Resolving Unexecuted Advisor Commitments During Acquisition Capitalization Diligence
Capitalization diligence converts unexecuted advisor promises into quantified financial liabilities settled from seller proceeds prior to acquisition closing.
cap table variance
Meaning
Discrepancies in ownership records arise when the documented sum of all shares does not equal the actual total issued by the entity. A cap table variance indicates a failure in the historical tracking of equity grants or transfers. It represents a risk to the integrity of the corporate ledger and the rights of individual shareholders.
This mismatch often surfaces during the audit of a financing round or an exit event.
Origin Source
Administrative errors or missing signatures frequently cause the misalignment between the ledger and the actual certificates. The cap table variance might stem from an unrecorded option exercise or a misinterpreted conversion formula. Each undocumented promise of shares creates a potential claim against the company.
Historical records must be reconciled against board minutes to find the root of the error.
Financial Implication
Valuation calculations rely on an accurate count of all outstanding units. A cap table variance distorts the price per share and the dilution experienced by current investors. It can lead to the overpayment or underpayment of dividends and proceeds during a liquidation.
Because investors require certainty, any deviation from the expected total can halt a transaction. The cost of resolving these gaps involves legal fees and the potential for renegotiating existing rights.
Rectification Effort
Formal board actions are necessary to correct the permanent record once a mistake is found. The cap table variance requires a forensic review of every grant and transfer from the date of incorporation. Shareholders must often sign waivers or updated agreements to reflect the reality of the holdings.