Cap Tables 101 for Founders

When founding a company, it’s essential to accurately record and track equity distribution. Most founders do this using a cap table, which can range from a basic Excel spreadsheet to an equity distribution software program. Whatever tool they use for the job, founders need to understand the intricacies of their cap table to ensure their records of equity allocations are accurate and up-to-date.

Cap Table Breakdown

Equity distribution is relatively easy when a startup is in its earliest phases. The partners agree on how to share profits, which is simple enough to track using an Excel spreadsheet. But as the business grows and more people gain equity, the cap table structure becomes more complex and high maintenance. As your business grows, what started as a simple task can morph into a complicated headache. If you’re brand new to cap table management, this article will get you started with the basics: what is a cap table, why do startups need a cap table, and how is a typical cap table structured?

What Is a Cap Table?

A capitalization table—usually called a cap table—is a document that records and tracks the changes in the equity structure of an operating business. It tracks activities such as funding rounds, stock issuance, share cancellations, transfers, exercising options, etc. Your cap table also includes details on company shareholders, stocks issued, the date of issue, the vesting date, and the expiry, as well as data on the total exercised stocks and the option pool. Essentially, your cap table is a live record that every founder needs to understand, as it shows how much of the company each individual owns at any given time.

Cap table management requires recognizing who owns what portion of the enterprise and constantly revising the document and making it available to all parties involved. It’s often a rigorous procedure of updating, tracking, and ongoing communication with all involved parties.

What Does a Startup Cap Table Contain? 

Typically, a cap table structure involves listing stakeholders on the Y-axis of a spreadsheet and the types and classes of securities investors might own on the X-axis. Here is a simple version of a capital table. The exact structure of your cap table will vary depending on your company’s requirements, which could range from a more detailed list of shareholders to a more general categorization of them as founders, investors, or employees. Similarly, security information may be condensed into categories such as preferred shares, convertible notes, and so on.

Depending on the size of your company, its growth stage, and the ownership structure, you’ll select the most suitable method to construct a cap table. However, here are some of the essential components that a startup cap table typically must contain:

• Shareholders’ names
• The number of shares owned by each shareholder
• Ownership percentage
• Share price
• Outstanding shares
• Stock options that are available for new issuance
• Option pool

Usually, founders are listed first. They’re followed by executives, then employees holding stock, and then finally external stakeholders such as angel and venture capitalists. You can easily tailor your cap tables to meet the needs of your business, depending on your team’s capacity to keep it updated.

Why Do Founders Need a Cap Table?

Cap table management for startups is a critical responsibility for any business. But keeping a comprehensive record of shareholder data isn’t just a standard requirement. Careful review of a firm’s cap table can uncover details that can help guide your company’s future. Here are a few of the key situations that rely on your cap table data:

• Depending on the kind of stock ownership, shareholders are awarded the privilege of voting rights, which could have major effects on management choices. Looking at your capitalization table structure can help you determine which investors should be included as decision-makers in important company matters.
• The details of your authorized, outstanding, and unissued shares and any options and equity are all kept in your capable. This data is necessary to gauge your company’s value correctly and attract potential investors. Therefore, it’s vital to keep an up-to-date cap table to help ensure that you’re attracting the right investors.
• Every startup cap table must include an option pool, which provides you with an idea of how much equity you can use to incentivize new hires. This part of the cap table is especially important in the early stages of your company, as it helps to make up an attractive salary package. As the company grows and employees come and go, the options pool keeps track of equity that can be used to bring in new personnel.
• A company’s cap table provides a glimpse of the amount of equity held by its stakeholders, which is extremely useful when determining if your business can handle dilution — if the need arises.

Cap Table in Different Stages of a Startup

Founders may feel like they have done their research when it comes to startup management, but true understanding comes from experience. Managing a cap table is an important part of a startup’s journey. It’s not enough to simply understand what it is and what it does — you must implement the right strategy at different stages of your company. Here’s a simple breakdown of how startups typically manage their cap tables at different stages of development:

• First stage: At the beginning of any startup, a great, scalable concept is the basis. If the founder is working together with a partner, creating a formal capitalization table usually isn’t essential right away. If there are multiple founders who are providing both money and non-monetary contributions, they need to talk about the distribution of shares and the timeline for vesting. To ensure that the agreements are recorded, it’s recommended they draft a straightforward agreement keeping a record of these early-stage decisions.
• Second stage: After your business is formally set up, managing a formal cap table comes into play. This can be done with a simple Excel sheet, or with a cap table software platform specifically designed to make cap table activities easier and more intuitive. It’s also advisable to seek advice from a lawyer during this step, as the content of a cap table could change based on industry and market demands.
• Third stage: By the third stage of development, startups often have limited cash flow, meaning they often rely on offering equity to help with employee recruitment. Employee equity has become a popular tool for hiring, retaining, and motivating workers. It ties the financial interests of the employee to those of the company, which can encourage better performance. However, it also makes your cap table structure more intricate, as it begins to include various share classes and vesting schedules. It’s extremely important that employees receive their equity benefits in a timely or transparent manner — or you can hurt your employees’ willingness to stay with the company.
• Fourth stage: This is usually where money from both angel investors and venture capital sources comes in. It usually comes in the form of seed money or series funding (Series A, Series B, and Series C, and so on). Seed investments often begin at around 250K. After this, venture capitalists take the reins in backing the venture. By the time a startup gets to Series B funding, it’s usually grown into a business valued at multiple millions of dollars, with plans to expand globally. Then, Series C financing is used for specific expansion and acquisition plans. No matter which stage of financing you’re in, all investors have similar essential considerations: stability in the startup’s ownership structure, liquidity, liability, etc.

The moment you decide to begin a formal cap table in Excel or using cap table software, it must be properly managed and kept up to date. If your cap table is outdated or doesn’t reflect the true value of ownership, investors will be reluctant to join your venture, and employees will have less trouble changing jobs if they can see a more reliable future elsewhere.

To learn more, read my next blog that covers cap table vocabulary, structure, and solutions.