Jeff Hall and I have almost finished teaching another semester of Entrepreneurial Finance at UVU. We've come a long way since the first time I taught the class, which was the first time any such class was ever taught at this University. The students have been diligently building business models and plans all semester, building up to the climax at the end--the capitalization table, or cap table.
When forming, planning, building, and growing a successful entrepreneurial venture, entrepreneurs need to be very familiar with their cap table. It is not enough to assign that to your legal counsel. The cap table will make all the difference in whether or not you maximize your chances for success, both personally and for the business as a whole.
Before I talk about why it is so important, here is the cap table we built during class while going through a series of ficticious rounds of funding:
The rounds of funding included seed, angel, series A, series B, series C, and then an Initial Public Offering (IPO). We assumed it was a C-Corporation with only common shares and no stock options to keep the example simple. With each round we valued the shares, determined the pre and post-money valuations, allocated the appropriate shares for the new round, and re-calculated the percentage ownership for each shareholder.
To make it interesting, I purposely made it so that we did not have enough shares authorized to complete the Series C round so we could discuss the corporate governance issues surrounding authorizing more shares. Up rounds, down rounds, cash-on-cash returns, and more were hot topics of conversation.
Not including all of the legal, accounting, and regulatory reasons for properly tracking and knowing your cap table, the most important reason for it is so that the entrepreneurs can understand if raising equity is really their best option for growth.
I often hear business people say things like this: owning 20% of a really big company is better than owning 100% or a really small one. Conceptually this makes sense, but the cap table proves it. A financial model without a cap table is incomplete. Why? Because the whole purpose of modeling is to figure out which choices will prove the most beneficial for the stakeholders. Without the cap table, the benefits to the stakeholders is usually not apparent, meaning the analysis and decision-making is not as good as it could be.
The key take-aways: have a cap table, keep track of it, and use it to analyze the potential returns for all of the funding strategies you consider.