Ask any entrepreneur out there and they will tell you that at some point, it was their goal to have complete ownership of their business. In fact, some of them may even have had that experience but once you start growing, keeping that status becomes almost impossible. The biggest and most common reason is the funding that you need to expand your operations. On the other hand, some businesses require so much input that they simply cannot be started or even operated by a single person. That is where partners come in and also where the need to keep a record of ownership comes in. That record and using it in different ways is what a capitalization table is all about.
What Exactly is a Capitalization Table?
Also known as a “cap table”, this is basically a document that contains information about the shareholding of each of the partners in a business. It defines the amount of investment that each partner has put into the company and the corresponding percentage ownership that they have. The values in this table change as new funding enters the business over time.
For example, if there are two original investors who each contributed $200,000, then the total would be $400,000 with each partner owning 50% of the company. These values and percentages would be present in the cap table. However, as time passes, the company may grow and new investments may come in. if the company has two new investors and they also invest $200,000 each, the total value will grow to $800,000 and the value of ownership for each of the investors will become 25%.
How Do Capitalization Tables Change?
You might be wondering that the role of a cap table is so simple that you would probably end up leaving it aside collecting dust for a long time. However, it does a lot more than just record the current share percentages for partners. Companies used cap tables to add current and future changes that may occur to the shareholding due to a wide range of factors. Things like stock options, warrants, convertible notes, and convertible debt are calculated and added to the table under the assumption that it could happen.
As the company grows, things get more complicated, and it becomes difficult to figure out where the shareholding stands for each partner. However, using clear guidelines and timely updating the table can help you clear out most of that stress. You will still reach a point, though when doing it yourself would simply become impossible. Thankfully, you can easily find professional help for that as well.
Automation for Managing Your Cap Tables Effectively
To make sure your cap tables are up to date, the first thing you should be doing is centralizing all your financial data. Use a good financial management software that allows you to adjust values in real-time and make changes to the overall table automatically with a good backup. In addition to that, you should also introduce automation in your overall financial systems so that your cap table is never out of date. This can be a big factor that differentiates between an updated table and an obsolete table that causes unnecessary confusion. Smaller businesses may not realize this but once you grow beyond a certain size, you can see its impact immediately.
Last but certainly not least, having professional help in managing your finances, especially your cap tables, can make a big difference for you. Not only can you keep an eye on your company’s decision-making situation, but you can also get suggestions on how to proceed in case of future issuing of shares in any form.