A capitalisation table (cap table) is a must-have document for new and expanding businesses. It outlines all stockholders' ownership shares, including founders, investors, and workers. The cap table assists businesses in making educated decisions about equity pay, fundraising, and exit plans. In this post, we will look at six tried-and-true methods for keeping a cap table that will attract investors and secure your company's long-term prosperity.
1. Keep Your Cap Table Accurate and Up-to-Date
Record Every Detail
Maintaining an accurate and up-to-date cap table is critical for making educated decisions concerning the equity of your organisation. Ensure that any changes in share ownership, such as the issuing of additional shares, the exercising of stock options, transfers between shareholders, or share repurchases, are documented immediately. This allows you to keep track of each shareholder's overall ownership in the firm and make more informed judgements regarding future stock transactions.
Use Reliable Tools
While many companies begin by creating cap tables on basic spreadsheets, this strategy may become cumbersome as your company expands and the number of owners and share classes increases. Consider adopting specialised cap table management software to help you keep your cap table precise, and tidy and do the math. These tools can automate difficult computations, maintain vesting timelines, and produce reports that make sharing your cap table with investors and other stakeholders a breeze.
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2. Include Convertible Notes and Other Outstanding Securities
Account for All Securities
Convertible notes, as well as other existing instruments like warrants and stock options, can have a major influence on your cap table. Make sure to include all such securities in your cap table, along with information on their terms and conversion characteristics. This will allow you and your investors to correctly analyse the possible dilution of their ownership shares, allowing you to make better decisions regarding future investments.
Track Conversion Triggers
Convertible notes and other instruments sometimes have triggers that convert them into equity, such as a later fundraising round or a change of control event. Keep an eye out for these triggers and adjust your cap table as needed. This can help you prevent surprises and guarantee that your cap table appropriately reflects all shareholders' ownership shares.
3. Make Provisions for Future Employee Stock Option Pools
Set Aside Shares for Employees
A stock option pool (ESOP) is a critical instrument for attracting and retaining top employees. Set aside shares for future employee gifts to incentivise them to help build your firm and share in its success. Include an ESOP plan in your cap table, defining the number of shares you want to reserve as well as the vesting timeline for those shares.
Communicate Your ESOP Strategy
Make sure your investors and other stakeholders understand your plan for rewarding staff with stock options. This will allow them to better analyse the possible dilution of their ownership shares and make more informed decisions regarding future investments.
4. Pre-Money Valuation and Related Calculations
Determine Pre-Money Valuation
The equity worth of your firm prior to obtaining additional investments is known as pre-money valuation. Included in your cap table, this valuation can assist you and your investors in determining the fair value of your shares and the right amount of investment to seek in future fundraising rounds.
Calculate Ownership Percentages
You may determine the ownership percentages that new investors will obtain for their investments based on the pre-money valuation. This information is critical for investors as they determine whether to invest in your firm based on the possible return on their investment.
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5. Address Potential Dilution Effects
Understand Dilution
Dilution happens when a corporation issues additional shares, lowering current shareholders' ownership proportion. While dilution is frequently required to obtain extra capital, it can be detrimental to current shareholders if not handled appropriately.
Plan for Dilution
Make careful to account for the possible dilution implications of issuing new shares, whether through fundraising rounds, stock option awards, or convertible instruments, when generating your cap table. This will allow you and your investors to make educated decisions regarding future stock transactions and guarantee that your cap table appropriately reflects all shareholders' ownership shares.
6. Regularly Review and Update Your Cap Table
Conduct Periodic Reviews
Your capital structure table should be a live document that changes as your company grows and its ownership structure shifts. Examine your cap table on a regular basis to ensure that it is correct and up to date, and make any required revisions to reflect changes in share ownership or outstanding securities.
Engage Professional Help
Consider hiring a professional adviser, such as an attorney or accountant, to assist you to manage and update your cap table as your company expands and your cap table gets more sophisticated. These experts may advise you on best practices for cap table management and help you avoid costly oversights.
Maintaining an accurate and up-to-date capitalisation table is critical for startups and growing businesses looking to attract investors and ensure long-term success. You can establish a cap table that correctly reflects your firm's ownership structure, allows you to make educated decisions regarding stock transactions, and positions your company for future development by following these six tried-and-true tactics.
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