A good cap table is a ticket to entry when raising funds because it shows potential foreign investors that the startup has the fundamentals sorted. So, how do business founders get it right?
Every business founder needs to raise funds for their startup at some point. Regardless of which funding round the company is at, foreign investors (Singapore investors) and VCs will need to see the capitalization or cap table. It clearly outlines the ownership, equity dilution, and equity value of the startup.
Cap tables may not be a familiar term to some, especially those just starting. Let’s discuss some of the typical questions around cap tables and hopefully help you get a complete understanding of what they are, how they work, and how you can use it for fundraising.
What is a Capitalization (Cap) Table?
A Cap Table is like a record-keeping tool for a company that shows who owns how much of the company. It helps us keep track of shares, which are like slices of the company, and who has those shares.
When a group decides to start a company, each person contributes money or skills, and in return, receives shares. These shares represent ownership in the company.
As the company grows, things can change. More people might join the company and get their shares by either investing money or skills to help the company grow. When these changes happen, the Cap Table gets updated to show the new shares and who owns them.
Sometimes, people earn more shares over time as a reward for staying with the company. These shares might have certain conditions, like working for a certain period. These conditions are also noted in the Cap Table to ensure that all the shares are accounted for and distributed fairly.
What are the basics of building a Cap Table?
Building a Cap Table involves gathering and organising information about the ownership and equity structure of a company. It typically includes identifying shareholders, determining share classes, defining ownership percentages, calculating total shares outstanding, factoring in vesting schedules, considering convertible securities, calculating dilution, and regularly updating and maintaining the Cap Table.
What information does a Cap Table include?
It typically includes details about the various shareholders, their equity ownership percentages, the types of shares they hold (common, preferred, etc.), any outstanding stock options or warrants, and the valuation of the company.
Why is a Cap Table important?
This table is essential for understanding the ownership and equity structure of a company. It helps determine the percentage of ownership held by each shareholder, the potential dilution of existing shareholders when new investments or stock options are issued, and provides a clear picture of the company’s capitalization.
Who typically maintains a Cap Table?
It is usually managed and maintained by the company’s finance or legal team. They are responsible for updating it whenever there are changes in the ownership structure, such as new investments, equity issuances, stock options grants, or transfers of ownership.
How often should a Cap Table be updated?
It is crucial to keep the Cap Table up-to-date to reflect any changes in the ownership structure. As a general guideline, the table should be updated after each significant transaction, such as funding rounds or stock option grants, and periodically reviewed for accuracy.
How do I build a Cap Table?
To start, identifying all the shareholders in the company. Determine the different classes of shares and assign ownership percentages to each shareholder based on the number of shares held. Calculate the total shares outstanding, factor in vesting schedules, consider convertible securities, calculate dilution, and regularly update and maintain the table. Using dedicated Cap Table management tools or templates can simplify the process.
Is a Cap Table confidential?
Yes, the information contained in it is typically considered confidential and sensitive. It is crucial to ensure that only authorised individuals within the company or relevant stakeholders have access to it to maintain data privacy and protect shareholder information.
Can a Cap Table be used for fundraising purposes?
Absolutely! When raising funds, potential investors often request a copy of the table to assess the company’s ownership structure, understand existing investors, and evaluate potential dilution. A well-maintained table can help instil confidence and transparency in the fundraising process.
While this article provides a general overview of how cap tables work, it’s always important to consult legal and financial professionals for any specific advice you may need. Here at Lanturn, we have corporate experts that can help answer your questions and even help get your business set up right away.
Singapore Investors Subject Matter Experts:
While working with our clients (which are mostly startups), we discovered that everyone wanted to learn more about fundraising, and what it takes to attract the right investors/VCs. Here are five learning points we’ve collected from different subject matter experts:
- Make sure your cap tables are well documented, and that there is a singular point of truth. Excel files with poor version control and wrongly referenced cells can send investors running.
- The easiest time to tidy up a messy cap table is during a funding round.
- While ESOPs can be very useful for securing talent in the early stages of a business, it could easily go the other way round. Business leaders really need to educate their employees on how an ESOP works.
- ESOPs are options. Business owners should not issue a bunch of additional shares to themselves, thinking they can allocate them out later. That’s not how ESOPs work, and it will ruin the cap table.
- Investment mandates for VCs fall on 3 axes – Geographical, Stage of Business, and Industry Sectors. Focusing your attention on the ones that match your business will help you save time.
Start your journey with Lanturn
One of our subject matter experts had said that businesspeople should spend their time building the business, because that’s where the value creation happens. No matter how beautiful the cap table is, if there’s no business, there is no business. Let Lanturn help you get your business started!
Our team of professionals and our cloud-based platform allows us to provide clients with any of the following services:
● Convenient and Accessible Accounting
● Accurate Tax Payments
● Timely Payroll Management
● Thorough KYC checks
● One-of-a-kind corporate secretarial services
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