Cap Table :
A cap table, short for "capitalization table," is a spreadsheet or document that records the ownership stakes in a company. It typically includes details such as the names of shareholders, the number of shares they own, the type of shares, and the prices paid per share. Cap tables are essential for tracking equity ownership and understanding the financial structure of a company.
Difference between a cap table and a term sheet:
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Cap Table
Records the current and historical ownership of a company, including shares held by investors, founders, employees, and other stakeholders.
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Term Sheet
Is a document that outlines the terms and conditions of a proposed investment, including the valuation, the percentage of equity being offered, and any rights or obligations attached to the shares.
Healthy cap table :
A healthy cap table is one that is well-structured and balanced, with ownership distributed in a way that aligns with the company's goals and future growth. A healthy cap table is typically characterized by the following:
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Balanced ownership
No single shareholder holds an excessively large portion of the company's equity, which can lead to a concentration of power.
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Diverse shareholder base
A mix of investors, including founders, employees, venture capitalists, and angel investors, can bring different perspectives and expertise to the table.
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Minimal dilution
Dilution occurs when new shares are issued, reducing the ownership percentage of existing shareholders. A healthy cap table should manage dilution effectively to preserve the value of existing shares.
Difference between a cap table and a stock ledger:
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Cap Table
Provides a comprehensive overview of the ownership structure of a company, including the number of shares outstanding, the type of shares, and the percentage ownership of each shareholder.
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Stock Ledger
Is a detailed record of all transactions related to the company's stock, including the issuance and transfer of shares, dividends, and stock splits. It is used to track the ownership history of each individual share.
Cap table modeling:
Cap table modeling is a process of creating a mathematical representation of a company's capitalization table to forecast how it might evolve over time based on different scenarios. This can include predicting the impact of future financing rounds, employee stock option plans, and other events on the ownership structure and valuation of the company.
Lets Understand with an example:
Harsh is the founder of a tech startup that has recently received its first round of funding from venture capitalists. To keep track of the ownership structure and make informed decisions about future financing,he decides to create a cap table.
1. Initial Shareholder
Harsh starts with 1,000,000 authorized shares of common stock, and he owns 750,000 shares (75%).
2. Venture Capital Investment
The VC firm invests $500,000 in exchange for 500,000 preferred shares, giving them a 25% stake in the company.
3. Employee Stock Options
To incentivize employees, he sets aside 50,000 shares for stock options, which represents 5% of the company's equity.
4. Series A Financing
The company raises another round of funding with an additional $1,000,000, issuing 1,000,000 new common shares to the investors. This dilutes Harsh's ownership to 46.88% and the VC firm's to 20.83%.
Through the cap table, Harsh can see how the ownership structure of his company has changed over time, track the impact of future financing rounds, and make informed decisions about equity allocation. A healthy cap table is crucial for maintaining a fair and balanced ownership structure, which is essential for the long-term success of a company.
Hope this was helpful! There's more to explore! Learn about Cash-Flow
here.