If you are an entrepreneur or an investor in the startup world, you have probably heard of the term cap table. But what exactly is a cap table and why is it important for venture capital? In this article, you will learn the basics of what a cap table is, how it works, and how it affects your startup's valuation, fundraising, and exit.
A cap table, short for capitalization table, is a document that shows the ownership structure of a company. It lists the names and percentages of all the shareholders, including founders, employees, investors, and other stakeholders. It also shows the types and prices of the shares, such as common stock, preferred stock, options, warrants, and convertible notes. A cap table is essential for tracking the equity distribution and dilution of a company over time.
A capitalization table, commonly referred to as a cap table, is a detailed ownership summary of a company. It lists the names of founders, shareholders, and stock option pools and their respective ownership percentages in the company. A cap table structures ownerships of all the relevant parties by breaking down different share classes issued, numbers of shares, and conversions between preferred stock and common. It also captures convertible securities such as SAFE notes, warrants, and convertible notes. Cap tables evolve and grow as the company dilutes its ownership by issuing shares to shareholders. Companies often use cap table management software such as Carta, Pulley, and EquityList to manage end-to-end cap table operations.
A cap table functions as a living document, which means it evolves alongside the company, changing due to new funding rounds, employee stock options, or M&A. This is why it's critical for any founder who looks for external financing to keep it updated so that potential investors can understand ownership distributions and potential future dilution. Often an Excel sheet is not enough, which is why ther are software on the market such as Carta and Ledgy.
The cap table or the equity table depicts who owns what percentage of the company. It comes into play when you first register your business. At the start, the founders own 100% of the equity and its just them on the cap table. As the company raises external funding against equity, the investor names get added to the cap table.
A cap table isn't merely a ledger; it's the narrative blueprint of a startup's ownership landscape. For investors, it's a window into the evolution of equity distribution among founders, backers, and stakeholders—a dynamic story revealing trust, milestones, and future potential. Reading between the lines of this living document is critical, decoding not just percentages but the vision, potential risks, and scalability hurdles. It's the compass guiding investment decisions, reflecting transparency and foresight in navigating the complexities of growth, dilution, and equitable structures.
Since everyone has already described it so I'll take a more simple approach for ones still facing the difficulty. So to simplify consider cap table as your startup's Family tree. It shows who's part of your business family - from you, the founder, to your team and investors - and how much each person 'owns' of the family business. Just like a family tree tracks relationships and ancestors, the cap table tracks who holds stakes in your company and how much. It's a simple but powerful way to see who's invested in your dream!
A cap table is usually created when a company is founded and updated whenever there is a change in the ownership structure, such as when a company raises funds, grants options, or issues new shares. A cap table can be created using a spreadsheet, a software tool, or a legal document. A typical cap table has four main sections: pre-money, post-money, fully diluted, and pro forma. Pre-money refers to the valuation and ownership before a funding round. Post-money refers to the valuation and ownership after a funding round. Fully diluted refers to the ownership assuming that all the convertible securities are converted into shares. Pro forma refers to the hypothetical ownership after a future event, such as an exit or another funding round.
The cap table is a foundational living document for a company that defines who owns what. It changes with every fundraise and can be dynamic depending on the terms of financing. Properly managing a cap table is critical for a founder/ceo, yet is typically delegated to commercial legal counsel and the financial executive, with the help of a securities management platform, like Carta.
A cap table evolves throughout the lifecycle of the company. The ownership structure of a company may change due to multiple reasons - issuing shares, fundraising, creating an options pool, secondary transaction, etc. A typical cap table is made of the following sections: 1. Pre-money: shareholder ownership before a funding round 2. Post-money: ownership post the fundraising round 3. Fully diluted: ownership post conversions of preferred stock, convertible securities, and stock options into common equity Cap tables are also foundational for financial modeling. A pro-forma cap table for example represents a modeled ownership based on a fundraising scenario. So are waterfall models for investors.
