What is the Capitalization Table?

Explanation

A Capitalization Table, which is often termed a ‘Cap Table,’ is a table maintained in a spreadsheet that may have different annexures recording the securities and shareholdings of a company in different perspectives. The table consists of the stakeholders’ data and their securities then. The table also mentions the percentage of holdings of the shareholders and the promoters. This table updates from time to time or whenever there is a requirement of updating the table, for example, in case of an issue of capital or change in shareholding.

How to Create a Capitalization Table?

The capitalization table is prepared during the company’s acquisition with the percentage of shareholdings maintained by the promoters. It can be created by maintaining a sheet in an excel file. A spreadsheet is used to record the name of the shareholders and the securities held by them with the value and the valuation of a percentage of shareholdings they hold then. Within the same spreadsheet, we can maintain the records of securities issued at an earlier stage and the recording of every fresh securities issue at every stage of the issue done by the company and mention the percentage of distribution.

Firstly, on the company’s acquisition, the holdings of Promoters or Founders are recorded. After that, upon the issue of securities to the Public or persons, the name of the shareholders and the number of securities held by them are recorded with the value of securities. The same sheet is updated every time on the transfer of securities or the issue of new securities.

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Example of Capitalization Table

We need to prepare a Capitalization Table. Let’s suppose a company on foundation/acquisition has issued common equity to its promoters worth $1500000 with shares of $4 each, making the number of shares 375000. Further, the company released preference shares of 1125000 shares of the value of $4 each, which was subscribed by nine persons with shares bought as 300000, 90000, 75000, 115000, 100000, 50000, 250000, 45000, 100000 shares.

Solution

Refer to the excel sheet given above for detailed calculation.

How to Use a Capitalization Table?

It is used to record the shareholding composition and pattern within a company, which can be done by updating the table based on a change or transfer or new fresh equities.

When the management decides to raise funds for the company, the reference to the cap table helps the company measure the effect of raising funds through other securities and analyze the effect on the company’s Debt Equity Ratio of the companyDebt Equity Ratio Of The CompanyThe debt to equity ratio is a representation of the company’s capital structure that determines the proportion of external liabilities to the shareholders’ equity. It helps the investors determine the organization’s leverage position and risk level. read more. In the case of securities, while finalizing the subscription company also refer to the capitalization table to ensure that the decision-making power of the

In the cap table, the date of issuance of securities can also be mentioned, which can help the organization look into the convertible securities and the impact it will bring on the structure of security distribution. In the case of issuing employee stock optionsEmployee Stock OptionsEmployee stock option plan (ESOP) is an “option” granted to the company employee which carries the right, but not the obligation, to buy a promised number of shares at a pre-determined price (known as exercise price). read more, capitalization also details how many stocks have been subscribed, how much has been rejected, and how many remain at a particular time.

Importance

Capitalization Table helps in making Notes to Accounts of the Balance sheet of the companyBalance Sheet Of The CompanyA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more,  where it is required to disclose the list of the stakeholders who hold a significant holding proportion of the securities of the company. The table helps determine and analyze the segregation in decision-making power within the company by ensuring that the decision-making power within an organization does not fall within a single group.

It also helps the board of directorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. read more to decide how to raise funds for the company and ensure compliance with the laws. I.e., whether a company should issue more common shares or raise funds by the issue of new debentures so that the company’s Debt-Equity ratio should be in check, it also helps the board decide whether to issue Employee stock options to match the organization’s interest with the employees and provide them with the incentives to motivate them toward the mission and vision of the company.

Conclusion

The capitalization table maintains the list of stakeholders and the percentage of holdings they possess at a particular time. For the new companies, doing so is simple, but the cap table becomes more complicated for the growing public companies. In the case of private companiesPrivate CompaniesA privately held company refers to the separate legal entity registered with SEC having a limited number of outstanding share capital and shareowners. read more, the shareholder’s list is limited, and the transfer of shares is also limited, so making and maintaining the capitalization table becomes less complicated. But in the case of public companies, on the issue of new public securities, the number of shareholders becomes large and regular transactions in shares also make it difficult to track records of the holding stakeholders. In this case, a company either uses heavy software or outsources handling such matters.

This article is a guide to the Capitalization Table. Here we discuss an example of the capitalization table, how to create it, use it, and its importance. You can learn more about accounting from the following articles –

  • Share Buyback MeaningBonus IssuesCapitalization CostUndercapitalizationPrivate Equity in South Africa