Meaning
The systematic review of ownership records confirms the distribution of equity among founders, investors, advisors and employees. This cap table verification ensures that the total number of shares issued matches the authorizations in the corporate charter. It identifies errors in share counts, grant documents, tax forms and unrecorded transfers that could lead to future disputes.
Diligence Standard
Examination of the history of share issuances requires a comparison between the current cap table and the original stock purchase agreements to ensure every share is accounted for. This process often takes place during a financing round or an exit when a third party needs to validate the ownership structure before committing capital. The standard for accuracy is high because even a small error in the percentage of ownership can lead to a large difference in the value received by a shareholder during a liquidity event.
It requires a detailed look at every option grant, warrant, debt instrument and convertible note issued since the inception of the firm to build a complete picture of the potential dilution.
Data Accuracy
Reconciling the digital record with the physical certificates and board minutes prevents the accumulation of errors over time. A company that fails to perform this check regularly may find that it has promised more shares than it has available to issue. The resulting cleanup process is expensive and requires the consent of multiple parties to correct.
Ownership Record
Ownership records provide a clean and verified list of all security holders and their specific holdings. This record remains the definitive source for any calculation of proceeds in a sale or dividend payment. A verified record reduces the risk of claims from individuals who believe they were promised more equity than they actually own.
The document provides a clear and undisputed map of the company’s capital structure.
