A cap table (short for capitalization table) is a document (spreadsheet or table) that provides an analysis of a company’s ownership percentage and value of equity in each round of investment by investors; it is used to understand who owns what in a company and how ownership is divided.
Why is a Cap Table Important?
A cap table is an essential tool for managing a company's equity and can be used to help determine things like dilution, valuations, and financing rounds. Here are a few specific ways a cap table is essential:
- A cap table helps in understanding ownership and equity structure: A cap table shows who owns what in a company and how the ownership is divided. This is important for understanding the company's equity structure and fully diluted percentage ownership. The structured ownership data that a cap table provides helps a company in its decision-making process by showing how a company's key decisions impact its equity structure.
- A cap table helps in understanding dilution: A cap table can be used to understand dilution, which is the reduction in the ownership percentage of a shareholder as a result of the issuance of new shares or the addition of shares to the incentive pool. This is important for investors and founders, as it can affect the value of their stake in the company.
- A cap table helps in determining valuation: A cap table can be used to help determine the value of a company, particularly when the company is considering an acquisition or merger. This is important for understanding the company's financial health and making informed decisions about its future.
- A cap table helps track token or shares issuance: A cap table is used to track the issuance of new shares during financing rounds. This is important for understanding how much equity has been sold and to whom, as well as the impact on the company's ownership structure.
- A cap table helps in planning and determining taxes: Cap tables are formal records of equity; hence, tax authorities such as the IRS may use a company's cap table as a reference to determine if a company, its employees, and its investors pay the right amount of tax.
A cap table is an important tool for managing and understanding the equity of a company. A cap table is a critical requirement for most startups. Shareholders, prospective investors, and founders and investors all benefit from the data a cap table provides.
A cap table typically consists of rows and columns containing information about the types of securities, options, diluted shares, and diluted percentage ownership, among others.
Blockchain-Era Cap Tables
As the Internet iterates to web3 and the adoption of blockchain technology continue to grow, companies are increasingly choosing to tokenize their stocks. Tokenization and security token offerings (STO) are becoming the preferred choice of crowdfunding over initial public offerings (IPO) and equity crowdfunding. Just like IPOs, STOs are regulatory compliant.
To streamline the process of asset tokenization and STOs, capitalization tables that use blockchain technology to record and track ownership of a company's securities are beginning to see daylight. In a traditional cap table (typically created and stored In a spreadsheet), ownership of a company's securities is recorded in a centralized database, which can be prone to errors and susceptible to tampering. By using a blockchain to record and track ownership, a blockchain-powered cap table can provide a more secure and transparent record of ownership. Additionally, the use of smart contracts on the blockchain can automate the process of issuing and transferring securities, streamlining the process and reducing the need for intermediaries.
There are several feature-rich capitalization table management solutions for companies and funds, based on blockchain technology. Vertalo, a digital assets and digital securities lifecycle management service provider, offers tools that enable the management of cap tables on the blockchain. Using these blockchain-powered tools, tokenized shares can be issued, tracked, and sold through blockchain-based platforms; a blockchain-based self-sovereign digital identity system could be integrated into a company’s fund-raising process for fully-automated KYC. A blockchain-powered cap table makes it easier for startups to launch private and public sales, raise funds, and track their capital structure on-chain, enabling greater automation. Investors can also easily view their position. A blockchain-powered cap table builds investors' trust, as the blockchain is transparent, secure, and immutable.
Cap tables require updating. When new shares are issued, for example, a cap table is updated to reflect the changes. Using spreadsheets and other traditional cap table solutions, updates are made manually in most cases. However, with the blockchain's ability to automate transactions using smart contracts, the tedious process of manual data entry is eliminated.
As more and more traditional assets become tokenized and STOs become the preferred capital-raising method of startups and early-stage ventures, cap tables are bound to follow the blockchain-induced evolution of traditional assets and fundraising methods.