Cap table management is the process of balancing a business’s balance sheet so that it does not have excessive debt or too much equity. A properly managed cap table can help a business achieve its financial and operational goals. It can also prevent the business from going into either deficit or bankruptcy. The purpose of a cap table, as stated by the Securities Exchange Commission, is “to fairly measure the value of the ownership interest of the registrant.” In plain English, it is the ratio of shares to total stock. If startup of the equity is owned by the owner and that number is higher than the percentage of shares that are registered on the company’s stock exchange, then there is discrepancy in the measurement.

There are two ways that companies use to determine their cap tables. One way is by using the method known as dilution. This involves diluting the ownership of equity. Equity dilution can take many forms. Two types that most commonly are used are:

Private placement transactions (or PEAT). This is where the business issues promissory notes that allow private investors to purchase a portion of its equity. The note then becomes a public information. When this occurs, the number of shareholders is decreased and the cap table becomes adjusted to reflect the new ownership percentage.

Another method of managing a cap table through waterfall analysis is to issue tranches. Tranches allow for incremental growth in equity. In addition to raising more money, however, they allow for a greater opportunity for further growth. As stated by the Securities Exchange Commission, this type of transaction requires the company to obtain additional funding before proceeding with a growth strategy. Therefore, the company must balance the need for additional funds against the ability to raise additional equity.

startup uses rounds of financing. The cap table is divided into “rounds” based on the amount of equity. The rounds start with a private placement, followed by rounds of common stock offerings to existing shareholders, and finally rounds of convertible preferred stock offerings. Each round of financing raises a predetermined amount of capital and decreases the amount of equity that has been raised during each round.

In order for a company to successfully manage and use a cap table, it must be well controlled. The ability to make decisions, as well as the ability to implement those decisions effectively, is imperative for a company to effectively use its cap table. Each time the company grows past a certain point, investors will become frustrated and may call upon the company to increase capital. In order to prevent this from occurring, a well thought out and written cap table should be in place. The size of the cap table, as well as the type of growth plans that are being implemented, must be carefully considered before any funding rounds or investments are made.

An easy way to keep track of your progress is to use an Excel workbook. You can use the function of an Excel workbook to track both income as well as expenses, which will help you keep track of what is going on with your business. startup may be wary of Excel, but learning how to use the functions of Excel can prove to be beneficial to you, particularly when working with other investors. Formulating an effective cap table would help to make it easier for you to get the most out of your investment dollars.

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