Pittsburgh, PA
Smart Business
(By Adam Burroughs featuring Michael Fink)
A company’s capitalization table, simply put, details who has what ownership within a company. That’s straightforward when the company has a single owner. But as other equityholders are introduced, it can become much more complicated.
While an accurate cap table is crucial for determining who gets paid what when a company is sold, it’s also important every day of the company’s life.
“Companies should start dealing with their cap table from day one and will need to stay on top of it throughout the entire life of the enterprise,” says Michael E. Fink, a shareholder at Babst Calland. “An orderly, up-to-date cap table is central to well-informed business decisions.”
Smart Business spoke with Fink about the role of the cap table and how failing to accurately maintain it can be costly.
How are cap tables used?
Cap tables are critical when a company seeks new investment, such as via a private placement of preferred stock. That’s because every investor — both new ones as well as current investors, who typically need to approve new investment — needs to know its position on the cap table post-investment and what impact a contemplated investment would have on its position.
As companies get new funding and prior owners see their positions diluted, a cap table tracks who has how much equity and what type. Introducing multiple equity series often imposes multiple voting thresholds, so the cap table allows management and stakeholders to see what sort of voting blocs serve to approve any corporate action. Such actions can range from mundane to fundamental, such as approving a merger or replacing somebody on the board of directors. …