A cap table (or capitalization table) is a financial snapshot of the company created using a spreadsheet that outlines the ownership stakes and the distribution of shares among the founders and investors. It tracks the equity ownership and value of each participant in the business, and if not correctly prepared, company executives and shareholders may experience hitches based on ownership stakes and concerns as the company evolves.
Initially, founders contribute their personal funds and assets to establish a company through a process popularly known as bootstrapping, and the cap table at this stage is rarely complicated. Illustratively, let’s say there are three friends, Alice, Bob, and Charlie, who decided to create a startup. Alice invests $50,000, Bob invests $30,000, and Charlie invests $20,000.
To reflect the ownership distribution, the cap table will show shares of just these three individuals. In this example, where a share is worth $1, Alice will be assigned 50,000 shares, Bob will receive 30,000, and Charlie will get 20,000. These numbers are proportionate to the amount of money they invested and will be reflected in the cap table.
However, the more the company gets investments, the more the cap table is updated, and if not carefully crafted may become complicated to understand. Hence, this article delves into the steps to create an efficient cap table so you can do the same for your company.
Cap Table Components
Developing a comprehensive cap table for a company relies on precisely delineating essential data. Primarily, the cap table is designed to articulate the ownership rights within a company, requiring the inclusion of variables that systematically furnish ownership information. These variables include:
Shareholder Name
The names or unique identifiers of individuals or entities holding shares in the company.
Share Class
The different classes of shares issued by the company, such as common shares, preferred shares, or different series of preferred shares.
Number of Shares
The number of shares each shareholder holds in a specific share class.
Ownership Percentage
A cap table must include the percentage of total shares owned by each shareholder, calculated by dividing their total number by the total outstanding shares.
Equity Investments
The amount of money invested by each shareholder to acquire their shares.
Vesting Schedule
If applicable, the timeline or conditions under which shares granted to employees or founders become fully owned by them.
Option Pool
The portion of shares reserved for future issuance to employees, advisors, or new hires.
Convertible Securities
Any convertible instruments, such as convertible notes or warrants, that may impact the company’s ownership structure should reflect on the Cap Table.
Valuation
The company’s estimated or actual value, which influences each share’s worth and the overall ownership distribution, must show on the cap table.
Capitalization Events
Any significant events that affect the cap table, such as new investments, stock splits, mergers, acquisitions, or share buybacks.
Dilution
The reduction in ownership percentage for existing shareholders due to the issuance of new shares.
Option Grants
The allocation of stock options to employees or key personnel, specifying the number of options granted and their exercise price.
For the cap table to remain comprehensive, it must be updated as investments are made in the company both internally and externally. In other words, funding rounds have an impact on a cap table. In the next section, we’ll briefly explore how funding rounds affect the structure and design of a cap table.
Data Collection to Create a Cap Table
Companies collect data to create a cap table through a combination of documentation, legal agreements, and financial records. The initial data collection process typically involves the following steps:
Incorporation Documents
Companies start by gathering the legal documents related to their incorporation, such as the articles of incorporation or the certificate of formation. These documents specify the authorized share structure, including the number of authorized shares and any specific share classes.
Founders’ Agreements
If there are multiple founders, the company will gather founders’ agreements or any similar documentation that outlines the initial ownership distribution among the founders. This agreement typically details the number of shares or ownership percentages allocated to each founder.
Share Issuance Records
Companies collect records of all share issuances, including the details of the investors or shareholders, the share classes, the number of shares issued, and the issuance dates. This includes any initial investments made by the founders or early-stage investors.
Equity Grants and Vesting Schedules
If the company has granted equity to employees, advisors, or consultants, they compile information regarding these equity grants. This includes the number of shares granted, the recipients, and any associated vesting schedules that specify the timeline or conditions for the shares to become fully owned by the grantees.
Investment Agreements and Term Sheets
Companies gather investment agreements and term sheets from all funding rounds. These documents outline the terms of the investment, including the amount invested, the share price, the ownership percentage, and any special rights or preferences attached to the shares.
Convertible Securities and Option Grants
If the company has issued convertible securities such as convertible notes, warrants, or stock options, they collect documentation related to these instruments. This includes conversion terms, exercise prices, and the number of potential shares that could be issued upon conversion or exercise.
Capitalisation Event Records
Companies maintain records of any capitalisation events that impact the cap table, such as stock splits, stock buybacks, or mergers and acquisitions. These events may require adjustments to the share count or ownership percentages.
Financial Statements
Financial statements, such as balance sheets and income statements, can provide valuable information regarding the company’s financial health and valuation. These statements help determine the value of shares and the company’s overall value, which are crucial for accurate representation in the cap table.
During the initial data collection process, companies typically work closely with legal counsel, accounting professionals, or cap table management platforms to ensure the accuracy and completeness of the gathered data. This ensures that the cap table reflects the actual ownership structure and facilitates effective decision-making based on the provided information.
