What are cap tables and how are they used in business valuations?

Key takeaways

  • A cap table, short for capitalization table, is a document – often in the form of a table or a spreadsheet – that lists all the securities or shares of a company, including stock, convertible notes, warrants, and equity grants.  
  • A basic cap table lists out equity ownership, the individual investors, and the share prices, while a more complex table may include details on potential new funding sources, M & As or other hypothetical transactions. 
  • Cap tables can inform investors on the company’s total market value and are especially important for valuing privately owned entities. 
Business growth, progress or success concept. Businessman is drawing a growing virtual hologram stock bar chart on dark blue background.

A capitalization table, or a cap table for short, is a chart that companies use to show ownership stakes in the business. A typical cap table will list out all the securities or shares of the company, usually in a table or a spreadsheet and include stock, convertible notes, warrants, and equity grants. Because it keeps track of stock ownership over the years, a cap table provides a fully-diluted picture of equity ownership at various stages of growth.

To many investors, cap tables are a great source of information on the company’s total market value while for many business managers, it’s an essential tool for figuring out the company’s market cap. 

All types of businesses can use cap tables to keep track of stakeholder activity but startups and early-stage businesses especially benefit from it.  A basic capitalization table (most common in startups) lists out equity ownership, the individual investors, and the share prices. 

A more complex one may include details on potential new funding sources, mergers and acquisitions, public offerings, or other hypothetical transactions. 

Startup companies generally have only a small number of equity owners, made up of the founders, friends and family of the founders, and angel investors. Keeping track of who owns what stake in the new company is important at this stage, because as the business expands and looks to raise capital, it needs to have a record of its various growth stages to present to potential investors. 

Private Market Investing 101, with Kal Penn

Because the company’s cap table gets updated after each subsequent funding round, it’s also a way to show how ownership became diluted over time, and how it spread across new owners. Investors can use cap tables to infer future dilution as well, especially if the company has a lot of convertible debt or warrants, which could be a sign to the potential investor that their holdings could be significantly diluted in the future.

Perhaps most importantly, cap tables also show investors how incentivized the startup’s founders are. Potential investors want to see founders who still hold significant stakes in their company, as that would affect their motivation in driving the company forward. A startup where the founders’ stakes have been almost wiped out by previous financings is sometimes read as a red flag. 

A poorly managed cap table can lead to bad decisions, diligence issues in transactions, as well as costly and time-consuming “clean-up” exercises.

Private companies especially benefit from cap tables, because they can provide investors with valuable information on the firm’s market value. While determining the market value of a publicly-traded company is usually a very straightforward process (outstanding shares are multiplied by its stock price), it’s less transparent for private companies, as they don’t  report their financials publicly and don’t possess stock that’s listed on an exchange.

But privately-held firms, like public companies, may also seek capital from private equity investments and venture capital to grow.  In this case, the company has to be able to provide an estimate of the firm’s value before investors can make a decision. There are various valuation methods that businesses can use to derive this number including comparable company analysis (CCA), which involves researching public companies of the same industry and seeing where their business fits within its industry, or using metrics like cash flow and EBITDA to estimate the enterprise value, or the EV. Businesses then use this value to create pro-forma cap tables, where they model the company’s future ownership, which not only helps investors make a decision but also help them arrive at appropriate investment amounts.

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