Stop us if you’ve heard this one: I wish I knew then what I know now. The ubiquitous phrase we all keep in our back pockets might be a little cliché, but it is not an evergreen thought for the ages.
When startups are founded, there’s a buzz, an excitement of “we’re doing it! We’re taking my idea and it’s happening!” And that’s how it should be, but once the excitement of the concept taking shape dies down, reality sets in: there’s red tape, paperwork, fundraising, and taxes to be dealt with.
One of the biggest mountains to climb when getting the startup into the next phase is fundraising, and when someone has invested in the company, you will have to give up equity in exchange for cash to keep growing. One of the easiest ways to keep track of who’s getting what once you’ve taken on multiple investors is by adopting a capitalization table — or cap table.
What is a cap table?
If you’ve never heard of a cap table, that’s why we’re here.
A capitalization table is a breakdown of your company’s ownership. It lays out company equity: how much someone has, share prices, and if stock is preferred or common*. A cap table also keeps investors organized and tracks equity grants to employees. It also allows them to see if their company is genuinely making progress!
In a nutshell, a cap table is an actual table that takes all of the shareholders in your startup and lays out who owns what, how much each one owns, and what value is assigned to the stock they own.
A contemporaneous and detailed cap table is also critical for tracking the value of a startup over time. Value tracking allows an analyst to track the progression of overall company value over time.
As a startup gains investors, the cap table can get more complex with its breakdowns of who gets what in terms of company shares. If you’ve cut company shares into 500,000 shares with founders, investors, and employees each getting a slice, those numbers can get tricky if someone isn’t paying close attention to who gets what if it comes to selling.
(What is preferred vs. common stock? * When issuing dividends, preferred stockholders come first, and common stockholders get voting rights on the company’s future. Startups typically issue preferred shares to investors, and common shares go to the core team.)
What should a cap table include?
Cap tables need to be detailed, clearly showing who’s an investor, founder, and employee and who gets what.
A cap table shows debt that can convert into equity, but it also helps find a way of looking at all outstanding options, warrants, and convertible notes.
It’s important to note that the structure of a cap table may vary with company needs. In some instances, you might see the cap table go into significant detail on the stakeholders and in other cases they might be grouped quite simply.
There isn’t just one way to build a cap table. Based on the size of the company, stage of growth, and ownership structure, a founder will adopt the preferred approach best suited to their business. Typically however, cap tables are built out on two axes’.
The basic requirement is to have the list of stakeholders on the Y-axis and details of all the securities on the X-axis. There are of course some basic parameters that must be included.
- Name of all shareholders
- Number of shares owned by each shareholder
- Percentage of ownership held in the company
- Total number of outstanding shares
- Total number of stock options available for new issuance
- Option pool
Why having a cap table is critical
A cap table gives startups a place to mark as Ground Zero, allowing them to monitor grant equity for employees or ownership dilution, and even pricing future fundraising. The clarity in this stage is crucial because it helps establish the middle ground of how much control you’re maintaining against outside influence.
With accounting, this data matters on the financial statement, which keeps the balance sheet correct when reconciling the balance sheet and the other statements. Your financial team needs this information to understand who owns X piece of the company. Certain levels and types of ownership require specific reporting like if a foreign investor buys in, taxes need to reflect that. Otherwise, if that goes unreported, that could mean penalties.
Another reason a cap table is needed is that investors always want a 360-degree look at the business. Due diligence is an exhaustive process that demands clarity from all sides, and investors will want to know everything is divvied out among other investors.
Cap tables can also be useful in the event of an audit. A well-managed one can help your legal team show your company’s history and holdings with accurate and well-organized information.
Establishing good practices early is one significant way to see wins in real-time, and this is one of the easiest for a newer company. If you’re looking to level up and get that game-changing funding, it’s all about the little things that set the successful companies apart rather than race to the finish line without any true navigation.
We’ve some of the best and brightest in the startup space evolve into companies making noise. Yours could be next, and we’d love to help get you there.