Available Now

Order now and be among the first to learn from Alternative Investing expert Bob Rice. Begin building your alternatives portfolio today! Order from Amazon.com, Barnes & Noble or 800-CEO-Reads

This episode aired on BloombergTV on Apr 20, 2012

Cap Table

Cap Table, or Capitlization Table, is a key concept in the world of private equity. In its simplest form, the cap table records share ownership of a company, but can include share purchase prices, warrants and options.

Q. OK, so this is a really key term in the world of private company investing. Tell us about it.

A . A capitalization table, at the most basic level, is a very simple idea: a spreadsheet that shows who owns what shares in a company. But good ones show more, and are extremely important documents to examine before making an investment in a pre-public company.

Q. So, let’s start with what is in a basic cap table, where the company has only issued common stock?

A. Let’s say we have three classes of shareholders: the founders, angels, and a VC who got shares at different times. Of course it’ll show which shareholders own what percentage of the company, but a good cap table will show how much each shareholder paid for their shares in each round, so you can see the financing history of the company. It will also show the options that have been reserved for management and employees. And it will show percentage ownership everyone has assuming all the reserved options are exercised, the “fully diluted” ownership.

Q. So, then, the complexity of the cap table will depend on the company’s financing history, number of rounds, and number of investors.

A. Right. They can get complicated if the company has issued preferred stock with liquidation preferences (buzzword) and anti-dilution provisions (buzzword!), or investor warrants. All that’s crucial to understand so you know who gets what exactly if the company gets sold at various exit values… which is, of course, what you’re looking to know when you invest.

Q. So, bottom line: extremely important for entrepreneurs to maintain accurate cap tables. Do they?

A. Very frequently, no. Often, when an investor asks for a cap table, he’s might just given a list of who owns what in the company. That’s inadequate, and there’s really no excuse for it, because there are all sorts of software programs and tools to do it with. Indeed, if you’re thinking of investing in a company and the entrepreneur can’t show you a complete cap table, think about whether he’s really the sort of manager you want to invest in.