When you start a new business from scratch, the amount of knowledge you have to acquire can be overwhelming. There is so much to learn and often it’s on the job. And you might be thinking, ain’t nobody got time for that, but even if you plan on hiring someone to handle the paperwork and the financials, as the business owner you should always have your eye across every aspect of the company and know your numbers.

You will come across terms and acronyms you don’t understand but don’t be shy to ask questions or Google them, then take action. If you’re an entrepreneur then it’s likely you’ve already heard about CAP tables, also known as capitalization tables. But for others, you might just be thinking what is a cap table and how do I read one? And if you’re entering the funding stages of your venture, it’s really time to step that knowledge up.

Below, we’re talking more about what a cap table actually shows and how to read, create, and use one in your business.

The basics

First things first: What does capitalization even mean? Capitalization is just a formal way of saying ownership shares (i.e., who owns capital) and includes all of your company’s securities: stocks, preferred shares, options, etc. A capitalization table, then, is a chart that shows who owns how much of each asset type.

In essence, the point of a cap table is to give a quick overview of ownership. When you’re first creating your company, this step is essential to make note of what everyone in the business owns, but it becomes even more important when you’re bringing investors into the mix. They need a clear picture of what they’re buying, and shareholders need to be able to keep track of their stakes in your company.

The nitty-gritty

In the example from Hyde Park Angels below, you’ll see the table includes both a pre-money valuation and a post-money valuation—this just means how much the company was agreed to be valued at before investment, and how much it’ll be worth afterward.

The third column shows shareholder names—early on, this list will be short, but it can get lengthy as the business grows. In the next column, pre-money ownership percentage is denoted. Because Investor A and Investor B are just now buying into the company, their pre-money ownership is listed at zero percent.

The price-per-share noted on the left is determined by taking the pre-money valuation and dividing it by the number of pre-money shares (here, $4 million ÷ 8 million shares = $0.50 per share).

Now that we know how much each share is worth, we can calculate the number of shares each investor is purchasing. Investor A is putting in $750,000, so her post-money shares equal $1.5 million (because $750,000 ÷ $0.50 = $1.5 million). Thus, her post-money ownership percentage is 15% of the new business valuation. Because Investor B put in $250,000, she owns 500,000 shares and 5% of the company. The founders, who just sold 20% of their shares, now own 80% of their business.

Scaling up

As your company continues to scale, your cap table will become more complicated. Not only will the list grow in length, but your level of ownership and control will likely change, too. It’s important to keep your cap table updated and buttoned up—you never know when new funding opportunities will arise, and if you ever sell the company, your cap table will spell out who gets what in the deal.

While the idea of raising money for your business can be daunting, having a well-documented cap table in your pocket will make the process simpler for both you and your investors. Happy funding!

This post was published on February 2, 2019, and has since been updated.

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