Capitalization Tables
Capitalization Tables
A capitalization table, often referred to as a cap table, is a spreadsheet or a table that provides a detailed breakdown of a company's equity ownership structure. It lists all the securities issued by a company, such as common stock, preferred stock, options, warrants, and convertible securities, along with the holders of these securities and their respective ownership percentages.
Here's a thorough breakdown of how a capitalization table works along with examples:
Categories of Securities:
Common Stock: This represents ownership in the company and is typically held by founders, employees, and sometimes investors.
Preferred Stock: This type of stock usually carries certain rights and privileges over common stock, such as preference in dividends or liquidation proceeds.
Options: These are contracts that give the holder the right to buy shares at a predetermined price in the future.
Warrants: Similar to options, warrants grant the holder the right to purchase shares at a specific price within a set period.
Convertible Securities: These are typically convertible notes or convertible preferred stock that can be converted into common stock at a predetermined conversion ratio.
Shareholders:
The cap table lists all the shareholders and stakeholders who own equity in the company.
It includes founders, employees, investors, and any other individuals or entities who have been allocated equity.
Ownership Percentages:
Each shareholder's ownership percentage is calculated based on the number of shares they hold relative to the total outstanding shares of the company.
Ownership percentages are crucial for understanding each party's stake in the company and their voting rights.
Transactions and Events:
The cap table tracks any transactions or events that affect the ownership structure of the company, such as equity financing rounds, stock option grants, stock issuances, conversions, and terminations.
These events are typically recorded with details such as the type of security issued, the number of shares issued, the price per share, and the date of the transaction.
Example:
+------------------+--------------+---------------------+-------------------+
| Shareholder | Securities | Number of Shares | Ownership % |
+------------------+--------------+---------------------+-------------------+
| Founders | Common Stock | 10,000 | 50% |
| Investor A | Preferred | 5,000 | 25% |
| Investor B | Common Stock | 2,000 | 10% |
| Employee Stock | Options | 1,000 | 5% |
| Employee Stock | Warrants | 2000 | 10% |
+------------------+--------------+---------------------+-------------------+
| Total | | 20,000 | 100% |
+------------------+--------------+---------------------+-------------------+
In this example:
The founders collectively own 50% of the company through common stock.
Investor A owns 25% of the company through preferred stock.
Investor B owns 10% of the company through common stock.
Employees collectively own 15% of the company through options and warrants.
Valuation and Dilution:
The cap table helps in understanding the company's valuation and the impact of future financing rounds on existing shareholders.
As new investors come in and more shares are issued, existing shareholders' ownership percentages may dilute unless they participate in subsequent rounds to maintain their ownership stakes.
Management and Reporting:
The cap table is a critical tool for management and reporting, providing insights into the ownership structure, equity distribution, and the impact of various transactions on the company's stakeholders.
It is often maintained and updated by the company's CFO, finance team, or legal advisors.
In summary, a capitalization table is an essential document for understanding a company's ownership structure, tracking equity ownership, and managing transactions that impact ownership. It provides transparency and clarity to shareholders, investors, and other stakeholders regarding their respective stakes in the company.
Some of this information is reported in the regulatory reports of public companies. Reg. S-K Item 403 Security ownership of certain beneficial owners and management, 17 C.F.R. § 229.403 (2024).