Private Offering Memorandum: The Cap Table

Written by Dave Lavinsky

A capitalization table (or cap table) is an important part of your private placement memorandum (PPM). It lists the shareholders of the company and shows their corresponding ownership shares along with voting rights and other specifics. It is typically shown in chart format with accompanying notes.

Pre-Money and Post-Money Ownership

The cap table can be used for your own purposes to better understand how your percentage ownership will change with the current capital raising round. This is important to understand, especially if the financing results in the original owners losing the necessary 50% of voting rights which gives them control of the company. A lawyer may be so focused on protecting you from legal liability that they do not adequately explain how you can keep this control, even through a significant round of funding.

If you can raise a smaller amount and spend more time proving your business model with this limited amount of financing, you can avoid giving up controlling interest in your company both now and in a future round of financing. By the time of the second round of financing, you will likely have sales revenues history and greater demonstrated interest from customers, all supporting a higher pre-money valuation of the company.

Common, Preferred, Options, Warrants

It is important that the cap table dig into the specifics, by differentiating between common stock and preferred stock. Preferred stockholders generally hold no voting rights but are paid dividends before common stockholders. Therefore, to keep control over the company, issuing preferred stock may be the way to go. However, savvy investors may want the control that comes with voting rights more than additional dividends if they believe their influence can help improve the value of the stock overall.

The cap table should include lists of options or warrants that have been issued or will be issued as well. This gives both management and prospective investors a full picture of potential future changes in ownership if and when the options or warrants are executed.


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