There are lots of shows out there like “Shark Tank,” where individuals pitch their ideas. Of course, these sorts of reality TV shows bear little resemblance to the real world. They feature dramatic elements that don’t exist if you’re trying to get funding for your company or product.
If you’re a would-be entrepreneur with an idea, it’s more likely you’re going to approach a bank or credit union to try and obtain financial backing. You might also try to approach a venture capital firm. There are definitely all kinds of ways to get funding, but without it, you’re never going to be able to get your idea off the ground.
This is where cap tables come in. Surprisingly, many entrepreneurs don’t know what they are or how to set them up. Let’s talk about some cap table basics right now.
What Precisely is a Cap Table?
If you don’t know what a cap table is, the first thing you should know is that “cap” stands for capitulation. This is a table that provides a detailed company analysis. It covers things like equity dilution and ownership.
If you’re pitching an idea for a product or company that does not exist yet, there isn’t much point in trying to create a cap table since any breakdown of profit or ownership will be purely theoretical. A cap table will come in handy when you’re trying to get additional funding for a fledgling company that you want to expand.
How Does It Work?
The cap table’s main point is that it shows the potential backer where they would come in regarding how much of the company they would own or what equity they would control if they decide to put up some of their money. The equity breakdown will show what the company’s principal owner retains, but also investors, founders, etc.
The table will often appear as a spreadsheet showing hard dollar financial breakdowns of the company in question. If you don’t have one of these tables, it’s hard to try to convince someone to back the business venture. All you’re doing is spinning yarns about how rich they might get without any data or empirical evidence to back it up.
Why Are These Tables So Useful?
If you approach someone like a venture capitalist, they’re almost immediately going to start asking you questions about things like market value, market capitalization, and equity ownership. They want to know, in hard dollar amounts, what they can expect back if they decide to go in with you.
If you’re a private company, creating this table is also a way to maintain an accurate calculation of your market value. This table will likely come in handy if you plan on taking the company public and you’re wondering about what the IPO should be.
What Should Be on a Cap Table?
In addition to a detailed investment breakdown, which is to say, who owns and controls what assets within the company, your cap table should also show whether you’ve outsourced any work in exchange for equity shareholding. This is something that some companies do if they feel like they have a sound idea, but they don’t necessarily have the capital in the beginning to get the whole process underway themselves.
An investor will probably want to see a breakdown of team members and long-term incentives. If you’re not able to show that, they are likely to dismiss your idea in favor of something more concrete.
How Can You Create One of These Tables?
Because your company’s state is likely fluid, what with market changes and new products or services you introduce, an accurate cap table might only remain correct for a certain limited time. That’s why it’s helpful sometimes to buy or rent software that you can use to create a cap table, but also it should have the capacity to make changes rapidly as the situation warrants.
There are several software suites that exist that you can use to create cap tables. You can shop around and see which one seems like the best fit for your business, and you should also make sure that you have someone on staff who can utilize that software.
Some of these programs are relatively intuitive, but if you don’t have anyone on staff who can use it, you may have to either hire someone and put them on the team permanently, or else you can temporarily hire an IT person to do it for you.