A capitalization table (or cap table) is a table providing an analysis of a company's percentages of ownership,
equity dilution
Stock dilution, also known as equity dilution, is the decrease in existing shareholders' ownership percentage of a company as a result of the company issuing new equity. New equity increases the total shares outstanding which has a dilutive effec ...
, and value of equity in each round of investment by founders, investors, and other owners.
Overview
In its simplest form, a capitalization table, or "cap table" as it is often abbreviated, is a
ledger
A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance, and would record each transaction as either a debit or credit in separate columns, and the ending or ...
that tracks the equity ownership of a company's
shareholders
A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal owner ...
. However, the term can refer to the way in which any company keeps track of all of the relevant information related to all of its stakeholders (including
debt
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
,
convertible debt
In finance, a convertible bond or convertible note or convertible debt (or a convertible debenture if it has a maturity of greater than 10 years) is a type of bond that the holder can convert into a specified number of shares of common stock in ...
,
option,
warrant, and
derivatives
The derivative of a function is the rate of change of the function's output relative to its input value.
Derivative may also refer to:
In mathematics and economics
* Brzozowski derivative in the theory of formal languages
* Formal derivative, an ...
holders) and their claims on the company.
Public companies
A public company is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public (publicly traded) company can be listed on a stock exchange (list ...
primarily use
transfer agents and a wide array of technologies and systems to keep track of their stakeholder information and therefore it is uncommon for public companies to refer to their stakeholder records and accounting as a "cap table".
Private companies
A privately held company (or simply a private company) is a company whose shares and related rights or obligations are not offered for public subscription or publicly negotiated in the respective listed markets, but rather the company's stock is ...
typically have a much simpler capital structure and more limited stakeholder accounting requirements. In the earliest stages of their development, private companies may track their shareholders in a simple document or spreadsheet. Cap tables are widely used by entrepreneurs,
venture capitalists
Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to start-up company, startups, early-stage, and emerging companies that have been deemed to have high growth poten ...
, and
investment bankers
Investment banking pertains to certain activities of a financial services company or a corporate division that consist in advisory-based financial transactions on behalf of individuals, corporations, and governments. Traditionally associated with ...
to model and to analyze events such as ownership dilution, issuing
employee stock options
Employee stock options (ESO) is a label that refers to compensation contracts between an employer and an employee that carries some characteristics of financial options.
Employee stock options are commonly viewed as an internal agreement prov ...
, or issuing new securities. After several rounds of financing, a cap table can become highly complex.
Most cap tables are managed in spreadsheets, which may lack
scalability
Scalability is the property of a system to handle a growing amount of work by adding resources to the system.
In an economic context, a scalable business model implies that a company can increase sales given increased resources. For example, a ...
—often, they are time-consuming to maintain and update and prone to human error. In recent years, cap table
automation software
Automation describes a wide range of technologies that reduce human intervention in processes, namely by predetermining decision criteria, subprocess relationships, and related actions, as well as embodying those predeterminations in machines ...
has becoming popular with growing businesses with increasingly complex equity structures.
Relationship to company shares
In the past, companies would issue shares on paper stock certificates and then use the cap table as an accounting representation and summary of share ownership. Public companies have increasingly eliminated all paper stock certificates in a process called "
dematerialization" to simplify and decrease transactions costs. Most global regulators have made and encouraged financial system changes to encourage dematerialization.
In the US and many other countries, companies can use their cap table as the only system of record for recording stock ownership. US state laws support a concept of uncertificated, or
book entry
Book entry is a system of tracking ownership of securities where no certificate is given to investors. Several terms are often used interchangeably with "book entry" shares including "paperless shares", "electronic shares", "digital shares", "digi ...
shares where the cap table is the formal legal record of equity ownership.
Waterfall analysis
As a cap table becomes more complex, the ownership percentages indicated on the cap table can diverge from actual percentage of proceeds distributed to shareholders upon a
liquidity event In corporate finance, a liquidity event is a transaction that enables the owners of a company to realize the value of their investment, such as a merger, acquisition or initial public offering. A liquidity event is a typical exit strategy for privat ...
. Some industry commentators have called the difference between actual ownership percentage on the cap table and a shareholder's percentage of exit proceeds "accounting ownership" (actual ownership percentage on the cap table) vs. "economic ownership" (percentage of proceeds available to equity).
This situation leads to the concept of a "waterfall" or "waterfall analysis." A waterfall analysis details the exact payouts to every shareholder on a company's cap table based on a specific amount of proceeds available to equity in a particular liquidity scenario. Since a company often does not know if, when, or how it will achieve a liquidity event, waterfall analysis typically covers a range of liquidity assumptions.
Liquidation preference A liquidation preference is one of the primary economic terms of a venture finance investment in a private company. The term describes how various investors' claims on dividends or on other distributions are queued and covered. Liquidation preferenc ...
charts extend the analysis, showing the economic outcome available to investors at all valuations across a range of outcomes, rather than focusing on a specific point or a discrete set of points.
References
External links
Capography Helps Entrepreneurs Manage Their Cap Table Without The Excel HeadacheSample capitalization table on a spreadsheetCommon cap table mistakes to avoidCap table of Everpix
{{Corporate finance and investment banking , state=collapsed
Corporate finance