When you’re starting a new business, there is a lot to consider. Gathering capital, selecting investors, and hiring employees are all essential activities for new startups. However, it is important to be cognizant of your funds, assets, capital, and fair market values.
Many new business owners dive in head first without taking a minute to organize their finances. However, taking a step back to create and maintain an accurate cap table can prevent a lot of trouble in the long-run.
What is a Cap Table?
A capitalization table, commonly referred to simply as a cap table, is a list of all the securities your company has issued and who owns them. Securities include common equity shares, preferred equity shares, stock, convertible notes, warrants, and equity grants.
In the simplest terms, a cap table is a record of who owns what inside of your business, including stock, shares and assets.
Typically, a cap table will include the following information:
- Names of shareholders
- Number of shares (both common and preferred)
- Fully diluted shares
- Percent ownership
- Stock class
- Price per share
At the same time, the capitalization table will also show a breakdown of the total number of shares in the company, including:
- Authorized shares
- Outstanding shares
- Unissued Shares
- Shares reserved for stock option plan
Having a neat and organized cap table is very useful. Firstly, it is used to show investors before they put any money towards your company for their due diligence. It also makes valuation of your business and its financial position much easier.
By maintaining a neat and organized cap table, you can see how many shares you have available in your option pool at any given time. It prevents you from overselling or underselling shares.
Cap Table Mistakes to Avoid
Now that you understand what a capitalization table is, and its importance for your Pakistani startup, let us take a look at the major cap table mistakes that every new business should avoid.
Not Regularly Maintaining the Table
As a rule of thumb, you should update your capitalization table any time there is a chance in the stock ownership of your company. Failing to maintain this record in real time can create a lot of confusion and headaches down the road.
To avoid this mistake, update your cap table after any of the following events:
- Liquidity changes
- Employee grants
- Option exercises
- Employee termination
Not Using Proper Software Tools
When you first start out, it may seem simple enough to maintain the record on a standard Excel spreadsheet. However, as your business grows there will be many financing changes, and manually maintaining the table will become too difficult.
Therefore, you should look into getting a proper software tool early on. This will allow you to automatically update the table whenever there are changes, and will reduce the risk of inaccuracies.
Entering Inaccurate Information
We cannot stress enough on how important it is to enter complete, accurate information in your capitalization table. Failure to do so can cause a lot of wasted time tracking down the correct information in the future.
Therefore, be very conscious of entering true and accurate information. This includes correct financial information, as well as complete shareholder names and data.
Need more help with drawing up a capitalization table? Get in touch with us!