Capitalization Tables

One of the first and most important documents that a startup company should have in place is a capitalization table, or “cap table.” A cap table provides details of all current and potential equity ownership of the company, listed by individual owner. The detail should include the name of the owner, their total investment, the class of equity held, and the number of shares or units held.

For a cap table to be complete, it must also include all potentially dilutive holdings. In other words, it must include holdings that could become equity in the future. Common examples of potentially dilutive holdings include convertible notes, stock options, warrants, and simple agreements for future equity (SAFEs).

A complete cap table is critical for many reasons. First, outside investors will likely want to review the cap table before agreeing to make an investment. They will need a clear picture of what the current ownership looks like to determine the value of their potential investment. Additionally, a complete cap table will provide company management and ownership with an understanding of which parties hold voting rights and other key decision-making rights. For partnerships, a cap table will likely also assist in determining the appropriate income or loss allocations to each partner for tax purposes. From the CPA’s perspective, a cap table contains information that can be vital to the audit and tax processes.

As the company grows, it may become too burdensome for management to maintain the cap table on its own. The good news is that there are a variety of third-party software options available that can help automate much of the process and present a company’s ownership details in a clear and user-friendly format. Some of the more advanced software options also offer additional services, including 409A valuation assistance and GAAP expense calculations for companies with stock option plans. We recommend that emerging companies examine these potential solutions when pursuing large-scale investment opportunities.