Capitalization Table - Explained
What is a Cap Table?
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Table of ContentsWhat is a Cap Table?Basic Information in a Cap TablePurpose Specific Information in a Cap TableResearch on Capitalization Table
What is a Cap Table?
A capitalization table, or cap table for short, is an ordered list of your companies outstanding securities, including stock, options, warrants, and convertible notes, and who owns them. The cap table has several important roles. Entrepreneurs use the cap table to make decisions that impact the capital structure, such as retaining earnings, equity compensation to executives, share repurchases, or issuances of new securities. A startup company will generally include a cap table in any disclosures to potential investors. This cap table will be used to demonstrate what the ownership structure would look like in various hypothetical investment scenarios. Cap tables will vary greatly in their level of detail. A simple cap table will simply identify the classes of owners (founders, investors) and the classes of shares (common, preferred). The table will depict the numbers and percentages of ownership of these classes. A more detailed cap table will identify the actual holdings of individual owners and investors.
Basic Information in a Cap Table
As noted above, the cap table can be used for varying purposes. No single organization of a cap table is correct. It will depend on how the table will be used. Below is some basic information that should be recorded in the table.
- Stockholder name (or class of stockholder)
- Type of Security (convertible note, common share, preferred share, share class)
- Date of issuance
- Number of shares issued
- Percentage of share issued (and potentially percentage of shares authorized)
- Date of disposition if the security is no longer outstanding.
- Commentary addressing special provisions or concerns for each aspect of information.
Purpose Specific Information in a Cap Table
Your capitalization table should track the purpose of shares identified in the corporate documents. A company that has received investment capital will have one or more classes of preferred shares. These preferred shares generally include provisions granting approval rights for the investors. This normally includes approval of subsequent financing rounds. So, if the charter or bylaws require that a majority of outstanding preferred shares (perhaps from multiple classes of shares) approve a subsequent financing, the capitalization table should include the percentage outstanding for each class of preferred share. This is just one example of how the capitalization table should be modeled to reflect the purpose for which it is used.
Research on Capitalization Table
- The capitalization, amortization, and value-relevance of R&D, Lev, B., & Sougiannis, T. (1996). Journal of accounting and economics, 21(1), 107-138. According to GAAP, R&D should be fully expensed in financial statements mainly because of objectivity, reliability and the value-relevance of R&D cap. To examine the value-relevance of R&D, this paper estimates R&D of a number of public companies. It finds that, these R&D estimates are statistically reliable and make economic meaning. It also finds that adjustments on R&D estimates are value-relevant to investors.
- Dual class firms: Capitalization, ownership structure and recapitalization back into single class, Amoako-Adu, B., & Smith, B. F. (2001). Journal of Banking & Finance, 25(6), 1083-1111. The paper looks at the changes that have been experienced in capitalization and how it has affected the control of dual class firms. The paper observes that combining with family interests with large controlling shareholders leads to dual class cap. The paper has also documented disputes between shareholders to show any governance problems. Following these disputes, most investors have no interest in dual class equity.
- The negative impact of R&D capitalization: A value relevance approach, Cazavan-Jeny, A., & Jeanjean, T. (2006). European Accounting Review, 15(1), 37-61. This paper looks at R&D capitalization. It tests the value-relevance of R&D cap reporting in 197 French firms. The study finds that capitalized R&D is negatively linked to stock returns and prices. This negative effect shows that investors are concerned with and actually react negatively to R&D cap. It also showed that companies that choose R&D cap are few, have high leverage and are less profitable with only a few growth opportunities.
- The association between financial accounting measures and real economic activity: A multinational study, Guenther, D. A., & Young, D. (2000). Journal of Accounting and Economics, 29(1), 53-72. This paper examines cross-country differences in accounting standards and how these differences affect relations between real-economic value-relevant events and financial accounting earnings. Accounting earnings in the UK and US were found to be closely related to economic activities wit7hin the countries.
- The right role for multiples in valuation, Koller, T., Goedhart, M., & Wessels, D. (2005). The right role for multiples in valuation. This paper observes that discounted cash flows are more efficient when assessing the value of projects but that the discounted cash flows can only be as accurate as the forecasts that aid them. A look at different cash flows from different firms will bring to light underlying forecasts.
- What do we know about capital structure? Some evidence from international data, Rajan, R. G., & Zingales, L. (1995). The journal of Finance, 50(5), 1421-1460. This paper looks at factors that determine the capital structure of a business by analyzing decisions made by public firms in developed countries. The paper finds that firm leverage is fairly similar in almost allG-7 countries. It also found that factors that affect capital structure in the US are similar to those that affect capital structure in other countries. However, the underpinnings of the correlations show that there are lots of unresolved issued.
- Corporate governance and bank capitalization strategies, Anginer, D., Demirguc-Kunt, A., Huizinga, H., & Ma, K. (2016). Journal of Financial Intermediation, 26, 1-27. This research paper analyzes the relationship between bank management and capitalization strategies. The paper found that shareholder-friendly governance is associated with lower capitalization and shifting of risks towards finances. The paper linked high capitalization with high values of executive option.
- Growth and Finance: What do we know and how do we know it?, Wachtel, P. (2001). International Finance, 4(3), 335-362. This paper looks at the roles played by the financial sector in developing the economics of a country. The paper looks at the increased interest in explaining the growth of firms and how the financial sector is contributing to the growth of firms.
- What affects the implied cost of equity capital?, Gode, D. D., & Mohanram, P. (2001). The paper examines the cost of equity capital in a sample of firms between 1984 and 1998. It found out that the cost of equity capital is associated with risk factors such as return volatility, earnings variability and leverage and is negatively affected by analyst following.
- Small capitalization companies: what does financial analysis tell us about them?, Dwyer, H. J., & Lynn, R. (1989). Financial Review, 24(3), 397-415. This paper analyzes accounting information and accounting ratios for a number of companies with the aim of answering some questions on financial ratios. It seeks to explain the differences in financial ratios of small and large companies, explain how these ratios affect stock prices and the implications of these ratios to investor decisions.
- Dual class firms: Capitalization, ownership structure and recapitalization back into single class, Amoako-Adu, B., & Smith, B. F. (2001). Journal of Banking & Finance, 25(6), 1083-1111. This paper examines changes experienced in capitalization and the control of dual class firms before and after IPO. It shows that when family interests are combined with large controlling shareholder, dual class capitalization is realized. The paper also looks at disputes within firms, especially between founders and investors, and how these disputes affect the governance of a firm. It explains the decrease in interest on dual class equity and why more firms are moving towards single class equity.