Cap tables for startup founders

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.

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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.

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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:

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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.

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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.

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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).