When preparing for funding rounds, investors often request a capitalization table (cap table) to assess your business’s equity structure. A cap table is a spreadsheet or table that summarizes the ownership stakes in your company, including shareholders and their equity shares. While the concept sounds simple, things can become complicated during initial funding rounds or as your startup scales.
A cap table is most commonly used by early-stage startups but is valuable for any business. Typically, it includes a breakdown of equity ownership, such as:
- Common stocks
- Preferred stocks
- Warrants
- Convertible equity
The challenge is creating a cap table that fits your specific needs and evolves as your company grows. This article outlines the steps to build an effective cap table and best practices to follow along the way.
Why Do You Need a Cap Table?
A cap table keeps a record of all investments made in your business over time, identifying major shareholders like founders and early investors. Additionally, it tracks distributions from an Employee Stock Option Plan (ESOP) and reflects equity allocations to employees and contractors.
Beyond tracking ownership, a cap table is essential for:
- Understanding your equity structure
- Discussing and managing initial equity distribution
- Offering and tracking employee equity
- Modeling ownership changes over time
How to Create a Cap Table
Creating a cap table is a milestone. It means that you are moving your startup to the next level. Here’s how to go about building one:
Step 1: Start from Scratch
Most founders initially create a cap table from scratch using a simple Excel or Google Sheets file. At the startup stage, your company has limited data, and a basic spreadsheet suffices.
Y-axis: Lists the names of stockholders
X-axis: Displays categories like common stock, preferred stock, warrants, etc.
From there, you can construct your cap table. Your company’s equity status and needs determine the other financial information you should include in your cap table.
As your company scales, so will the complexity of your cap table. Manual updates become more cumbersome, so many startups turn to cap table management software or seek help from valuation firms to maintain accuracy.
Step 2: Structure your Cap Table
A cap table should be a basic and uncomplicated format for recording crucial information such as share ownership and total outstanding shares.
First, note the names and securities of all owners or investors. Easily enter important numerical and business data into ready-made cap table templates.
Using a cap table template is as simple as downloading one, filling it up with your data, and you’re ready. Bear in mind, nevertheless, that you won’t find a cap table template that fits your requirements perfectly. Finding what you need, considering your options, and making a final decision could all take a long time.
Whether you begin from scratch or by downloading a template, you will ultimately want software and the assistance of a professional to establish and manage your cap table.
Step 3: Essential Components of a Cap Table
The following elements are required as you construct your cap table.
According to the Articles of Incorporation, “Authorized shares” means “the maximum number of shares the Corporation may issue.” The balance sheet typically notes this under “Capital Accounts,” but it has a major impact on the company’s reputation in the market.
The shares that are currently pending distribution to shareholders are known as unissued. Amounts of authorized but unissued shares may impact important indicators, including profitability per share and board effectiveness. Though it may affect earnings per share, the board has more flexibility with more unissued shares.
The stock market considers issued, approved, and acquired shares “outstanding.” Knowing the total number of outstanding shares is necessary to calculate important metrics like cash flow per share (CFPS) and earnings per share (EPS).
- Shares Reserved for Stock Option Plan
Prospective employees can access authorized but unissued shares through the stock option pool. This provision permits converting a specified percentage of the authorized shares into common stock, which is a regular procedure in preferred stock capital raises.
Step 4: Managing Growth and Complexity
As your company grows and new transactions are processed, your cap table will become increasingly complex. You may need to link different parts of your cap table to track more detailed information, such as stock grants or option exercises.
Maintaining an accurate and up-to-date cap table is crucial for ensuring transparency and accountability. If you stick to these guidelines, you should be fine making your first cap table and learning how to manage the ownership structure of your business.
Quick Checklist for Cap Table Management
Here are some best practices to help you effectively manage your cap table:
- Create your cap table early: Start tracking equity ownership when your startup issues its first shares. Be sure to update key details like share price and the total number of diluted shares.
- Leverage cap table software: Using specialized software ensures accuracy and eliminates the risk of data discrepancies, which can occur with manual updates.
- Plan your equity pool: Before allocating equity, determine the size of your equity pool (typically 10–20%) for key employees, founders, and advisors. This ensures fair distribution while reserving shares for future hires.
- Share your cap table with stakeholders: Regularly update and share your cap table with all stakeholders to maintain transparency. Using centralized cap table management tools ensures that everyone works from the same version, avoiding inconsistencies.
- Review your cap table regularly: Key events, like fundraising rounds or exit opportunities, require thorough cap table reviews. Make sure your table reflects the most current data and ownership changes.
Knowing who has invested in the company and the amount they have contributed is crucial for you as a company owner. You can stay one step ahead of this by maintaining an up-to-date cap table.
From Vision to Valuation: Mastering Cap Tables for Startup Founders
Maintaining an accurate cap table is more than just a formality—it’s an essential tool for managing your company’s equity structure. Regularly updating the cap table helps founders understand their company’s worth and make informed decisions.
As your company expands, cap table management can become increasingly complex. In such cases, consider enlisting professional help or using cap table management software to streamline the process and maintain accuracy.
Ultimately, transparency and precision are key in building investor trust and demonstrating your company’s growth potential. Keeping a well-maintained cap table will ensure that you’re ready for future financing rounds and business success.
Interesting Related Article: “5 Tips for Founders to Sustain Peak Performance“
