THE CAPITALIZATION TABLE, A USEFUL, ALBEIT SOMETIMES MISUNDERSTOOD AND UNDERUTILIZED TOOL

When I am asked how I choose my investments, I talk about my 8 investibility criteria, which is already a more scientific approach than most people are accustomed to expect.  The weight that each criterium carries and the interaction of the key criteria that really make the difference in reaching the investibility score that prompts an angel investor to say yes, and in the ultimate success of the startup.

The capitalization table is of paramount importance for 2 of the criteria, the team and the financial documents. 

Having written about it many times and having talked about it even more, it is well known that I believe that the team is one of the first qualitative criteria I evaluate.  The team has the ability to make a good project great, the right team will have the ability to pivot as needed and to take the opportunity as they present themselves. 

Once a stellar team has been formed and engaged, the startup has a chance to test the market and further the project, very likely it will be desirable and necessary to add new people to the human capital.  By definition a startup will not have a lot of cash to lavish on the new hires and to attract talent from other ventures and companies, and this is when the remuneration strategies play a fundamental role.

The capitalization table, mostly referred to as the cap table, is an amazing tool for a management team.  As the business develops, developing and properly managing a cap table is one such necessary business evolution. In this context, the cap table shows the sum and itemization of all those who hold equity in the company or the right to receive equity in the future. Tracking these items helps illustrate the ownership stakes in the business and what securities the company has outstanding and can dispose of.

The management of the cap table can seem daunting for many founders, thankfully many legal firms are versed in helping with the task, and this is an item that can be outsourced but must be understood internally. 

Here are a few pointers that can help founders make the best possible use of the cap table:

1. Get comfortable with the format, be it a chart, a table or a spreadsheet. At a basic level, the cap table should list the equity stakes in a company, including common stock, preferred stock and stock options. Other elements include transaction history and legal restrictions, such as sales, transfers, exercise of options, transfer restrictions and the conversion of debt to equity, among others.
2. Use it for executive alignment, equity is a key consideration in talent recruitment and retention packages. Without an accurate cap table, you’ll find yourself in situations where you have to routinely ask yourself how many shares you can offer to a new hire, which can unnecessarily slow down the hiring process.

However, if you can use the cap table as a way to gain alignment on such matters, you can begin to use it to solve actual business problems.

3. Share it with your investors, providing investors with a summary cap table is common practice, some investors will want to see a detailed cap table, it is important to know what is expected and be able to provide it.

The cap table should be well managed and up to date.  Just like the balance sheet, the profit and loss statement, and the cash flow statement it is a very useful tool for management to make the right business decision.  Learn to use it from the very beginning!