When deciding to invest in a company, investors will be looking at a number of things, but you can be sure that your cap table is a must-review item in their checklist.
A capitalization table, or cap table, is a breakdown of a company’s equity dilution, listing the type of equity ownership, individual investors, and share prices. It’s a must-have for all startups. In fact, getting your cap table right is the key to securing solid investment and staying on the right side of government regulations.
As your company grows and ownership spreads across new team members and investors, your cap table will become more complex and challenging to manage. In this article, we’ll show you what a good cap table should look like and cover some of the most common mistakes companies tend to make.
Cap table basics
Your cap table’s appearance can vary depending on the template or software you choose, but the core elements will remain the same. At the bare minimum, a cap table needs to list a detailed ownership summary.
Your cap table’s ownership summary should clearly show the names of shareholders, the amount of fully diluted shares, and the division of ownership.
It should drill down on your company’s equity ownership capital to include common equity shares, preferred equity shares, warrants, convertible securities, and more.
Top 9 cap table mistakes to watch out for
Mistakes can be costly. At best, they deter investors. At worst, they may result in fines and a tarnished reputation. Here are some of the most common mistakes founders make when it comes to their cap tables.
1. Not having a cap table at all.
If you have shareholders or plan to allow employees to own stock, you need a cap table. A cap table helps you keep track of who owns what stake in your company, something that will become increasingly difficult to track retrospectively as the company grows. A cap table also shows the total market value of a company and its components. Investors expect founders to have an up-to-date cap table ahead of a fundraising round.
2. Relying on a spreadsheet.
One of the biggest mistakes new founders make is keeping their cap table on an Excel spreadsheet. Most startups start with a simple spreadsheet or template, but as the number of employees and investors grows, the cap table gets more complex, making it harder to keep track of manually.
This is where cap table software comes in. Vital for any founder, cap table software automates the whole process and makes it easier for you to update data in real time.
3. Not maintaining your cap table.
Cap table management is an ongoing exercise. As your company evolves, so should your cap table to ensure it always contains the most recent information. At a minimum, you should be conducting an annual cap table health check.
Here’s when you should update your cap table:
- Following a funding round
- After a liquidity event
- When an employee leaves or joins the business
- After an investor or employee exercises vested options
- For new equity compensation grants
- If an investor redeems, transfers, or sells shares
4. Having multiple versions of the same cap table.
Working manually with a compilation of spreadsheets can create multiple versions of your cap table, which will consume time and effort to reconcile. It also increases the risk of contradictory information.
Ideally, you want to have just one cap table to establish a single source of truth that you and your team can confidently refer to before meetings with employees, the board, or investors.
5. Not consulting professionals.
Delegate ownership of your cap tables. A cap table contains legal documents, records, and agreements, all of which must be stored and managed properly. Employing a legal team or external counsel to maintain all the records can help you avoid expensive mistakes and stay on top of critical changes. It’s also easier to ensure that your legal documents match your cap table.
6. Keeping poor records.
Always record the details of any equity agreement in the cap table or your company ledgers. You should also track terminations and exercise windows to prevent former employees from exercising options outside their permitted window.
Look out for errors such as:
- Dates that don’t agree
- Incorrect or abbreviated entity names (especially important when dealing with stock certificates)
- Missing or unrecorded transactions
7. Assuming cap tables are legal agreements.
While they serve as a record of equity ownership, cap tables are not legally binding agreements. In the United States, companies are not required to make their cap tables public and can choose to share them with a select group such as their shareholders and investors.
8. Issuing options without a 409A valuation.
A 409A valuation sets the fair market value for shares and must be done before any options are issued. It ensures everyone gets a fair deal in terms of stock options. Failing to do so can lead to major tax implications and penalties for the company and your employees.
One of the requirements for a 409A is an updated cap table. So, make sure you have one on hand before you start the valuation process.
Want to know more? We’ve put together a list of everything you need to know about 409A valuations here.
Beware of over-dilution, especially in early rounds. Founders who own less than 10% of equity at the seed round are a red flag to investors and suggest that you may not stick around in the future.
A cap table helps you chart out your share ownership, making it clear who owns how many shares amongst the employees, investors, and other shareholders.
What can you do
Having a team of cap table and fundraising experts on your side is one of the best tools you can have in your arsenal. Before you get started, read up on best cap table practices or learn from those who have already gone through the process.
One of the best things you can do is to opt for trusted equity management tools like cap table software that automates your data and keeps you on track. Forget a spreadsheet, cap table software can build your cap table for you and make management a breeze while ensuring you’re always fundraise-ready.
The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. Information about the company is provided by the company, or comes from the companies’ public filings and is not independently verified by LTSE. Neither LTSE nor any of its affiliates makes any recommendation to buy or sell any security or any representation about the financial condition of any company. Statements regarding LTSE-listed companies are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. Investors should undertake their own due diligence and carefully evaluate companies before investing. Advice from a securities professional is strongly advised.