What is the Capital Table? A Capital Table (abbreviated as CTV) is a mathematical formula providing a percentage of ownership or equity dilution of a business during each capital offering process. The concept is simple: If you purchase 100 shares of stock from a start-up firm, what is the business’s total equity? The answer is: zero. So why do companies offer “subject to” capital options?

A Capital Table, abbreviated as CTV, is a simplified formula that provides an owner/manager with accurate, transparent, and relevant information about the balance sheet of any publicly traded company. The benefits of the capital table (CTV) are not immediately apparent to investors who are not financial professionals, or have limited knowledge of the industry or business sector. As a manager, it may seem like common sense to include an equity or ownership percentage in your capital structure. However, there are many restrictions on the use of the capital table in the context of capital raising and share offerings. Moreover, the use of the capital table is highly dependent on current market conditions and goals for financing, which may vary from year to year.

A Capital Table can help ensure that the Company’s management has the right percentages of capital appreciation (or dilution) for its preferred or underlying equity issues. For example, if the current financial results suggest that a firm may be increasing its dividend policy (paying more per share to shareholders), it would be difficult, if not impossible, to raise the funds necessary to pay this policy through standard private placement offerings (IPOs). On the other hand, if the current financial results indicate that a firm could be decreasing its dividend policy (paying less per share to shareholders), then it would be much easier to raise the capital through standard commercial paper (or debentures). The capital table should also be used to aid financial managers in determining whether it is advantageous to issue equity to prevent dilution of ownership. In the past, IPOs have typically been issued to dilute the ownership within the range of about 40 percent to about 65 percent of the issued share capital. The use of the cap table enables managers to provide accurate information to their underwriters, reducing the chances of serious underwriting errors.

Because the purpose of startups is to achieve rapid growth in a relatively short period of time, capital appreciation is very important to the success of the startups. Thus, the ability to properly calculate the value of one’s shares is critical to startups . Unfortunately, despite the importance of calculating cap-weighted stock dividends on a regular basis, most startup companies are unaware of this requirement. This oversight leads to a number of risks associated with incorrect computation of the value of the company’s shares. These risks are compounded when startups fail to obtain necessary funding, reduce their working capital or obtain seed money from investors or venture capitalists.

The second risk is related to the use of employee stock options, when these options are not properly valued. While these employee stock options are generally thought to be tax-free equity in the business, incorrect computation of these options may result in underpayment of capital taxes by the company. In addition to underpayment of taxes, an incorrect computation may also result in incorrect capital gains and dividends.

The third risk relates to the incorrect use of the date of birth of the founders of a business. Determining the date of birth of the founder can significantly affect the calculation of the shareholding pattern of the corporation. For example, if the date of birth of the founder is unknown or if the person’s birth date is very close to the start of the business’s operations, the founders will often be granted shares of stock that are worth far less than they actually own. This occurs because the calculation of the date of birth usually requires correction for rounding errors and other common mistakes.

One final issue relates to the use of cap table sheets in the calculation of dividend payments to its shareholders. The use of cap table sheets to compute the capitalization and liquidation of companies is now regarded as being in violation of accounting principles required by IRS regulations. Ineffective calculations of the capitalization and liquidation of corporations are often the cause of companies that receive a large cash-flow windfall becoming unable to pay dividend payments on time or to meet their other obligations. An experienced accountant familiar with valuation methods and the process of tax depreciation should be consulted if a company is considering the use of cap table sheets to calculate dividend payments. While this method may not provide accurate results, a well-calculated cap table can significantly improve the accuracy of the dividend payment calculation.

As with any investment, careful consideration must be made prior to the determination of whether to utilize a capital structure consisting of multiple rounds of capitalization. The option pool option is one method that has been considered, but is not appropriate for all types of businesses and investors. Another option would be to use the multiple rounds of capitalization approach, which is not only much less costly, but provides excellent long-term planning benefits as well. Regardless of which capital structure options should be chosen, all must be subject to the careful review and analysis of an experienced professional accountant.