Cap tables have the utility of showcasing the ownership of the company across different shareholders. This shareholding would naturally change as new shareholders enter, old ones leave, and existing ones get diluted. Cap tables help founders understand how raising new shares would dilute them and the existing shareholders, along with visualizing how much equity is available to be offered to their employees.
A cap table is important for venture capital because it determines the value and returns of the investors and the founders. Venture capitalists use the cap table to evaluate the potential and risk of a startup, negotiate the terms and price of the investment, and monitor the performance and progress of the portfolio companies. Founders use the cap table to plan their fundraising strategy, allocate their equity to their team and partners, and optimize their exit options. A cap table also helps both parties to avoid disputes and misunderstandings regarding the ownership and control of the company.
Alot has been said about what cap tables are in general. I'd like to offer my view on why they are important - especially given the numerous conversations I've had with founders - whether as a mentor, advisor, investor or just an observer. Evaluating a cap table is obviously a key step in DD for a VC. Ideally we look to see if equity has been distributed to those actively contributing to/and creating value for the company. Warning lights go off when there are pre-existing cofounders or people who are generally no longer involved, yet collectively hold 30%+ equity. With so much stake in the company unmanaged...it will be hard to attract both top talent, but also good follow-on investors to grow the business. So reduced incentive to invest
Cap tables have a highly significant impact on a startup's ability to raise venture capital. It is no exaggeration to say that cap tables can be perceived in both good and bad light. VCs analyze cap tables to determine the overall 'health' of the company's ownership and shareholder structure. Oftentimes, a crowded cap table with multiple shareholders leads to a risk of complex administrative workflows and shareholder consent that founders have to deal with. Founders with overly diluted ownership due to multiple fundraises before an institutional VC decides to invest could also be considered a red flag. VCs optimize for their ownership targets when investing as it eventually determines their potential exit outcome as well.
VCs stress on the fact that up until later stages of fundraising, founders should own majority of the shares so as to be able to have enough motivation and decision making power to take the business towards growth.
Well Cap table gives a lot of Insights if you study it well and for VCs it makes their decision about investing easier. for ex: It helps understanding team dynamics, If one founders owns too much from other despite equal dedication than its a red flag. It also helps in understanding the psychology of founders, suppose if they diluted too much in first round than its a big no as founders need equity as motivation for future rounds. It also helps in accessing credibility depending on the person who invested in previous rounds, In many Cases a BIG Name here creates FOMO in VC to invest and you can see VCs in more hurry to close the round than you :p Also + points, if there's good Equity distribution plan for ESOPs, Future Dilution, etc.
Venture capitalists generally use the cap table to get a quick view of the current shareholding of the company and here is what they look for: - The shareholding of the founders. This allows them to know how much skin in the game the founders have and if there are any discrepancies between their holdings i.e., some founders having significantly low equity which could result in morale issues in the future. - Whether the cap table is cluttered. - Amount of stock options the company allocated, allowing them to know if the company has enough equity dry powder to hire better. - Number of shareholders with anti-dilution and voting rights, further complicating future fundraising and corporate governance.
Creating and managing a cap table can be challenging and complex, especially as a company grows and raises multiple rounds of funding. To make the process easier, begin with a simple and clear cap table that reflects basic information, such as the names, types, and amounts of the shares, and the pre-money and post-money valuations. Additionally, use a reliable and secure software tool or platform to automate the cap table management process. It's important to keep your cap table updated regularly and accurately to reflect any changes in the ownership structure. Moreover, communicate your cap table with shareholders and stakeholders to ensure transparency and alignment. Lastly, consult with professional advisors to verify and validate your cap table while complying with legal and tax requirements.
