What is a capitalization table?


Cap tables are important records that can inform major company decisions, so it is imperative that a company keep its cap table accurate and up to date. They are widely used by entrepreneurs, venture capitalists, and investment bankers to model and analyze events such as ownership dilution, issuing employee stock options, or issuing new securities. After several rounds of financing, a cap table can become highly complex.

Early-stage startups typically have a simple capital structure and more limited shareholder accounting requirements. In the earliest stages of their development, you may track security ownership in a simple document or spreadsheet. As the startup grows and ownership structures become complex, there’s an increased risk of errors or omissions, making the use of a dedicated cap table tool necessary.

What information is in a cap table?

A typical, relatively detailed cap table will have an investor-by-investor breakdown of the number of securities held, the percentage of ownership of the company (by class or series of security, if relevant), and the percentage of voting control over the company (by class or series of security, if relevant, and if different than ownership).

The level of detail provided in any given cap table can vary depending on the intended audience, as well as the information that a company is willing to share. The image below shows a capitalization table example:

How are cap tables used?

Companies use cap tables to determine how much equity to award to employees and to sell to investors, and which investors are needed to approve certain major company actions, among other equity- and governance-related issues. 

Investors use cap tables to determine their potential ownership and voting control in a company on an absolute basis and relative to other investors.

In the fundraising context, both startups and investors use models based on cap tables (known as pro forma cap tables) to forecast changes to the startup’s ownership structure and voting control as the result of new investments. In mergers and acquisitions, buyers and sellers typically build complex spreadsheets, using cap tables as a starting point, to calculate how much and to whom the proceeds of a transaction will flow.

Understanding a cap table

A cap table typically includes the following information:

  1. Shareholder information: The individual or entity holding the securities (e.g., founders, employees, investors, advisors, etc.).
  2. Type of security: The type of ownership (e.g., common stock, preferred stock, options, etc.).
  3. Number of shares: The total number of shares owned by the stakeholder.
  4. Ownership percentage: The ownership stake as a percentage of the startup’s total shares.
  5. Share price: The price at which the shares were issued or acquired.
  6. Investment amount: The total amount of capital invested by the shareholder (if applicable).

Hypothetical cap table sample

The following is a hypothetical cap table for startup ABC Tech.

Hypothetical cap table sample.

Interpreting the cap table

  • Founder ownership: In this example, Founder 1 and Founder 2 each own 1,500,000 shares of common stock, representing 50% of the startup’s total shares issued before any fundraising events. After the seed round, their ownership percentage is diluted to 32.61% each (1,500,000 / 4,600,000).
  • Investor ownership: The seed investor holds 1,000,000 shares of preferred stock, representing a 21.74% ownership stake. Preferred shares often have additional rights, such as liquidation preferences and anti-dilution provisions, which protect the investor's interests.
  • Employee option pool: The startup has set aside 600,000 shares as an option pool for employees. These options can be granted to employees as part of their compensation package, providing incentives for them to contribute to the startup’s growth. The options, once exercised, would dilute the ownership percentages of all other shareholders.
  • Valuation: The pre-money valuation is calculated as the share price times the number of shares outstanding before the investment. In this example, it is $0.01 x 3,000,000 = $30,000. The post-money valuation is the pre-money valuation plus the investment amount. In this case, it is $30,000 + $1,000,000 = $1,030,000. This valuation helps the startup and investors understand the startup’s worth at each stage of development and informs future fundraising rounds.
  • Dilution: As the startup raises more funds, existing shareholders' ownership percentage will typically be diluted. In our example, the founders' combined ownership dropped from 100% to 65.22% after the seed round. It is essential for founders to understand dilution and its implications as the startup grows.
  • Liquidation preferences: Some investors, particularly those holding preferred stock, may have liquidation preferences. This means that, in the event of an exit or liquidation, these investors will receive a predetermined multiple of their initial investment before any proceeds are distributed to other shareholders. Founders should be aware of these preferences when negotiating term sheets and considering potential exit scenarios.

What is a pro forma capitalization table?

A pro forma cap table is a projection of a company's expected ownership structure after a future investment round, acquisition, or other capital event. It is generally created for startups and shows the distribution of equity ownership and voting rights among shareholders, assuming the proposed event takes place. Investors and board members use pro forma cap tables when making major investment decisions.

