A capitalization table, or “cap table,” is an essential record for any organization and its entities. It details an entity’s ownership structure, including who owns what percentage of equity, the types of securities issued (such as common and preferred stock), ownership percentages, and the value of these securities. Cap tables are crucial for making informed decisions about financing, ownership dilution, and potential mergers or acquisitions.
However, the real challenge lies in the fact that many organizations fail to maintain historical records of their cap tables as they evolve over time. To fully grasp the importance of this, let’s look at the parties involved in cap tables, the situations that require historical records, and the consequences of not having them.
WHO: Parties Involved in Capitalization Tables
The full list of parties involved may differ depending on the type of entity and its business purpose, but common parties involved in the creation, maintenance, and utilization of cap tables include the following.
- Founders use cap tables to track their ownership, make strategic decisions about equity allocation / future financing, and effectively manage investor relationships.
- Investors rely on cap tables to understand their ownership percentages, potential dilution, and return on investment.
- Finance and accounting personnel refer to cap tables to ensure the organization maintains accurate bookkeeping and pays investors the correct distributions.
- Legal teams rely on cap tables to ensure entities maintain regulatory compliance, as well as to support due diligence processes.
WHEN: Situations Requiring Historical Capitalization Table Records
Having visibility into historical records of an entity’s cap table (such as changes in stock classes, ownership percentages, and values) is paramount in scenarios such as the following.
- Funding Rounds: When raising new capital, potential investors want to understand the existing equity structure and how the new investment will impact ownership percentages. Additionally, historical records can provide much needed transparency and demonstrate how equity has evolved over time.
- Equity Distributions: Depending on the ownership structure/agreement, some entities may provide equity distributions to investors. As cap tables evolve over time, organizations need to ensure that each investor (whether old or new) receives the correct distribution in relation to their equity ownership (stock class, percentage, value, etc.).
- Audit and Financial Reporting: Whether for tax purposes, internal audits, or other financial initiatives, having direct access to historical cap tables provides proof for how numbers got to where they are today. In other words, an organization needs the ability to “show its work” and prove that current cap tables are correct.
WHY: Consequences of Not Having Historical Capitalization Table Records
Failing to maintain historical records of an entity’s cap table can have repercussions that greatly outweigh the time and resources needed to have maintained them over time, such as:
- Legal Issues: Inaccurate or incomplete cap tables can result in legal disputes between investors and entities/founders. In addition to costly litigation, organizations must spend time and resources (whether internal or third parties) to generate an audit trail to help resolve legal disputes.
- Loss of Investor Confidence: Current and future investors rely heavily on cap tables to inform their decisions. Inaccurate records (or lack thereof) can hurt investor confidence, making it difficult to raise new funding or continue partnering with current investors on future endeavors.
- Operational Inefficiencies: Organizations need data to make well-informed decisions. Whether it’s for distribution schedules, issuing new equity, or big-picture strategic decisions, organizations may face administrative challenges that consume time and resources.
Some organizations believe it’s unnecessary to maintain historical cap table records, especially if they haven’t needed them so far. However, there will inevitably come a time when this information becomes crucial. You don’t want to wait for that moment of urgency. Start capturing these changes now, ensuring your organization is prepared and not scrambling to piece together records when it matters most.
Streamline Your Capitalization Tables with EntityKeeper
EntityKeeper enables you to quickly build capitalization tables and capture every detail as they evolve over time. What’s even better, you can use that same information to generate organizational charts to visualize and report on entity ownership. Connect with a product expert for a no-strings-attached demo and see just how easy it is to create and maintain capitalization tables with EntityKeeper.
