In this competitive business world, funding is a crucial aspect in order to grow, expand,
and succeed. One of the key components of funding is a cap table, or capitalization table. This is a document that lists the company’s shareholders and their ownership stakes, the value of those shares, and the number of shares each shareholder holds.

Investors generally provide capital to start-ups in return for equity or ownership interest in the business; thus, a cap table effectively documents these transactions.

In this article, we will address the importance of cap table in an overview of creating them, what information investors will need, and how to go about it hassle-free with Equivista.

Investors and Cap Table

A cap table is used by both investors and the company’s management in order to make
important decisions about the company’s future. Investors use it to understand the company’s ownership structure before making their investment, while the company’s management can use a cap table in order to record, track, and monitor the company’s equity.

In short, they are basically a snapshot of the company’s ownership structure at a particular time. Therefore, it is necessary to prepare the cap table in the initial stages of the company.

Who are Investors?

In start-ups or privately held companies, an investor can be a group of people, a company, or an individual who comes in and provides capital to the company for the purpose of obtaining an ownership interest in the company. Capital is generally invested to generate an economic return, and these returns are usually distributed as shares of the company’s stock to investors, and on the other hand, this capital is used in the company to fund operations, as well as to grow and expand.

In addition to providing capital, investors may also provide expertise, advice, and management support to help a company grow and succeed. Therefore, investors play a key role in a company’s long-term success.

What is the Role of Investors in a Company?

When it comes to the startup world, investors play an integral role by providing funding in the form of capital. However, investors provide more than just that – being frequently referred to as the drive and direction for companies. Here are a few other reasons why investors can have a very important role in a company’s success:

  1. Strategic partnerships – In some cases, investors may have valuable connections
    or business relationships with other individuals or entities, which could be of great value
    to the startup when it comes to growth and expansion.
  2. Advice and mentorship – Investors may provide advice, direction, and mentorship
    to the startup’s management team in order to help the company become more
    successful. This can be particularly helpful in the early stages of a startup’s lifecycle.
  3. Enhanced credibility – Having a strong investor base can help to build the credibility
    of a startup, and help it to grow and succeed. It is also a way to build the company’s
    reputation and brand recognition in the business world.

Types of Investors in Private Companies

There are several types of investors in private companies, each of which will have its
own unique characteristics and requirements. The following are the top 4 types of
investors in a private company:

  1. Personal investors – Personal investors are often friends or acquaintances of the founders of a company. They can be people who know the founders personally and have either taken an investment from them before or have an existing relationship with them. These investors will typically expect that the company will pay a certain return on their investment.
  2. Angel investors – Unlike personal investors, angel investors may not be known to the founders of a company, but instead may be people who are willing to help young companies in growth and expansion. Angel investors are basically high-net-worth individuals who look for opportunities to invest in companies that can be a potential source of return.
  3. Venture Capitalists – Venture capitalists (VCs) are individuals or companies that are willing to invest in private companies, and these investments will typically be made in return for a certain percentage of the company’s equity or ownership interest. VCs are considered risk-taking investors, and they will typically expect a high return on investment.
  4. Others (Peer-to-Peer lending) – Peer-to-peer (P2P) lending is a form of direct lending in which investors lend money to borrowers and receive interest on the money they have lent out. This form of lending is usually done on a small scale, and it is a way to help individuals or companies that are in need of funds.

What is a Cap Table?

A cap table is essentially a table or spreadsheet that lists a company’s shareholders and their ownership stakes. This document lists the number of shares each shareholder owns, the value of those shares, the percentage of ownership, and other equity-related information.

The purpose of a cap table is to record and track the ownership structure of a particular company at a given point in time. As a result, it is very important to maintain a cap table in order to keep track of the company’s shareholders and their respective equity ownership.

What Information is Included in a Cap Table?

A cap table includes all the necessary information about a company’s equity and is updated after every major financial event that typically affects the ownership, listing details such as total authorised shares, issued shares, and total unissued.

