You must understand cap table basics at every stage of the business before handing equity out to cofounders or early employees.
The cap table is a living document representing the ownership of a company. It changes as investors enter or exit the picture and helps you stay organized by ensuring everyone is on the same page regarding who owns what percentage of the company.
Understanding the basics of your startup’s cap table underpins your ability to assess risk and make intelligent decisions. It shows how much each investor contributed and the number of shares issued as part of that investment.
The information available in the cap table allows you to calculate ownership percentages for each team member (including yourself).
What is a Cap Table?
A cap table, or capitalization table, is a spreadsheet or a database that is sometimes built into cap table software showing the ownership split. In short, it’s an organizational chart for a company’s equity. The cap table includes information such as how many of which types of shares are outstanding, who owns them, and what percentage of the company each person owns.
The information helps investors understand how much control they have over company decisions. It lists each shareholder’s name and percentage ownership stake in the company.
What is a Cap Table Used For?
There are two ways to look at a cap table: from an investor’s and company’s perspectives. Knowing which lens you’re looking through helps better assess the cap table’s purpose.
A cap table’s core aspect is providing an accurate record of ownership and protection against fraud.
It’s also useful for investors and advisors who want to know how much their stake in the company is worth at any given time. A cap table also tracks how much dilution has occurred in the past for each round of financing.
Although it’s not necessary in all cases, a cap table can also be an internal tool for managing ownership in a company. Some companies use more primitive methods such as spreadsheets or email chains to track who owns what percentage of shares, and others use dedicated tools.
Why Do Founders Need Cap Tables?
Having your caps table sorted out might not be critical when it’s just you and a partner. But with employees and investors, who owns what can play a significant role in company direction and have high financial stakes.
Knowing who’s involved in company decision-making can be especially critical for a potential investor when large sums of money are on the line.
A cap table shows each person who has an allocation of stock, usually with corresponding voting rights and other privileges, like board seats or access to dividends. It is a record of who owns what percentage of the company at any given time — and it can vary over time as people contribute capital or leave their stake behind.
Cap tables are essential for founders because they make understanding the company ownership structure easy. The information can help you decide who to talk to when you need advice, who to involve in critical decisions, and who you should invite to join your board of directors.
Further, it’s essential to know your investors and how much money they invested at all stages of business building. It is helpful for tax purposes and helps you manage your investors’ expectations.
How to Create and Maintain a Cap Table
Creating a cap table involves gathering information from all relevant parties and organizing it into one place. It includes investors who provide their names (legal name or business name), investment amount, and percentage owned through an investment round.
The information can come from an investment contract but may also be verbally provided if there isn’t one (e.g., when you’re raising money from friends and family). Investors are also responsible for providing additional essential information like their social security number (SSN) or tax ID.
A few additional variables can help you understand cap tables and the various roles that participants play on your team:
- Liquidation Preference
- Preferred Shares
- No-Voting Shares
- Convertible Notes
A cap table is among the company’s most important documents and requires careful maintenance. While spreadsheets can work for a time, they’re often neither secure nor user-friendly, especially if your structure is complex.
If a company’s structure is so complex that a spreadsheet doesn’t cut it, you can use software like Carta or Stride (both free). These tools let you import existing data from sources like AngelList or Crunchbase, so you can keep track of who owns what percentage of your company at any time. You can then export the cap table as an Excel spreadsheet for easy reference later.
If you need help creating and maintaining your cap table, contact Founder’s CPA! We can help you make sure it’s done right.