Cap Table

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A cap table — short for capitalization table — is a document that shows who owns what in a company, essentially your business's equity backbone. It lists a company's securities, including stocks, options, warrants, and convertible notes, detailing the number of shares held by each party and why. Thus, whenever your company's equity gets divided between two or more parties, it's time to update the cap table.

Why are cap tables relevant to startups?
Cap tables matter to startups because they help track who owns what percentage of a company and determine its worth. For example, if the cap table shows that one person owns 50% of the company, that person has a lot of control over the startup's decisions.

Why do you need a cap table?

Ideally, your company will grow and receives external investment. When that happens, knowing the different types of shares with varying rights and obligations that investors hold will help you understand your company's ownership structure and financial status. The cap table usually includes the following information for each security:

  • The type of security (e.g., common stock, preferred stock, options, etc.)
  • The number of shares or options outstanding
  • The price per share or option
  • The percentage of ownership represented by each security
  • The total value of each security

How do you read a cap table?

To read a cap table, you'll need to understand the different columns and information included in it. Here are some of the key elements to look for:

  • Shareholder names: This column lists the names of each shareholder who owns a portion of the company.
  • Ownership percentage: This column shows how much of the company each shareholder owns.
  • Equity type: This column indicates the type of equity each shareholder has, such as common stock, preferred stock, or options.
  • Shares outstanding: This column shows the total number of shares the company has issued that are currently outstanding.
  • Fully-diluted shares outstanding: This column accounts for all possible shares that could get issued if the company exercised all outstanding convertible securities (e.g., options, warrants, and convertible debt).
  • Pre-money and post-money valuation: These columns show a company's valuation before and after a financing round. The difference is the amount of money raised in the financing round.
  • Option pool: This column lists the shares saved for the company's employee stock option plan.
  • Liquidation preferences: This column shows the preferences and priorities of shareholders in the event of a sale or liquidation of the company.
  • Exit scenarios: This column lists the potential outcomes for the company in the event of an IPO, acquisition, or bankruptcy.


What do investors look for in a cap table?

When evaluating an early-stage startup, investors typically look at several key factors in the cap table, such as:

  • Founder ownership: Investors will want to see whether the founders have a significant stake in the company, demonstrating they have skin in the game and are committed to the business's success.
  • Equity distribution: Investors will want to see that equity has been distributed fairly among all parties, including founders, employees, and early investors. This is important because it ensures everyone has a stake in the company's success and agrees with its goals.
  • Valuation: Investors will want to see a reasonable valuation for the company based on its stage of development and market potential. A high valuation can be a red flag for investors because it may indicate that the company is overvalued and has unrealistic growth expectations.
  • Option pool: Investors will want to see that the company has set aside a sufficient option pool for future employees. This shows that the company has a plan for attracting and retaining top talent, which is critical for the success of an early-stage startup.
  • Previous funding rounds: Investors will want to see the terms of previous funding rounds, including the amount raised, the valuation, and the investors involved. This can provide valuable insight into the company's financial history and ability to attract investors.
What is a messy cap table? / How do you keep a cap table clean?

Maintaining a clean cap table requires diligence and discipline because it's easy to get caught up in the day-to-day operations of your startup. The best way to avoid a messy cap table from happening is by following these steps:   

  • Keep track of all securities issued by the company.
  • Properly document all stock options or warrants issued to employees, investors, or advisors.
  • Update the cap table regularly as new securities are issued, converted, or canceled.
  • Consider the impact of convertible debt and preferred stock.

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