If you are an aspiring entrepreneur or have an established company, there comes a time when you have to account for the new stakeholders buying your company stock. That is where the capitalization table comes in. Simply put, the capitalization table is a spreadsheet (or table) that shows the equity for your company. 

However, with much mystery surrounding creating cap tables that work, it is only standard that you research carefully on creating the one your company needs. There are factors to be considered, terms to be learned, and other peripherals to digest. If that's what you're here for, ensure you read through this article to get a clearer understanding of how a good capitalization table works.

Firstly, What Really Is A Capitalization Table?

The capitalization table is a snapshot of the ownership of a company at a point in time. A well-structured cap table shows your existing shareholders (including founders) the percentage of the company they own. 

If you are looking to gather new shareholders, the latest cap table explains lets them know how much of the company they will own once they purchase company shares. In the case of an exit event, the cap table makes your shareholders understand their standing. An exit event could be likened to selling the company or going bankrupt. 

It is advisable to keep updating your cap table periodically, whether monthly or each time a new investor buys into your company stock. 

How Should a Cap Table Look Like?

The most basic capitalization table must have columns with these headings below:

• Holders of securities – This column holds the shareholders' name who owns a percentage of the company (including the founder).
• Securities owned by shareholders – The column(s) contain the securities owned by each shareholder. 
• Total fully diluted securities/shares owned by each shareholder – This column adds up all securities owned by each shareholder. If the securities possessed by a particular shareholder exceed a column, it is all added up.
• Fully diluted percentage ownership – This column, which is usually the last one on the table, shows each stakeholder's percentage ownership. It is expected to change with each transaction or investment the company makes.

Finally, How Does The Cap Table Work?

Properly-structured cap tables show the percentage ownership of a shareholder's equity in the company. 

However, with each significant transaction being done in the company by founders and investors, a cap table will change, making the old one lose its value. The new one will contain an adjusted table that evaluates the effect of the change on the company's ownership.

Is it getting too hard to understand? Let us break things down a little. Say you, partner, with your friend to birth a company worth a million dollars; since you both have equal ownership of the company initially; your first capitalization table puts the two of you as the only shareholders, leaving your percentages at 50-50.

Suppose you are able to convince Ben to put in $100,000. You'd have to update your cap table. The new cap table would have Ben as the third shareholder and his investment. The percentage ownership, however, would change considering the investors' equity. Percentage ownership would now be 45% (you) - 45% (your friend) - 10% (Ben). 

The more investors/transactions you garner, the more your cap table increases. If Janice invests another $100,000, the new percentage ownership becomes 41.67% (you) - 41.67% (your friend) - 8.33% (Ben) - 8.33% (Janice). Since there is a change in percentage ownership, the cap table will show this during the update. 

While holding on to this knowledge, always keep in mind that your cap table will get more complicated with each transaction you make.