How a Cap Table Should be Structured and Formatted
When structuring and formatting a cap table, it is essential to maintain clarity, accuracy, and ease of use. Various options are available, including spreadsheets and dedicated cap table management platforms. Here are some recommendations for formatting and structuring a cap table:
Spreadsheet Format
If you choose to use a spreadsheet, consider using software like Microsoft Excel or Google Sheets. Set up the cap table as a table with rows and columns, allowing for easy data entry, sorting, and calculations. The following are specific points to note when using the spreadsheet format for creating a cap table:
- Column headings:Include column headings that clearly define the data being represented. Standard column headings in a cap table may include Shareholder Name, Share Class, Share Count, Ownership Percentage, Equity Investments, Vesting Schedule, Option Pool, and Valuation.
- Formulas and calculations: Utilize formulas using your spreadsheet to automate calculations and maintain accuracy. Standard formulas and calculations in a cap table include:
- Ownership Percentage: Calculate the ownership percentage for each shareholder by dividing their share count by the total outstanding shares.
- Dilution: Automatically calculate dilution percentages for existing shareholders when new shares are issued or converted.
- Option Grants: Use formulas to calculate the impact of stock option grants, such as determining the number of fully diluted shares considering potential option exercises.
- Valuation and Share Price: Incorporate formulas to calculate share price based on the company’s valuation and total outstanding shares.
- Totals and Summaries: Include formulas to calculate and summarize the total share count, ownership percentages, and equity investments for each share class and overall.
- Formatting and Visualization: Use formatting techniques to enhance the readability of the cap table. Employ consistent formatting for columns, apply color coding to differentiate share classes or types of investors, and consider using conditional formatting to highlight specific cells based on certain conditions or thresholds.
Alternatively, you can use cap table management platforms.
Cap Table Management Platforms
Cap table management platforms offer specialized features and automation, providing a centralized and secure environment for managing and updating the cap table. They often include built-in calculations, scenario modeling, and the ability to generate reports or visualizations.
When selecting a cap table management software or designing a spreadsheet, ensure that it aligns with your specific needs, scalability, and the level of complexity required for your company’s ownership structure. Regularly review and update the cap table to reflect any changes in ownership or funding rounds, ensuring it accurately represents the company’s equity ownership.
Examples of Cap Table Management Platforms
There are a handful of cap table management platforms that companies can use to create and modify cap tables however they want. These platforms include:
- Raise.io
- Carta
- Gust Launch
- Diligent Equity
- Shareworks
- LTSE Equity
- Eqvista
- Pulley
- Shareworks
- SeedLegals
- Astrella
- Trica Equity
- Capdesk
Cap Table Best Practices
Maintaining a reliable and accurate cap table is crucial for effectively managing a company’s ownership Maintaining a reliable and accurate cap table is crucial for effectively managing a company’s ownership structure and equity distribution. Here are some suggestions for best practices:
- Regular Reviews: Conduct regular reviews of the cap table to ensure it accurately reflects the latest changes in ownership, such as investment rounds, employee equity grants, and option exercises. This helps prevent errors and discrepancies.
- Confidentiality and Security: Treat the cap table as highly sensitive and confidential information. Limit access to authorized individuals and implement robust security measures to protect against unauthorized access or data breaches.
- Consistent Documentation: Everything should be documented. Every transaction that concerns investment agreements, stock option grants, vesting schedules, and so on must be properly documented in the cap table.
- Version Control: A transparent, retractable version control system should track every revision and update made on the cap table. This allows for easy referencing and identification of change over time.
- Reconciliation with Legal and Financial Professionals: The cap table management process should involve lawyers and accountants. They are saddled with the responsibility of providing expert advice, reviewing legal implications, ensuring compliance, and assisting in complex transactions.
Bottom Line
Uber’s cap table management style played a crucial role during its IPO. The company had several rounds of funding and a complex ownership structure. A well-maintained cap table helped facilitate a smooth IPO process, accurately representing the ownership stakes of investors, employees, and founders. Consequently, having a well-organized cap table cannot be overemphasized.
Startups often use cap tables to attract investors and manage employee equity. A well-managed cap table instills confidence in potential investors, demonstrating transparency and accuracy. It also enables efficient administration of employee equity, ensuring fair and accurate distribution.
Also, during mergers or acquisitions, a clear and accurate cap table is essential for negotiations and determining the equity exchange ratio. A poorly managed cap table can lead to disputes and delays in finalizing the deal.
FAQs
What makes a good cap table?
A good cap table stands out for having the following features:
- Accuracy
- Version control
- Scalable; that is the ability to accommodate changes in the future
- Transparency
- Comprehensiveness in that it covers every aspect of the ownership stakes
- Integration with financial and legal systems
Who handles the cap table in a company?
The founder (s) handles the company’s cap table. They are responsible for updating and modifying the table as their company undergoes changes. In addition, they work with lawyers and financial experts to ensure the table meets standards.
Is a cap table a legal document?
This largely depends on the jurisdiction. For example, a cap table is a legal document in the United States containing details of a company’s ownership stakes and rights. Because of the kind of information a cap table is expected to contain, it is a legally recognized document capable of informing legal actions.
Does the cap table include debt?
Yes, a cap table should include debt. It is important to note that debt informs how equity should be spread, and when it is included in a company’s cap table, the founders are able to apportion equity based on the situation of things carefully.