Start-ups often have difficulty obtaining financing, but when they get to the stage where investors want to put in money, a lack of preparation is usually the major reason for failure. These are some of the recurring problems encountered by startups.
It is generally difficult for companies to know where to start for their first round of financing, what to prepare and how, what the different terminologies used mean, what the different types of investors or funds are available, how to approach investors, what to offer in return for funds and how much and what to do once the funding is received. Find out how to create an effective capitalization table, a key step in financing startups.
What is a capitalization table
A capitalization chart is an effective tool that provides a solid foundation that can help start-up owners convincingly demonstrate business ownership percentages, equity dilution, investor information and the value of equity in each fundraising investment cycle.
A capitalization table is a snapshot of the company at a point in time that shows its exceptional shares, capital structure and also reveals information about holdings of directors, investors and employees.
The capitalization table shows the “ownership participation”, which is the percentage of ownership of each shareholder in the company. It therefore makes it possible to understand the percentage of participation of each shareholder in the company.
What is included in a capitalization table?
A typical capitalization table includes the securities of the company also known as shares, warrants, share classes or options and the amount that has been invested in the capital so far. It therefore helps to understand who owns the majority of the business, the liabilities of the business due to equity held and the dilution that occurs when new shareholders join the business.
So a capitalization table summarizes and organizes everything you need to understand about the major shareholders of the company, the percentage of shares held by each shareholder and also discloses information about the dilution of equity over time, account due to the issuance of new shares by the company.
This table provides an up-to-date record of everything a startup needs to control regarding shareholders, share classes, price, and voting rights that come after purchasing shares. It changes each time a new shareholder enters the company and the figures for percentage of ownership and dividends will have to be changed in the ceiling table, which allows a company to effectively meet its obligations.
Why do startups need to work on their capitalization tables?
The capitalization table is useful both for organizational management, inventory management or even legal preparation. An accounting firm will enlighten you on how you can use these capitalization tables for your business.
Ownership information about each shareholder in the company helps to understand the ownership structure of the company and the responsibilities that come with it.
Capitalization table attracts investment
Startups need to have sufficient funds to launch their business and successfully complete their start-up phase. A well-maintained and updated capitalization chart helps potential investors determine the level of control they can exercise over the business during the initial negotiations. Startups increase their chances of growth when they can recruit multiple investors who will inject the required amount of funding into the business.
It facilitates the work of investors
One of the main reasons startup executives need to work on their capitalization table is that it makes it easier for investors by enabling them to understand their right to the power they can exercise over company policies. Investors indeed need information to predict any potential dilution of stocks in the future by considering different scenarios.
Helps to build a relationship of trust
A well-maintained capitalization table not only keeps employees and shareholders informed of their company's position but also helps to develop a relationship of trust between the various stakeholders. It allows all these players in the company to know its valuation, as well as the real-time value of their stock options or their equity investments.
Valuable source of information for negotiations
An up-to-date capitalization table can be a valuable source for providing historical information on critical factors for valuing the business. The most relevant up-to-date limit tables include information from the past that can aid in negotiating the business valuation. A capitalization chart can also be an extremely useful tool in every round of fundraising to attract the attention of potential investors looking for investment opportunities.
It increases the credibility of your business
When you regularly update your capitalization table, you create opportunities for your legal team to work more efficiently as you provide them with information about your financial assets as well as accurate and up-to-date information about your organization. In addition, for the audit, your capitalization table is the complete representation of your company's ownership and investment history. Thus, not only does it strengthen your legal position, but it also increases the overall credibility of your business.
This article highlighted the importance of the capitalization table in the organizational management of a startup since these tables influence the decision-making process regarding ownership percentages, equity value, business transactions and others. aspects. It is therefore essential to keep this table up to date so that any obsolete or inaccurate information does not compromise the credibility of your business with potential investors.
Do not hesitate to hire a professional accountant who has developed a clientele of start-ups and who can use technology to effectively ensure the issuance of shares and communication with the shareholders of your company.