Cap table exercise: how to create a pro forma cap table

  1. Start with the current cap table: Begin with the most recent and accurate cap table, which should detail all existing shareholders, the type of security they hold, the number of shares, ownership percentage, share price, and investment amount.
  2. Determine the event: Identify the event that will impact the cap table, such as a funding round, option exercise, or new share issuances to employees or advisors.
  3. Calculate the dilution: Estimate the number of new shares that will be issued as a result of the event. This could involve calculating the number of shares required to raise a specific amount of capital or the number of options to grant to new employees.
  4. Adjust the cap table: Incorporate the new shares into the cap table; updating the number of total shares, ownership percentages, and investment amounts accordingly. This will give you a pro forma cap table that reflects your startup’s ownership structure after the event.
  5. Account for conversion rates and preferences: If the event involves issuing preferred shares, consider the conversion rates, liquidation preferences, and any other specific terms associated with these shares in the pro forma cap table.
  6. Analyze the impact: Review the pro forma cap table to assess the impact of the event on existing shareholders' ownership stakes and your startup’s valuation. This can help founders and investors make informed decisions regarding fundraising strategies and equity allocation.

What is cap table management?

Cap table management is the process of maintaining, updating, and organizing a company's capitalization table throughout its lifecycle. Effective cap table management involves:

  1. Record keeping: Ensuring that the cap table accurately reflects all issued securities including details of the stakeholders, security types, the number of shares, ownership percentages, share prices, and investment amounts. Proper record keeping also involves maintaining documentation related to share issuances, transfers, and cancellations.
  2. Regular updates: Updating the cap table every time there is a change in your startup’s ownership structure, such as after fundraising rounds, share transfers, exercising of stock options, or issuing new equity to employees or board members.
  3. Dilution management: Analyzing and projecting the impact of potential dilution on existing shareholders when issuing new shares or raising additional capital. This helps founders and investors make informed decisions about fundraising strategies and equity allocations.
  4. Compliance: Ensuring that your startup adheres to all relevant regulations, legal requirements, and shareholder agreements when issuing or transferring shares. This may involve coordinating with legal counsel and financial advisors to verify that all transactions are in accordance with applicable laws and agreements.
  5. Communication: Providing transparent and timely information to shareholders about changes in the cap table and the potential impact on their equity holdings. This helps maintain trust among shareholders and fosters a positive relationship between your startups and your investors.
  6. Scenario planning: Creating pro forma cap tables to evaluate the potential impact of various events, such as fundraising rounds, option grants, or acquisitions, on your startup’s ownership structure and valuation. This helps founders and investors anticipate the consequences of different strategic decisions.

Cap table management can be done using spreadsheets or specialized cap table management software. Using a dedicated solution can simplify the process, reduce the likelihood of errors, and enable access to additional features, such as scenario modeling, automated compliance checks, and shareholder communication tools.

What is cap table management software, and how does it work?

Cap table management software is a specialized tool designed to help startups and private companies efficiently maintain, update, and organize their capitalization tables. The tool streamlines the process of tracking equity ownership, automates numerous manual tasks, reduces the likelihood of errors, and in some cases, facilitates scenario planning, compliance, and stakeholder communication.

Here's how cap table management software works:

  • Data input: You’d insert your startup’s ownership structure information, including details of the stakeholders, security types, the number of shares, ownership percentages, share prices, and investment amounts. The software may also allow data import from spreadsheets or other sources to minimize manual data entry.
  • Record keeping: The software serves as a centralized repository for all cap table-related data, including share issuances, transfers, cancellations, and relevant documentation. This makes it easier to maintain accurate and up-to-date records of your startup’s ownership structure.
  • Automatic updates: Cap table management software automatically updates the cap table whenever there is a change in your startup’s ownership structure, such as after fundraising rounds, share transfers, or the exercising of stock options. This eliminates the need for manual calculations and reduces the risk of errors.
  • Dilution management and scenario planning: The software enables you to model various scenarios, such as new funding rounds or equity grants, to evaluate their potential impact on the cap table and existing shareholders. This helps founders and investors make informed decisions about fundraising strategies and equity allocations.
  • Compliance: Cap table management software often includes features to help you adhere to relevant regulations, legal requirements, and shareholder agreements. This may involve automated compliance checks, reminders of filing deadlines, and integration with legal and financial advisors.
  • Reporting and communication: The software can generate customizable reports, charts, and visualizations to help you analyze and share cap table data with shareholders. This promotes transparency and fosters a positive relationship between your startup and your investors.
  • Integration: Cap table management software may integrate with other financial and business tools, such as accounting software, HR systems, and legal platforms, to streamline data sharing and ensure consistency across various systems.

By leveraging cap table management software, startups and private companies like yours can simplify the process of managing your cap tables, ensure accuracy, and gain insights into the potential impact of strategic decisions on ownership structure and valuation.

Disclaimer: LTSE is neither a law firm nor provides legal advice. Before making decisions on matters covered by this post, readers should consult their legal adviser.

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