Apart from this, it should have details about each of the shareholders, including their names, the number of shares of each class they hold, the value of these shares, and the percentage of ownership they have. In addition to this, funding rounds, option pools, stock awards, equity splits, and other equity information should be listed.

How to Prepare a Cap Table?

Once you know what information should be included in the cap table, it is just a matter of compiling this information appropriately. Traditionally, Microsoft Excel or other spreadsheet programs were used to prepare cap tables, but nowadays, these programs are not efficient enough. Other management software is available and offers improved creation, organisation, and usability.

Eqvista, is one such management software provider. This software offers a seamless model to create
and manage cap tables online. As such, by filling in the required information in the interface, the software compiles the information in a spreadsheet, which is viewable and editable at any time.

Cap Table for Investors

Now that you know the concept of a cap table, you may be wondering why an investor would read or view one? Well, a cap table for investors is an essential element in the process of due diligence. Investors will typically demand to see a company’s cap table before making any investment decision. This is so that potential investors can get a good grasp of the ownership structure of the company to gauge its suitability and the risks involved.

Why do Companies Need to Prepare a Cap Table for Investors?

Investors will typically analyse the complete ownership structure of the company when making an investment decision, and as such, a cap table is a critical element in this process. It basically acts as an instrument of transparency, wherein all the shareholders are listed with their respective stakes in the company. This provides a more complete vision of ownership, which can be beneficial to investors. Thus, it is essential for a company to prepare a cap table for investors, as it will effectively help them in the due diligence stage of the investment process.

How Does a Cap Table Benefit Investors?

Although it may appear that investors are only concerned with the business plan and the potential of the company, however, they will actually look at a variety of factors to determine the viability of the company and their level of commitment to the investment. When it comes to equity investing, a cap table allows potential investors to find all the necessary information about a company’s equity.

In this regard, investors will thoroughly review the cap table to find out what type of investors the founders of a company have, the percentage of ownership they possess, and so on. As a result, investors have a clear view of the ownership structure and indicate their relative position within the company.

What Do Investors Expect?

In the initial stages of the company, it is often difficult for investors to assess the viability of a company. This is because it requires a considerable amount of research and investigation in order for them to understand the business idea and the concept behind it. A cap table in this case helps investors get a good overview of the company’s ownership structure, which can then be used to assess the company’s potential. Most importantly, investors expect an updated cap table that contains all the recent changes
to the ownership structure of the company. Accordingly, the future profit potential of the company can be determined with the help of an updated cap table.

How to Present to Investors?

After creating a cap table, it is essential to present it in a way that can be easily understood. A pitch deck is a great medium to present a company’s cap table. It helps investors get a quick overview of the company’s ownership structure and financial statistics, which are often the most important factors when making an investment decision. Thus, at the time of pitching the company, it is essential to share a cap table along with the financials to aid the investors in their decision-making process.

What is the Difference Between a Cap Table and a Pitch Deck?

You might be confused about the purpose of both a cap table and a pitch deck.

Well, a pitch deck is primarily for pitching the company’s business idea, financial roadmap, and other aspects to potential investors. On the other hand, a cap table is created as a way of providing detailed information about the company’s ownership structure.

If a pitch deck is shared along with a cap table, it will provide investors with more information about the company’s business and help them make more informed investment decisions. As such, it is important for companies to create both a pitch deck and a cap table to effectively present their company and get funding.

That’s a Wrap

The concept of a cap table is particularly important in today’s market, as it provides investors with a comprehensive view of the company’s ownership structure. But, creating and maintaining a cap table can be a daunting task. Why not consider partnering with a software provider, such as Eqvista, to create and maintain a cap table that can be viewed and edited online in a streamlined way?

Eqvista’s cap table management software offers a comprehensive solution that allows you to create a cap
table in minutes while enabling you to view, customize, and update the cap table anytime
you need. Visit Eqvista now!

About the author
Colin McCrea

Colin McCrea, a certified valuation analyst (CVA) at Eqvista, currently serves as head of Eqvista's valuation team where he manages company valuations and corporate taxation. His background includes years of experience in the taxation and auditing sector for small and medium-sized companies located throughout the US and Asia.