What is a cap table (i.e. capitalization table)?
“Cap Tables” or capitalization tables are a critical term to understand for any startup founder or aspiring founder. But what is a cap table and why is it important? At the core, a capitalization or cap table is a table or spreadsheet that lays out the equity capitalization for the company. The equity capitalization is the total value of all the shares of the company and the breakdown of how those shares are divided. A cap table is an intricate breakdown of the shares value, holders, and projections. The cap table typically includes specifics of a company’s equity ownership capital such as common and preferred equity shares, warrants, and any convertible equity.
Why is a cap table important for startups?
Cap tables are important for startups for a variety of reasons. It is fundamental for a founder to understand the full scope of a cap table and why they are so important to execute. Cap tables are important because overall they illustrate the health of a startup for investors.
Founders need to be aware at all times of what their cap table means for ownership of their company. Understanding ownership is critical as the company grows and develops. Cap tables tell investors who owns what part of a company. Current investors want to see who has control. They also want the ability to forecast potential payouts and dilution under specific scenarios based on the ownership split. The breakdown of ownership in a startup can overall affect the value of the company for future fundraising rounds as well as who needs to be at the table for certain critical company decisions.
- How to Fairly Split Startup Equity with Founders
- Understanding Contributed Equity: A Key to Startup Financing
An up-to-date and detailed cap table is important for tracking the value of a startup over time. Beyond current investors and founders understanding the value of a growing startup, employees find cap tables useful as well. A detailed, well-kept cap table is helpful for employees to access if they have options or equity stakes in the startup they work for. Offering equity is an appealing way to draw in top talent at leading startups. The ability to track value real-time by viewing a cap table is an important component of the value of a cap table.
In addition to current investors utilizing a cap table for forecasting and dilution predictions for different outcomes on their investments, potential investors and future fundraising can also be affected by cap tables. Potential investors can evaluate how much control and leverage could be maintained during negotiations by viewing a cap table. Historical insight provided in a cap table can affect negotiating current valuation for new funding raises. Additionally, an existing shareholder can easily determine what percentage of the company to give to the new investors in exchange for the capital contributed.
In the event of an audit on a startup, a well-managed cap can allow your legal team to present your company’s history and holdings with accurate and well-organized information via a cap table. In general, a well-organized and well-maintained cap table is critical for the health and growth of a company across all financial situations.
What does a cap table look like?
Cap Tables are built out on two axis’. Typically, cap tables include a list of names or groups associated with the startup including founders, investors and common share stakeholders along one of the axis. Along the other axis the items that the various stakeholders and owners own. These items include things like types of securities, how many of these securities they own, when they invested in the company, and the percentage of company owned. Carta provides a good example of a Cap Table below:
How do you make a cap table?
Cap tables can be created and managed in a variety of ways. Typically it is common for new startup founders to build their initial cap table in a spreadsheet. However, as your startup grows and the valuation and stakeholders get more involved and complex, simple cap table design in a program like excel won’t work.
Some companies will use a tool, such as CapShare or Carta to build and manage their cap tables. These tools are typically more dynamic and less manual than managing via excel. They can be easier to utilize to share out and circulate with employees and investors.
In other scenarios, it might make the most sense to outsource the production and management of a cap table. When founders choose to self-manage their own cap table they are susceptible to risks. Some of these risks include miscalculating valuations which can lead to giving up too much equity and over-diluting shares in new investment rounds. Additionally, there might be tax consequences or legal issues that come up from mis-management of a cap table. By outsourcing the production and management of a cap table. Typically this management is outsourced to a legal team to ensure accuracy and compliance. Outsourcing is more expensive than managing with a software but can be much less expensive the cost of major mistakes or miscalculation of value.
How to use a cap table?
When using a cap table, it’s important to understand the following formulas:
- Post-Money Valuation = Pre-Money Valuation + Total Investment Amount
- Price-Per-Share = Pre-Money Valuation / Pre-Money Shares
- Post-Money Shares = Post Money Valuation/ Price-Per-Share
- Investor Percent Ownership = Investor Shares / Post-Money Shares
These formulas are essentially what will be laid out in a cap table so understanding them is crucial. These formulas can also be used to update the cap table as it grows more complex via different significant financial rounds.
The more investment rounds or other significant financial changes on the table, the more complex the cap table gets. This breakdown essentially showcases the additional steps and participants who are stakeholders in the startup.
- Founders round – this is the simplest version of the cap table and will typically showcase the simple split of equity between the founders of the company.
- Seed round – this introduces investors to the table who now own a portion of the company along with the founders and have given cash to the startup altering the overall value.
- Options pool round – when options are provided for new employees, this changes the value and breakdown of the company as represented by the cap table. Overtime, as more employees are hired and more options are granted, the more complex the cap table gets.
- VC round(s) – With any additional funding rounds taken on by the startup, the valuation drastically changes as does the list of stakeholders on the cap table.
All of these events or rounds are significant and will change the breakdown and complexity of the cap table.
How do you keep a cap table updated?
With the array of cap table management tools on the market updating and keeping tabs on your cap table is easier than ever before. Generally founders need to stay on top of their cap table management. If you raise a new round, offer new employee grants, terminate an employee, etc. you need to make the changes as soon as possible to avoid future headaches.
If you put off updating your cap table in real time it could end up being a costly mistake as you need a lawyer to update and correct the table.
We highly recommend using software to manage and update your cap table to make your life as easy as possible. There are countless options but we recommend using Pulley. You can learn more about cap table management (and Pulley) in our Founders Forward Podcast with Pulley CEO and Founder, Yin Wu, here.
Cap table examples/templates
Instead of starting from scratch, many founders will use a template to build out a cap table. Alexander Jarvis provides an easy cap table template here.
S3 Ventures offers a template in Excel that they recommend for their portfolio companies.
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