How is the cap table used in Fundraising?

Your cap table is a summary of all equity interests in your startup. It will contain information about the founders’ shares, investors’ shares, and the stock options issued to employees. In addition to the number of securities held, cap tables will also have information about the rights of each shareholder. Such information is crucial for prospective investors to value your company and the shares being offered to them.

In this article, we will review the importance of cap tables in fundraising and how to create cap tables for startups.

Importance of a Cap Table in Fundraising

In this section, we will review the importance of a cap table in fundraising.

Demonstrates ownership structure

Investors can observe your company’s ownership structure through a cap table. Since companies offer equity interests in various forms like common stock, preferred stock, employee stock ownership plans (ESOPs), and restricted stock units (RSUs), simply looking at the shareholding pattern is not enough. A lot of important insights will be missed and hence, prospective investors will ask for a complete cap table.

Helps in valuation and dilution analysis

Dilution analysis is crucial in ascertaining the true value of shares. Access to the cap table is crucial for dilution risk analysis.

Dilution is the reduction in percentage shareholding when new shares are issued to other shareholders. New shares may be issued when new investors are onboarded, when ESOPs become fully vested, or when an existing investor utilizes their anti-dilution rights, i.e. their right to buy a certain number of shares when new shares are issued to others.

Facilitates transparency with investors

If you do not share your cap table with investors, they may suspect that you are favoring other investors. On the other hand, sharing the cap table transparently builds trust.

Ensures accurate record-keeping for future funding rounds

As discussed earlier, equity interests can come in different shapes and sizes. You will want to compensate investors and employees as per their contributions. Since these contributions can vary, so will the vesting periods and investor rights. Keeping track of all these different forms of equity interest you issued is nigh impossible without a cap table.

If you know your shareholding pattern and the potential changes it may be subjected to, you can confidently approach investors in future fundraising rounds while having a concrete investment task in mind.

Assessing Founder Incentives

In an early fundraising round, a startup’s valuation depends heavily on its founders. Investors will want to know the founder’s academic background and work experience. Once investors are satisfied with the founders’ abilities, they will want to know if the founders are motivated to drive the company’s success. One way of motivating the founders is through incentives. However, excessive incentives can hurt investor returns. Since incentives are often tied to equity, prospective investors will want to look at the cap table and verify the incentives offered to the founders.

Evaluating Employee Incentives

In every organization, there will be key employees who keep the ball rolling. Investors will want to know if such employees are well-incentivized so that they remain motivated to drive the company’s growth, and in turn, investor returns. Once again, incentives at this level are often related to equity, so, naturally, investors would want access to the cap table.

Facilitating Due Diligence

Cap tables are useful for investors to assess founder and employee incentives, and analyze dilution risks. Additionally, they show how well you have recorded and managed information about equity interests. Thus, cap tables are unmissable in due diligence.

How to Create and Maintain Cap Table for Fundraising?

Creating and maintaining a cap table is something that requires discipline more than it requires ingenuity. You can create an easy-to-understand cap table for fundraising by taking the following steps.

Creating a cap table involves the following three steps:

Gather necessary information

The key components of a cap table are shareholder details, number of shares, and types of securities. So, you must list everyone who has an equity interest in your startup and the terms and conditions attached to their equity interests.

Use of spreadsheet software or specialized cap table management tools

Now that you have collected all the required information, you can enter it into a spreadsheet. Since terms and conditions of securities can be long, you can save them in separate documents. Then, you can leave links to the terms and conditions documents in the main spreadsheet.

You should arrange the data in such a way that you can easily generate reports on current shareholding pattern and expected shareholding pattern in a year, three years, five years, and so on. If spreadsheets are not your strong suit, you can utilize specialized cap table management tools like the one offered by Eqvista.

Updating the cap table with each funding round

After every funding round, you will need to add new shareholders, remove the shareholders that made their exit, and update the value of shares held as per the change in valuation. You should also update any changes to other forms of equity interests as per the change in shareholding pattern and valuation.

Examples of cap table templates

Some cap table templates that you can use are as follows:

Simple Cap Table

For day-to-day activities, you can utilize the following cap table format.

Particulars	Common stock	Common shareholding %	Value of equity
Founders
Founder #1	500,000	17.90%	$1,789,709.17
Founder #2	500,000	17.90%	$1,789,709.17
Founder #3	500,000	17.90%	$1,789,709.17
Founder #4	500,000	17.90%	$1,789,709.17
Founder #5	500,000	17.90%	$1,789,709.17
Investors
Investor #1	125,000	4.50%	$447,427.29
Investor #2	67,500	2.40%	$241,610.74
Investor #3	67,500	2.40%	$241,610.74
Equity incentive plans
Granted option shares	16,875	0.60%	$60,402.68
Available option shares	16,875	0.60%	$60,402.68
Total	2,793,750	100%	$10,000,000
Valuation	$10,000,000
Share price	$3.58

Such a cap table can be shared with existing investors and employees who received equity incentives to help them analyze the value of their equity interest.

