The importance of a cap table cannot be underestimated. This seems like a fundamentally obvious point but it is surprising how many clients don’t pay attention to the specifics or spend time keeping an updated table. It usually falls to the accountant to be diligent about keeping an accurate cap table. But what is a cap table, and why do you need one?
The basics of a good cap table is to list by column the legal name of the shareholder, date shares were issued, price per share issued, options if part of issuance, and resulting % ownership. I like to keep the founders shares in separate columns as well as the preferred and different series as issued. If you group them this way it’s easier to tie to each issuance. Also keep track of the vesting schedule.
Reference the ownership on a diluted and non-diluted basis which means taking into account all shares issued, factoring in the option pool (fully diluted basis) and without options (undiluted). A cap table can get very complicated depending on whether options and/or warrants are involved.
This worksheet has many uses. In addition to keeping track of the stock, it is very helpful to understand what the dilution effect will be on the percentage of ownership after rounds of investments when running what if scenarios to evaluate different investment options, additional series issuance, mergers, acquisitions, or selling the company.
Keep a notebook with tabs for each shareholder. In each section of the notebook, keep copies of the stock paperwork which includes the vesting period, the amount invested, the signature pages, shareholder contact information and the shareholders tax ID. A copy of the check or copies of the wire ACH notification also need to be included. Another alternative is to scan and keep electronic copies of all the same information; however, most attorneys are going to want printed copies.
In addition to being used as a reference document when questions arise, it is also useful in an audit or to give to the law firm that handles the stock issuance when they review your documentation.
Attempting to recreate the cap table if it hasn’t been done can be an arduous task. Much of the information can be difficult to obtain, some of it can be ambiguous, and memories fade with time. TGG Accounting can offer a great service to our clients as we make sure the cap table is well documented and current. They may not appreciate it in the beginning but it can pay big dividends down the road.Written by: Nancy Brzezniak TGG Accounting