Small Business Basics - What Is a Capital Table?

A Capitalization Table is an interactive table giving an analysis of the percentages of total ownership, net value of an offering, dilution of stock ownership by early investors, and estimated value of additional equity capital by owners, founders, management teams, and other stakeholders during each round of financing for a business. Capitalization Tables are prepared for many different types of financing including merchant cash lines, business loans, commercial mortgage, purchase of business assets, equipment loans, venture capital, private placements, etc. Capital tables can also be adjusted to give more detailed information about the financing options available to the company in different situations, such as acquisition of related parties, fundraising, partnership arrangements, partnership acquisitions, ownership issues, spin-offs, and name equity. The information on capital tables can also be adjusted to provide information on preferred and common stock and preferred and common equity holders.

A capital table that presents the data from the previous year along with current amounts due and upcoming payments is called a working capital table. The working capital table can be adjusted to show balance sheet data in addition to cash equivalents, long term and short term debts, operating costs, inventory, and net worth. It can also present estimates of the effect of discount rates on revenues, as well as specific discount rates on purchases, inventories, cash collections, and equity instruments. A spreadsheet provided with a capital table can be used to make adjustments to the data shown in the table for any reason. An investor can use the spreadsheet to examine trends in revenues, expenses, and profits over a period of time or to examine relationships among these factors.

A cap table is used by early investors and later investors in a business to determine if the business has the potential to earn dividends that meet their requirements. A cap table compares the amount of shares of the corporation's capital stock that would be paid out under the cap table with the amount of capital stock available to the company under its existing cap table. It is based on the historical performance of the corporation. An early investor who buys up shares before the startup has started generating profit will pay a higher price than an equal amount of purchase of regular stock from the company later.

One of the simplest cap tables compares the value of shares of capital A withum with the value of shares of A plus membership interest. This is called the premium to A at a ratio of A to E at a dividend rate equal to A / E. This ratio allows investors to determine if the company has the potential to pay out large cash dividends. It may not, for instance, be the case that all of the members of a startup have immediate cash investments that will allow them to accumulate a substantial amount of wealth over time. In order to determine this, it is necessary to consider the potential earning power of each member of the company. If there are relatively few direct investments that can be made, the ratio of premium A to E may be too low, causing too small an incentive for shareholders to buy up shares.

Another way to use the cap table to determine the potential earning potential of startup founders is to calculate the value of their personal equity as a percentage of the overall value of the business. By dividing the startup founder's stake of equity by the total number of equity owners, it is possible to get a rough estimate of how much each individual investor could potentially be contributing to the company. The potential amount of money that  startups  could raise using this method is based on the projections of future sales by the company's future product sales and its potential for future earnings per product sold. This calculation can be done with a spreadsheet or other financial software program. Once investors know the potential value of their shares, they will want to evaluate the funding options available to them.

Capitalizing for growth depends upon how well the company does and the amount of new capital needed to make it successful. For instance, if the company has only a small amount of capital and the business is profitable, then it may be reasonable to allow equity holders to keep 70% of the equity value of the company. However, in a growing business that is already experiencing success, owners may feel the need to dilute their ownership so that they can receive a larger portion of the overall profits instead of just a fixed percentage. This means that the capital table would need to be adjusted to reflect current and future equity value instead of future net worth. The use of cap tables is necessary to accurately determine the capital structure of an emerging business.

Many  startups   choose to use limited liability companies (LLCs) as a means of avoiding capital taxes. However, when companies are growing and making money, they are required to pay taxes on their income and on their profits. The IRS limits the total amount of shares of capital stock that companies can issue to their employees as part of their annual tax return. The IRS has provided guidance on how employees should compute their share of profits and apply the tax rules to the computation of their shares.

Capitalizing for growth also requires that employees understand the stock options that they are offering to the company. Stock options are terms that refer to an employee's right to purchase a specified number of shares of stock from the company at a pre-determined price during a specified period of time. Employees must exercise this option before the end of the designated period of time in order to exercise it. The value of the option is the difference between the value of the shares of stock that the employee is purchasing and the value of the option.