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January 7, 2022

Cap Tables: How Do They Work?

Arguably the MOST important data your company maintains is on your company’s capitalization ("cap") table. Cap Tables are an integral part of the entire lifecycle of your corporate growth, so let’s take a brief look at how they work.

Let’s start with a basic cap table that demonstrates the state of a company after a few stages of company growth.   Here are some key sections (See Fig. 1).  Your authorized capital is dictated by your corporate organizational documents.  This first half of the cap table usually details the issued equity, such as common stock and preferred stock.  This section also illustrates the total ownership of stock, otherwise known as Voting Control.  This second section demonstrates convertible securities and their effect on the entire ownership of the company.  The Fully Diluted section details ownership after all company securities have been issued and converted.  This is the column that gets the most attention, especially from investors.

 

Fig. 1

That’s a lot of information.  Let’s go over some of the growth stages that are summarized in this table.

 

First, when you start your company, you determine your founder common stock ownership. You see here that the founders control 100% of the voting control AND the fully diluted percentage amount (See Fig. 2).  Pay attention to this column as we go through the corporate growth stages.  This column provides a clear picture of how your company will change as it scales.

 

Fig. 2

Once your company has completed its formation process, it may be time to bring on employees and consultants to assist with your business.  At this stage you may grant stock options to your employees and consultants. Here, we demonstrate several stock option grants and we keep some left over for future issuances.  Take a look at the affects of the fully diluted percentages once a stock option plan is implemented.  (See Fig. 3).

 

Fig. 3

Now that your company is gaining traction, it may be time to raise funds to keep the momentum going.  In these early stages, a typical fundraise would consist of selling convertible notes or some other form of convertible security.  You see here that you are not issuing equity, but you reserve the estimated equity that may result when the note converts.  See what this does to your fully diluted percentage?  Also note that the founders still maintain voting control (See Fig. 4).

 

Fig. 4

Things are going along great, and you have made outstanding progress.  Now is the time for an equity round in which you sell preferred stock.  Here we are demonstrating the issuance of preferred stock, which now affects voting control.  See that fully diluted column?  Your lead investor wants to know these numbers BEFORE the term sheet is signed (See Fig. 5).  

 

Fig. 5

Tending to each item on your cap table, or Cap Table Management, requires accurate changes, which are all crucial to reflect your company’s ownership. Managing your cap table involves recording many transactions and a detailed knowledge of legal documents that affect each and every stage of your company’s development and growth (See Fig. 6).

 

Fig. 6

It is very important that your cap table is kept current and reflects all equity transactions, including those that mayhappen in the future.  If your cap table is up to date and correctly reflects your company’s equity distribution, you can close funding transactions more efficiently while saving legal fees in the process.  That usually means you will get your money faster.

 

Fig. 7

 Is this all a little confusing?  Don’t worry, you are not alone.  The cap table is likely the most neglected and mismanaged data set your company controls.

 

Afissio can help.  Instead of spending precious time worrying about your cap table management, let Afissio provide you with the guidance, documents, compliance and cap table management for every round of fundraising.  When you join the Afissio ecosystem, your cap table management is free.

 

Afissio. Investor Ready.

 

 

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