The prospect of building a startup and taking it from pre-seed to its initial public offering (IPO) is a venture that’s as exciting as it is daunting. As startups grow in size, they also grow in complexity and can overwhelm even seasoned founders.
A well-maintained cap table can be the guiding north star for founders. By tracking key information such as ownership structure and equity transactions, cap tables help founders stay on top of their startups’ evolving needs and serve as a reliable reference point for all stakeholders.
To understand what cap tables are, why they’re so essential, and how to maintain them, amongst other things, read on.
What are cap tables?
A cap table (also known as a capitalization table) is a spreadsheet or table that records the equity ownership structure of a startup. It provides a comprehensive overview of a startup’s securities (e.g., common stock, warrants) and detailed information on stakeholders, and their level of investment and ownership. In short, a cap table paints a picture of a startup’s financial and equity capitalization status.
Ultimately, cap tables are tools used by founders and investors when making key business decisions as they:
- Help founders closely monitor their startup’s ownership and equity distribution which enables informed decision-making (e.g., planning for equity compensation packages).
- Help investors by providing a transparent, thorough view of the startup which enables informed investment decisions.
Do startups need cap tables?
Unlike 409A valuations, having and maintaining a cap table isn’t an enforced legal requirement per se. That said, cap tables, when done right, provide startups with a host of benefits that go beyond listing who owns what.
Here’s a breakdown of why startups stand to benefit from cap tables:
Components of cap tables
While initiatives like the Open Cap Table Coalition are gaining momentum, there isn’t any universally imposed format that cap tables have to adhere to. The makeup and layout of a cap table depend entirely on the unique circumstances of a startup. That said, cap tables generally include the following:
Best cap table practices to remember
Creating and managing a cap table can be overwhelming because of its complexity and the potential for costly errors. Nevertheless, founders can keep headaches to a minimum by following these tips:
Consequences of a poorly maintained cap table
Poorly maintained cap tables spell far-reaching consequences for startups. They can impact startups internally by causing internal disputes; and externally, by impairing a startup’s fundraising efforts. Other consequences include:
Different types of cap tables
We previously mentioned that there is no universally imposed format when creating cap tables, as each cap table depends on your startup’s situation. As a result, cap tables can vary greatly in format and content. However, there are a number of different types of cap tables that serve a distinct purpose, including:
I. Basic cap tables
Basic cap tables (also called simple cap tables) are the bread and butter of many startups. They’re the simplest type of cap table and are often used by very early-stage startups before things get complicated.
It usually includes the bare minimum to present a snapshot of the startup’s ownership. Components include authorized shares, shareholder information, issued shares, and outstanding shares. However, elements that account for any future share issuances (e.g., via options) are often omitted.
II. Fully diluted cap tables
Fully diluted cap tables depict share ownerships at any given time and also account for additional shares that could be created in the future through options, warrants, and other related securities. In other words, it assumes that all possible dilutive events have already occurred.
Unlike basic cap tables, fully diluted cap tables go the extra mile and create a more holistic picture of startups, focusing not just on the present ownership structure but the potential future structure as well. This can be used to make forward-looking decisions by both investors and founders alike.
III. Pro-forma cap tables
Pro-forma cap tables are projections that illustrate what the startup’s ownership structure would become if the startup went through certain events, such as financing rounds, buyouts, buybacks, or being involved in mergers and acquisitions. They show what happens to a startup’s capital structure presently and after potential investments.
Tables like this are appealing as they enable founders and investors to understand the future impact of equity transactions on the startup’s ownership structure (and by extension, ownership rights).
How cap tables preserve a startup’s mission
Cap tables play a critical role in ensuring that a startup stays on track toward fulfilling its mission, both within and beyond the startup. While cap tables are on one level, simply spreadsheets filled with numbers, on another, they see to it that startups stay true to their mission:
The best way to make a cap table
While it is true that there is no single way to create a cap table for your startup, this doesn’t mean that there isn’t an optimal way. Founders have three options at their disposal: adapting existing templates, using software like Excel, or using a dedicated cap table solution.
Templates are tempting due to their vast availability online and the fact that they’re often free to download and use. Likewise, as cap tables are generally similar for the majority of startups, tweaking them to fit your needs is a straightforward experience:
Almost everyone is familiar with Excel. It’s a versatile tool and the method of choice for many startups thanks to its affordability and functionality when compared to templates:
Using dedicated solutions
Dedicated cap table solutions, on the other hand, provide a streamlined approach for startups making it the most efficient and stress-free approach.
In conclusion, while there are multiple options available for creating a cap table, the optimal way is to utilize a dedicated cap table solution. While templates can be easily adapted and Excel is a popular choice, dedicated solutions provide a streamlined and efficient approach for startups. By choosing a dedicated cap table solution, startups can minimize stress and maximize efficiency in managing their cap table. Make the best choice for your startup and ensure your cap table is accurate and well-managed from the start.
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.