Most founders do not understand cap table maths. Oftentimes they raise capital through convertible securities such as SAFEs and have a tough time calculating their fully-diluted cap table. Use a cap table management software instead! Some of them (such as EquityList) have a free tier for early startups and offer assisted onboarding and intuitive workflows. This allows you to: 1. Maintain data accurately 2. Invite your investors to access documents 3. Highlight errors 4. Model scenarios for future fundraises 5. Easily sync with other fundraising tools and your ESOP pool 6. Easily conduct valuation exercises (409A, etc) 7. Give access to lawyers and accountants This allows you to productize ops and digitize your securities with ease.
[P3] 8. In the end Keep It Organized - As you add more investors and employees with stock options, your cap table can get complicated. Keep it organized and clear to avoid confusion down the line. Pro Tip: Take Feedbacks from experts, mentors or more experienced entrepreneurs.
Cap tables provide an overview of the company's financial health, which is important for VCs to assess as it helps them understand their share of risk and returns. Hence, having a clean and organized cap table often helps secure capital quickly. A few red flags that entrepreneurs must avoid while creating their cap table: 1. Diluting too much before the seed stage 2. Having a crowded cap table 3. Dead equity (Ex-founders) 4. Too many classes of shares 5. One investor having too much control Please note that there is no hard and fast definition of a clean cap table; it usually depends on the preferences of potential investors.
-Start Simple: Use a spreadsheet. List your shareholders, their share types, and the number of shares they own. Keep it clear and straightforward. -Update Regularly: Whenever you issue new shares, sell, or have stock options exercised, update the table. This is key to keeping it accurate. -Use Software When Scaling: As your company grows, switch to cap table management software (like Carta). This saves time and reduces errors. -Stay Compliant: Be aware of legal requirements, especially during fundraising or issuing employee stock options. Compliance is crucial! -Seek Expert Help if Needed: Don't hesitate to consult a legal or financial expert, especially when dealing with complex equity structures.
[P1] It's quite easy nowadays with GPT and Other Tools, still here's a step by step guide: 1. Start with Basics, Make initial one in spreadsheet/excel List down all current shareholders, including yourself, co-founders, and any early investors. For each, note the type of shares they own (normal or preferred) and the quantity. 2. Understand what is pre and post money valuations. These valuations affect how much of the company each new investor gets. 3. Update it after every round or changes in equity - Someone joined, left, ESOPs, Investments etc. 4. Shift from spreadsheet to tools when it gets complex, seek help of a CA of finance expert
Reading and analyzing a cap table can help you understand the value and dynamics of a company and its shareholders. Pay attention to key metrics such as the ownership percentage, which is calculated by dividing the number of shares by the total outstanding. Dilution occurs when new shares are issued, while appreciation happens when the company achieves milestones or receives positive feedback from the market. Liquidation preference gives preferred shareholders the right to receive money before common shareholders in case of liquidation or exit. Option pool is a reserve of shares for future employees, advisors, or consultants. It can help attract talent, but can also dilute existing shareholders and lower the pre-money valuation. It's important to plan and size it strategically.
Most important aspects: No overdilution and no patchwork. Founders should still have a majority stake in the company post Seed (ideally 60-70%+) and 50%+ in Series A. Benchmarks vary by vertical and funding needs, but general rule of thumb: you want to see founders motivated until exit (ie they should own majority stakes). As a founder you should try to pool small investors to not overpopulate the captable. Lastly, a captable is NOT the place for creativity. A wild mix of funding vehicles, different vesting terms, special rights or different types of shares might be very unattractive to new investors.
-Understand Ownership Percentages: Look at who owns what percentage of the company. This gives you a clear view of control and influence. -Check for Dilution: Be cautious about dilution rates. Aim to keep dilution under 20% per funding round to maintain value. -Review Share Types: Different shares (common, preferred) have different rights. Understand these to know the power dynamics. -Look at Future Implications: Consider how future funding rounds or option exercises will affect ownership. Plan to avoid unwanted surprises. -Seek Clarity on Vesting Schedules: Employee shares often vest over time. Understand these timelines for a true picture of current and future ownership.
