What is a cap table ?
Simply put, a cap table is a point in time ownership report. A cap table captures all transactions / option and warrant grants since the beginning of the company.
A company’s capital structure (excluding debt) usually consists of preferred shares, common shares, warrants and options.
Preferred shares are reserved for investors. Depending on the number of rounds Preferred shares are divided into different classes Preferred A, Preferred B, Preferred C and so on.
Warrants are usually given to investors (mostly debt) to be converted into one of the Preferred share classes.
Common Shares are also divided into classes let's just call it Common A and Common B, one of which is reserved for founders. The other class of Common Shares are for option conversion.
Options are common stock options granted to employees (ISO’s) and consultants(NSO’s). If the value of options granted to an employee is greater than a $100K, then those options will be classified as NSO’s.
The company’s outside counsel is usually responsible for managing the cap table. Software such as Solium or eShares is used.
What is the use of cap table ?
The most common use is it gives you the ownership details.
However, there are plenty of other uses
Most investors ask for Cap table along with an investor deck. This gives investors an idea of the capital structure and how they can fit in. On the other hand, it gives the founders an idea of how the capital structure will look if they raise a certain amount.
Most companies register themselves in Delaware to save on corporate taxes. Companies, however, have to pay franchise taxes in Delaware. These taxes are calculated based on authorized shares. See here
Companies issue stock options to its employees at board meeting every quarter. The stock options are valued by a valuation firm in a 409(a) report.(see my previous post on Option valuation). Companies are required to do a 409(a) valuation every year.
Stock options are compensation similar to salary. Per US GAAP (ASC 718, previously FAS 123R), the company is required to record stock compensation in the financials. This requires an up to-date cap table. Softwares such as Solium or eShares can calculate it for you.
Warrants are also compensation or contra-debt and need to be valued every year.
IRS filings (Form 3921)
Companies are required to report all stock option exercises with the IRS(Form 3921). See here . Softwares such as Solium or eShares can file it for you electronically. All you need to get TCC from IRS.