Knowing the value of the investment that each individual in your company has made can help you keep things clear for a lot of things. You should be able to access and understand certain things immediately, and one of them is capitalization tables. These are an essential tool for any business owner as they allow you to weigh things in a wide range of situations. It also helps you out as an investor to see what kind of decision-making power you hold in any entity and what you need to get to your desired sweet spot.
One of the things that provide you quick access to investor information is a capitalization table. Knowing what they are and how you can use them to your advantage is essential for any investor, large or small.
What are Capitalization Tables?
In simple words, it is a table that has the information about each investor in the company, their total investment value, and the percentage of shares they hold in a company. This table tells the details regarding ownership of assets in the company by different parties/individuals. It can be convenient in several different scenarios where you would need to make financial decisions based on this information.
An essential purpose of a table like this is to keep every investor informed about its stake. It is also handy for new investors who want to gauge what their investment would potentially be worth if they were to invest in a particular company. As a running business, you also see how your shareholding is changing as the company grows with time and introduces more capital.
Startups Need Cap Tables
From a company’s perspective, this table is one of the most critical pieces of information. It is used in various scenarios, including bringing in potential investors, deciding the future division of percentages among shareholders, and making financial decisions tied to more significant moves like mergers and acquisitions. Even though the basic concept is quite simple, the document is updated continuously as it grows and ventures into new areas. The table can get quite complicated once a few years have passed. However, it is still the most crystal-clear source of information for shareholders and potential investors for future planning and decision making.
When to Make a Cap Table?
Cap tables must be created right at the inception of the company. Even though shareholding information is recorded in other documents, having a dedicated source is much more convenient as your business becomes more complicated. Using the balance sheet to find this information can become a daunting task, so a cap table can keep things cleaner and easily understandable even when things get complicated.
How to Make a Capitalization Table?
The table is two-dimensional, with the rows showing the investors’ names and the columns showing the specifics of their investment and holding in the company. The four columns you can usually find in a table like this includes:
– Authorized shares
– Non-issued shares
– Outstanding shares
– Stock option share reservations
Conclusion
Making cap tables is extremely easy, and as a business owner, you should know how to create and read one. This information can be invaluable to you as your business grows and can also help you make smart investment decisions in other entities.