Es muy frecuente, en el mundo Startup, utilizar esquemas de retribución de perfiles clave basados en la figura de los Phantom Shares (participaciones que gozan de derechos económicos, pero no políticos). Estas Phantom Shares, en virtud de los derechos económicos que ostentan suponen, de facto, una dilución sobre las participaciones "normales" de la Startup. Desde el punto de vista de un inversor, es importante conocer si el CAP TABLE muestra la estructura del capital conocida como "fully diluted" o no. Es decir, si contempla potenciales Phantom Shares y, en tal caso, que % del total del Cap Table suponen pues, en la eventualidad de un "Exit", las participaciones "normales" deberán repartir ganancias con las "Phantom Shares". Careful
It is very common, in the Startup world, to use remuneration schemes for key profiles based on the figure of Phantom Shares (shares that enjoy economic rights, but not political ones). These Phantom Shares, by virtue of the economic rights they hold, represent, de facto, a dilution of the "normal" shares of the Startup. From an investor's point of view, it is important to know if the CAP TABLE shows the capital structure known as "fully diluted" or not. That is, if it contemplates potential Phantom Shares and, in that case, what % of the total Cap Table they represent, then in the event of an "Exit", the "normal" shares must share profits with the "Phantom Shares". Careful
Here's what you need to check and how to analyze it: - Ownership: Understand whether founders still have enough equity to have skin in the game. - ESOP pool: Know whether the company has a sizeable pool to hire and compensate better - Share classes: Understand if there are shareholders with special rights that could impact your dilution or the company's decision-making during board resolutions. - Clutter: Are there too many shareholders? If yes, then seek to know if there were any terms that make the company unattractive from an investor's perspective. - Clarity: Is the information in the cap table very detailed and exhaustive or overly simplified? The latter could be a red flag as the company might be trying to hide information.
A "broken" cap-table is a major investor turn off. To counter this, in the early stages avoid: - passive shareholders (inactive advisors, angels, employees) - greedy investors (wanting to acquire 30-40% prior Series A) - "dead equity" by inactive founders - three or more classes of shares - agressive founder dilution (<50% after seed round) Follow these steps to have a better structured cap-table, with active shareholders who align for the best interest of the company.
A messy cap table is a big hurdle for investors. That said, when they see a great company with unicorn potential, the VCs will help you clean it up in a funding round.
A cap-table is crucial as it provides deep insights into a company's history. It highlights the errors committed during the company's infancy. These errors can range from simple naivety to severe lapses in business judgment. Key issues include: - Inappropriate allocation of shares: When there's a mismatch between operational contributions and equity stakes. - Disputes among founders: such disputes often result in messy cap-table. - Excessive dilution in funding rounds, resulting in bad incentives for the core team. - Overly complex capital structures, including multiple classes of shares and complicated liquidation preferences. Please note that cleaning up a cap-table is a tedious and time-consuming process--> many VC will pass their way.
Gone are the days of using Excel sheets to manage cap tables - while it proves to be a powerful tool to structure data, it doesn't provide enough capabilities for stakeholder management. Using a Cap Table Management software is vital in today's world. With dynamic changes in funding rounds, transactions, and stock option allocation, the software powers real-time transparent updates for all stakeholders. It ensures that the company adheres to relevant laws and regulations, such as tax reporting and company laws. It also provides real-time capability for founders to plan for their future fundraising better, facilitate secondaries and share transfers, maintain a timeline of all transactions, visualize liquidity scenarios, and much more.
I would agree that your cap table is an indicator of the distribution of ownership of the business. As a founder not being able to control who’s on your cap table and for how long can potentially stifle your growth. It’s equally important to maintain a good relationship with all your investors, those who invested early are as important as those keen to invest now. You may also want to apply some strategic logic, for whatever round you’re raising, calculation and market value awareness are very key to succeed. Grasping pre and post money valuation and potential impact on ownership, will save you a lot of time when negotiating terms, alongside your offer and prospective investor value.