Startups are funded by investors known as shareholders. Without this investment, it’d be difficult to raise the needed capital. However, investors would want their returns back through proper share management. Unless this is done, there’s bound to be a conflict.
One way to avoid conflict and ensure startup growth is through cap table planning. Continue reading to learn how successful startups leverage cap table planning to achieve efficiency and growth.
What Is A Cap Table?
It’s not just about the founders. The cap table is a document that lists all of the company’s shareholders and their percentage of ownership.
This table is also called the capitalization table or capital structure. It shows how much each person owns in a company, which can tell you if they have enough shares to make decisions. The process of creating a cap table is known as cap table planning.
The first thing to do in cap table planning is to decide whether you want to use one share or many. When there’s only one share, one person will own 100% of the company.
Ways Cap Table Planning Can Help Your Startup Grow
Besides the documentation feature, cap table planning can track your operations and improve efficiency and growth. Below are some ways they help achieve that:
1. Helps Avoid Potential Disputes Among Founders
Cap table planning helps startups avoid potential disputes among founders. For example, if two founders have an agreement that one founder will get 60% of the company’s shares and the other will get 40% of the company’s shares, then it can be written down on this document so that there are no disagreements about who owns what percentage of shares. Reduced conflicts lead to more cooperation and business growth.
2. Ensures Your Startup Comply With Securities Laws
Startups are often not aware of the laws and regulations they must comply with. This is a significant problem for them because it can lead to severe consequences if they don’t comply. For example, a startup could be fined or even shut down if they don’t abide by these laws and regulations.
The information contained in cap table planning helps startups comply with securities laws. It’s usually created at incorporation and updated as new shares are issued or repurchased. This ensures that all the investors are on the same page and have been adequately compensated for their investment. A startup can only thrive where compliance exists.
3. Helps Your Startup Understand Your Company’s Equity
Cap table planning can be helpful for founders and investors because it shows them the distribution of ownership in a company. The planning can tell you who owns what percentage of the company, which will help you know how to vote on certain decisions that lead to a successful business.
The benefits of knowing your company’s equity and cap table can be different for startups and established companies. For startups, understanding the company’s equity is important because it helps them know how much they own in the company. This equity distribution knowledge informs the distribution of shares, leading to business growth.
4. Tracks Your Startup’s Progress In Terms Of Equity Distribution
A cap table planning summarizes the ownership structure of a company. It shows who owns what percentage of the company, which can be helpful in many ways.
For example, it can help founders and employees know how much equity they have in the company, which is essential because it determines how much money they will receive when the company gets sold or goes public.
Cap table planning also shows investors how much equity they own, so they need to keep track of their investments and ensure that their percentage doesn’t change too quickly without knowing about it. As a tracking tool, the planning improves transparency, informing business growth.
5. Helps Your Startup Raise Money From Investors
A cap table planning is typically created during the beginning stages, but it can be updated as the company changes. This is important because you can use it to show potential investors how much equity is available for them to purchase. Letting them know helps investors make the right decision, especially about investing in your company. Increased investment funds bring about improved startup capital needed to fuel your operational efficiency and growth.
Cap table planning is the process and activities involved in creating a cap table. It’s needed not just for documentation purposes but to achieve other crucial metrics needed to grow a startup. Listed above are ways startups can leverage cap table planning to grow and scale.
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