A cap table, short for "capitalization table," is a document that shows the ownership structure of a company. It lists all of the shareholders in a company, along with the number of shares they own and their percentage of ownership.
It also shows how much money has been invested in the company, including any loans that were originated via share offerings and the terms of those loans (debt-for-equity swaps included). The cap table is an important tool for startups and small businesses, as it helps them keep track of their ownership structure and understand how much equity they have available to raise funds. Every time money is raised, it will change.
In the financial models you see on this site, the startup forecasting templates contain a cap table section that shows equity investments for outside and inside investors (up to 20 input slots for each), their ownership share (% and share amount) and the resulting implied valuation.
What I don't include is lender / debt impacts on the cap table directly, but I am thinking about building a standalone pre-money and post-money cap table that is not tied to business operations of anything directly and is just is for ownership calculations. In this case, the valuation is essentially an input and it could take into account various debt options. This template would have options for 100s or 1,000s of shareholders and some cool functionality in Google Sheets. I'd also put an Excel version out, but it won't have as much dynamic array capabilities. I'll be thinking about building this after I finish the Oil and Gas extraction business financial model.
Is a Cap Table Legally Binding?
A cap table is not legally binding in the sense that it does not have the force of law. However, it is an important document that provides a record of a company's ownership structure and is used to track the issuance of shares and other securities.
In most cases, the information on a cap table is based on the company's stock ledger, which is a legally binding document. The stock ledger is used to record the issuance of shares and other securities, as well as changes in ownership.
In addition, most of the agreements related to the issuance of securities, such as stock purchase agreements and subscription agreements, are legally binding. These agreements will set out the terms of the issuance of shares, including the number of shares issued, the purchase price, and the rights and privileges associated with the shares.
So while the cap table itself is not legally binding, it is based on legally binding documents and agreements, and it is important for the information on the cap table to be accurate and up-to-date to comply with legal and accounting requirements.
Who Would Want to View a Startups Cap Table?
- Investors: Cap tables are important tools for investors, as they provide a clear picture of the ownership structure of a company. They can use the information on a cap table to determine how much equity is available for investment, and what percentage of ownership they will receive in return for their investment.
- Entrepreneurs: Entrepreneurs and startup founders also need to understand their company's cap table. They will use it to understand their own equity stake in the company and monitor the dilution of their ownership over time.
- Potential acquirers: Companies that are looking to acquire startups often request to see the cap table. This helps them to understand the ownership structure of the startup, and the potential cost of buying out existing shareholders.
- Lawyers and accountants: Lawyers and accountants may also need to review a startup's cap table to ensure that it is accurate and complies with legal and accounting requirements.
- Employees: Employees of a startup may also want to view the cap table to understand their own equity stakes and how that may change over time.
Overall, cap table provides a snapshot of the company's ownership and investments it received, so it's an important document for anyone involved in the company or considering becoming involved in the company, including current and potential investors, employees, and acquirers.
How Debt Can Effect the Cap Table
First, understand that you can take on debt to finance business operations and it has no effect on the cap table, but if you want to raise money by offering more shares to the lender as collateral or as a way to get better loan terms / in the place of interest / repayment, then there will be an impact.
In terms of the cap table, debt can dilute the ownership stakes of existing shareholders. This is because the total number of shares outstanding has increased, but the value of the company (and thus the value of each share) has not necessarily increased proportionally.
Additionally, if the company is unable to repay the debt, the lender may have the right to convert the debt into equity, which would result in the lender becoming a shareholder. This would further dilute the ownership stakes of the existing shareholders.
It's important for companies to carefully consider the potential impact of debt on their cap table and overall ownership structure before taking on significant amounts of debt.
When a company takes on debt to issue new shares, it is essentially borrowing money from a lender and using that money to issue additional shares of stock to raise capital. This process is known as a "debt-for-equity swap" or "convertible debt financing."
Here's an overview of the process of issuing new shares with debt:
- The company borrows money from a lender, such as a bank or other financial institution. The lender may require the company to put up collateral, such as assets or real estate, as security for the loan.
- The company uses the borrowed money to issue new shares of stock to raise capital. This increases the total number of shares outstanding, which dilutes the ownership stakes of existing shareholders.
- The company is then required to make regular payments to repay the debt, including interest. If the company is unable to make these payments, the lender may have the right to convert the debt into equity. This means that the lender would become a shareholder in the company, further diluting the ownership stakes of existing shareholders.
- The lender may also have the right to convert the debt into equity at a certain price or at a predetermined future date, regardless of whether the company is able to repay the debt on time or not.
- As a result of the debt-for-equity swap, the company's cap table is updated to reflect the new ownership structure, showing the additional shares issued and the new shareholders.
It's important for companies to carefully consider the potential impact of debt on their cap table and overall ownership structure before taking on debt to issue new shares. This type of financing can be a useful tool for raising capital, but it also comes with the risk of diluting existing shareholders' ownership stakes.
Article found in Accounting and Finance.
