What is the Capitalization Table?
Capitalization table is a record of all the shareholders of the company as well as the records of all the securities issued by the company with pricing i.e., preferred shares, equity shares, share warrants, convertible debts etc. and their holdings which helps to keep track of equity ownership of the company and the percentage holdings of stakeholders.
A Capitalization Table, which is often termed as ‘Cap Table,’ is a table maintained in a spreadsheet that may have different annexures recording the securities and shareholdings of a company in different prospectives. The table consists of the data of the stakeholders and the securities held by them at that point in time. The table also mentions the percentage of holdings of the shareholders and the promoters. This table updates time to time or whenever there is a requirement of updating the table for an example, in case of an issued of capital, change in shareholding.
How to Create a Capitalization Table?
The capitalization table is prepared during the acquisition of the company with the percentage of shareholdings maintained by the promoters. It can be created by maintaining a sheet in an excel file. A spreadsheet is to be 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 at that point in time. 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 also mentioning the percentage of distribution.
Firstly, on the acquisition of the company, 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 fresh securities.
Example of 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 value $4 each, which was subscribed by nine persons with share bought as 300000, 90000, 75000, 115000, 100000, 50000, 250000, 45000, 100000 shares. We need to prepare a Capitalization Table.
Refer to the excel sheet given above for detailed calculation.
How to Use a Capitalization Table?
It is used for recording the shareholding composition and pattern within a company, which can be done by updating the table based on a change or transfer or issue of 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 different securities and analyzing the effect of such in the 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. . In case of the issue of securities, while finalizing the subscription company also refer to the capitalization table to ensure that the decision-making power for the company does not fall within a particular person or particular group.
In the cap table, the date of issuance securities can also be mentioned, which can help the organization to look into the convertible securities and the impact it will bring upon the structure of security distribution. In the case of issuance of 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). , capitalization also provides the details of how much stocks have been subscribed, how much has been rejected, and how many are remaining at a particular time.
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., where it is required to disclose the list of the stakeholders who hold significant holding the proportion of the securities of the company. The table helps determine and analyze the segregation in the power of decision making 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 directors to decide how to raise funds for the company and to ensure compliance with the laws. I.e., whether a company should issue more common shares or raise fund by the issue of new debentures so that the Debt-Equity ratio of the company should be in check. It also helps the board to decide whether to issue Employee stock options to match the interest of the organization with the employees and provide them with the incentives to motivate them towards the mission and vision of the company.
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 for the growing public companies, the cap table becomes more complicated. In the case of private companies, the shareholder’s list is limited, and the transfer of shares is also limited, so making and maintaining the capitalization table become less complicated. But in the case of public companies, on the issue of new public securities, the number of shareholders become large and regular transaction in shares also make it difficult to track records of the holding stakeholders. In this case, a company either uses heavy software or outsource the handling of such matters.
This article has been a guide to Capitalization Table. Here we discuss an example of the capitalization table, how to create it, how to use it, along with importance. You can learn more about accounting from the following articles –