders. It organizes shareholder agreements and records within the company. It includes providing basic information about company shares, options, warrants, and convertible notes.
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