February 3, 2023   / Uncategorized

The Only Cap Table Guide You’ll Ever Need- Part 2

3 minutes Read

 In the previous part, we saw the basics of what a cap table is and why it is important. Now, it is time to move on to the next chapter. 

Let’s check out some of the best ways to sustain a cap table for your investors: 

Keep updating the table

Keep your cap table straightforward and well-organized to get the most value out of it. Make sure that the cap table must always be current. 

This entails updating any alterations caused by events like adding new shareholders, transferring shares between shareholders, exercising stock options, repurchasing shares back from the corporation, and other transactions. Each shareholder’s total ownership of a firm may be impacted by any of these on a daily basis.

The greatest way to decide quickly and wisely on the company’s shares is to have a well-organized cap table. Furthermore, this is one circumstance in which cap table software is advantageous and preferred to the conventional excel cap table. 

Prepare the cap table and the data so that it is always relevant, especially when making a pitch to potential investors.

Add in the convertible notes 

Convertible notes are becoming more and more common in the world of startup finance, particularly in seed-stage businesses. For seed-stage businesses who haven’t had much time to demonstrate any traction in terms of their product or income, it is appealing. 

The corporation can delay that choice rather than offer investors a discount on the price that will be decided later. Convertible notes are frequently employed as the first outside investment in many businesses because of this.

But a common error made by startups is that they fail to list convertible notes on their cap table. New investors frequently become unpleasantly startled by ignored convertible notes because they base their decisions on the potential for dilution of their ownership stakes.

Mention the plans for stock option pools

The team is the most important resource for any (early stage) firm. Building a highly engaged team and a strong work culture is one of the most efficient methods to implement an employee stock option program or ESOP. 

Your ambitions for future employees and exponential business growth may or may not succeed depending on how well your ESOP is laid out. Define your strategy for future employee stock option pools, paying particular attention to how you want the options to vest.

Pre-money valuation and calculation

Pre-money valuation, as the name implies, refers to a company’s stock worth prior to receiving funding from a new round. The fair value of the shares and the amount the company ought to be seeking from new investors are references provided by adding this pre-money valuation to the company’s Cap Table when planning.

This pre-money valuation also provides new investors with a point of reference for the percentage of the company they will own if they invest X dollars.

Details of possible dilution

When a corporation issues new shares, it dilutes the ownership stake that the existing investors hold in it. By issuing new shares, the equity stakes of shareholders are decreased. 

Existing shareholders are typically hurt when a corporation raises extra equity capital, but dilution can occur at any time. As a result, you must provide information about potential dilution impacts with the addition of new shareholders in order to keep your cap table current for investors.

You now have a thorough understanding of what a cap table is and how it impacts the organization. Keep all the information about your cap table in Excel initially. When your firm expands, consider automating the details using smart cap table software to streamline administration and let you concentrate on what matters most—running your company.

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