Cap Table - The most important financial statement for early stage startups

Typically, companies maintain 3 Financial Statements – The Profit & Loss, The Cash Flow Statement, Balance Sheet. But if you are a young startup then you will have what we call the ‘4th financial statement’ which is called the Capitalization Table or commonly referred to as the “Cap Table”.

What is a Cap Table and Why is it important?

Put it most simply, the Cap Table is a ledger that shows the ownership of the company as represented by the commensurate share of its owners. So, assume, you have a company with 2 owners, each of whom own half of the company, then the cap table will show that each owner owns 50% of the company’s common shares.

But what if you are a startup company that invites multiple external investors, each of whom is given a share in the company. Suddenly your cap table starts to get longer with more entities each of whom might have different number of shares and hence different ownership percentages.

The story does not stop there. What if you hire employees and issue stock options to incent them? This brings into play new variables like the hire date of the employee, the price at which you grant them the options and their vesting timeline.

What happens when you take out a loan from your friendly bank. The bank will likely ask for a future equity stake in the company in the form of warrants which will be exercised at certain price. Your cap table needs to represent this information.

These are simply some examples of how a cap table gets complex very quickly.

But why maintain a cap table and why are we at the CFO Office calling it the “Fourth Financial Statement”. The answer is simple. Its because every time your company goes to raise new funding, investors will ask for your cap table data. The cap table will tell a story and sometimes even with good financials, they will refrain from investing in the company because the deem the cap table as being too messy.

Why can a cap table end up being messy? 

It’s a topic we will cover in a future blog but suffice to say that it is critically important for company’s to be on top of their cap table, have the resources to keep them updated and be mindful of maintaining a clean cap table over the course of the company’s existence as a private investor funded company.