Fundraising Cap Table

For fundraising purposes, you will need to show how equity interests will shift. So, you will need a cap table template with additional columns for the post-money shareholding pattern. Such a cap table will look like this:

Particulars	Pre-money			Stocks issued in fundraising round			Total
	Common stock	Common %	Value of equity	Common stock	Common %	Value of equity	Common stock	Common %	Value of equity
Founders
Founder #1	500,000	17.90%	$1,789,709.17	-	-	-	500,000	14.82%	$3,705,075.95
Founder #2	500,000	17.90%	$1,789,709.17	-	-	-	500,000	14.82%	$3,705,075.95
Founder #3	500,000	17.90%	$1,789,709.17	-	-	-	500,000	14.82%	$3,705,075.95
Founder #4	500,000	17.90%	$1,789,709.17	-	-	-	500,000	14.82%	$3,705,075.95
Founder #5	500,000	17.90%	$1,789,709.17	-	-	-	500,000	14.82%	$3,705,075.95
Existing investors
Investor #1	125,000	4.47%	$447,427.29	62,500	1.85%	$463,134.49	187,500	5.56%	$1,389,403.48
Investor #2	67,500	2.42%	$241,610.74	33,750	1.00%	$250,092.63	101,250	3.00%	$750,277.88
Investor #3	67,500	2.42%	$241,610.74	33,750	1.00%	$250,092.63	101,250	3.00%	$750,277.88
New investors
New investor #1	-	-	-	150,000	4.45%	$1,111,522.79	150,000	4.45%	$1,111,522.79
New investor #2	-	-	-	150,000	4.45%	$1,111,522.79	150,000	4.45%	$1,111,522.79
New investor #3	-	-	-	150,000	4.45%	$1,111,522.79	150,000	4.45%	$1,111,522.79
Equity incentive plans
Granted option shares	16,875	0.60%	$60,402.68	-	-	-	16,875	0.50%	$125,046.31
Available option shares	16,875	0.60%	$60,402.68	-	-	-	16,875	0.50%	$125,046.31
Total	2,793,750	100.00%	$10,000,000	580,000	17.19%		3,373,750	100.00%	$25,000,000
Valuation	$10,000,000			$25,000,000			$25,000,000
Share price	$3.58			$ 7.41			$7.41

In this cap table example, you can see how additional shares are issued, how the valuation changes, and how the share price changes. You can also see the change in the value of the shareholding of each shareholder. Such a template is very useful in fundraising rounds.

Cap Table in Different Fundraising Stages

Cable table management takes a different form at each startup stage in the following manner.

Seed Funding

Cap tables are first created at the seed funding stage by most startups. At this stage, you must record the investments made by angel investors and early-stage venture capitalists (VCs). You must also note down the founders’ equity. Once you are done with all this, you can start recording the rights of each shareholder which can affect the shareholding pattern in the future. You must also mention the type of equity interest each shareholder has.

Series A, B, C, and Beyond

In each funding round from Series A onwards, new investors will join, and existing investors will make their exits or increase their shareholding. Such changes must be recorded. You must also record shifts in equity incentives to employees. Since you may issue equity incentives to investors and founders so they contribute to the growth of the company, you should track the progress of the goals set for them so you can effectively implement such incentives.

As you approach a new fundraising round, you will need to create a copy of your cap table that can be shared with prospective investors. Such a cap table must show the existing shareholding pattern, amount of shares you will issue and to whom, and the change in valuation.

Exit Strategies

Investors can see the value of their equity through a cap table. They can also see how much dilution they will experience over a certain period. Such information is useful in timing exits. Investors will want to have a solid exit strategy at all stages from seed funding to IPOs and acquisitions. So, you must regularly update your cap table for changes in valuations so your investors can plan their exits. If you have issued stock-based compensation, employees will want to know when they should sell their stake. So, cap tables are important for your employees as well.

Why use software to manage your cap table for fundraising?

At a startup, you would want the employees and founders to focus on important tasks that can bring in clients or improve the product. Maintaining a cap table is also important but it may take valuable working hours away from critical tasks. At the same time, it is a task that requires considerable discipline, an eye for detail, and focus. Instead, you can rely on cap table management software like Eqvista which can have the following benefits:

Provides transparency into the company’s ownership structure

One of the main benefits of cap tables is that they provide transparency into a company’s ownership structure. You can securely share such information via cap table software.

If you use Eqvista’s cap table management software you can easily generate visualizations of current shareholding pattern and expected shareholding pattern after fundraising rounds.

Enables modeling of different fundraising scenarios

You may raise funds via debt as well as equity. Your shareholders will want a report on how the overall liabilities, including shareholding, will change after a fundraising round. Such a task can be automated with cap table software.

Eqvista has a round-modeling feature where you can enter the expected fundraising scenarios manually or via a spreadsheet and then, you can generate valuable reports in minutes!

Keeps the cap table up-to-date

A cap table management software can update the cap table every time new shares are issued and shareholders make their exit.

On Eqvista, you can add or remove shareholders in a couple of simple steps. Read this to know more!

Simplifies the process of issuing new shares

When you are raising funds, you can simply add shareholders, enter the number of shares issued, and the change in valuation to update your cap table when you are using cap table management software.

At Eqvista, we go a step further and provide similar simplifications in adding and managing stock options. Once a stock option is added and its vesting period is mentioned, the cap table will update automatically.

Provides a single source of truth

Instead of sharing spreadsheets, cap table software lets you share direct viewing access. So, you will not need to run behind all shareholders every time there is a shift in the shareholding pattern.

When you store your cap table data on Eqvista, you are storing it in a secure and accessible cloud storage. We strive to maintain the highest levels of data privacy.

Tracks historical transactions

Every time you update your cap table via software, it will record the changes as transactions. Alternatively, you can also enter transactions into the software which will update the cap table automatically.

If you use Eqvista, you can visualize various scenarios arising from different types of transactions with little to no effort.

Eqvista, The complete equity management solution!

Cap tables are quite useful for prospective and existing investors in analyzing dilution risks, evaluating incentives to founders and employees, and planning their exits. They contain information about the current shareholding pattern, vesting periods of stock options, and rights afforded to different investors. So, you must maintain a cap table for the sake of all equity interest holders, at all startup stages.

You need not start from scratch. You can simply use our cap table templates and update them with the relevant data. If you still find cap table management difficult, rely on Eqvista – a user-friendly cap table software. Contact us to know more!