What is a cap table?
Not sure what it is? This article would explain it in detail.
Every entrepreneur hopes one day to own their own successful corporation. But doing so required a lot of hard work, determination, a bit of luck, and planning. And every successful corporation has a well organized plan for how they handle their shares, be it for company founders, for employee stock options, for investors or for advisors & consultants. This is why it’s important to start off on the right foot and keep track of your company shares through a cap table.
Capitalization Table or Cap Table
A capitalization table, or cap table for short, is a spreadsheet or a table that shows the share equity in a company. A cap table is mostly used for early-stage and startup companies, but all kinds of companies can use it as well. In short, a cap table is an intricate breakdown of the equity of the shareholders of a company. The cap tables includes all of the company’s equity ownership including the common shares, preferred shares, options, warrants, convertible notes and others.
Understanding a Cap Table
As shared above, a cap table lists out each kind of equity ownership capital, along with individual investors and share prices. The cap tables are mostly used by private companies to share information on the shareholdings and the investors of the company. A cap table that is more complex might also include details on potential new funding courses, acquisitions and mergers, public offerings, other hypothetical transactions, and legal documents. So, things usually get pretty complicated as the company grows.
Why do you need a Cap Table?
Cap tables are vital as they tell us who owns the company and how much of the company is owned. This can affect everything from who has control of the company to how you price future fundraising rounds. Let us say that you are the founder of the company and you do not have a cap table to help you make your decisions. With this, you can end up giving out a lot of shares of your company away to your employees or investors and be left with a lot less than you expected.
What does a Cap Table look like?
A cap table looks just like a table where the details are lined up. Most companies use spreadsheets to create a cap table at the inception of their business. The cap table should be designed in a simple and organized layout that clearly shows who owns certain shares and the number of outstanding shares in the company.
The most common kind of structure is to list the name of the security owners/investors on the Y-axis, while the type of securities listed on the X-axis. And as you move from the left to right of a cap table, the dilution items will help you understand a person’s true ownership percentage of the company.
Here is an example of how the sheet would look where the first row indicates the total number of shares of the company. The next rows would have the following things:
- Authorized shares: Number of shares the company can issue.
- Outstanding shares: Number of shares held by the shareholders.
- Unissued Shares: Number of shares that haven’t been issued yet.
- Shares reserved for stock option plan: Shares reserved for future employee hires.
Below this should be a separate table that includes the following:
- Names of shareholders
- Shares owned by each shareholder
- Stock options owned by each shareholder
- Fully diluted shares: Number of outstanding shares, which helps shareholders determine the value of their shares.
- Remaining Options: Number of shares remaining to be optioned.
The founders of the company are listed first, followed by the executives and employees who own equity and then the investors.
Cap Table Example
Let us get a bit of a better idea about a cap table by looking into a simple example with one founder and ten different investors.
Here is the cap table example:
|Company Ownership Cap Table
As you can see the founder received common shares at the beginning and different capital funding from the investors for their preference shares. With 22.2% ownership of the company, the founder has given away 77.8% of the company for $3.5 million dollars of investments over time. Depending on the company’s valuation and potential for future earnings, this could either be a very smart move to grow and expand the business, or be a burden on the founder in case the company gets acquired or goes through an IPO.
How to use a Cap Table?
It has become clear that you need a cap table for making important decisions for your business, but what else is it used for? Let us get into the details of how a cap table benefits the company:
- Understanding your equity: This is the main reason why a cap table is made. It shows how decisions you make impacts the equity structure of the company. For instance, are you raising another funding round or do you want to expand the employee option pool? Whatever the reason is, you will be able to see how it impacts the shareholders and their shares. You will need to know exactly how much you are giving up and the cap table will help you see just that.
- Initial equity distributions: When a company is formed, discussing the initial equity distributions is difficult and it is something you cannot avoid. That is where the cap table helps you by putting all the discussions into writing. It helps you to outline the distributions to the founding team, where you can then use the cap table to facilitate the conversation on day one.
- Managing employee options: When you hire new employees for your company, it is normally important to align their objectives to that of the company. For this, you will have to offer them with incentives. And employee stock options, or ESOs for short, help employees feel that they are part of the company and tend to work harder. But how many shares should you offer them without diluting the shareholders and your ownership? The cap table will help you determine this. It will help you see how many options can be given out and help you keep track of them.
- Term sheet negotiation: When you have a clear snapshot of the ownership structure of your company, you can easily run the what-if analysis on a financing round. You will be able to see what happens to your ownership stake and company control at different valuation levels. And with this, you will be able to evaluate every factor such as if new options are issued before or after the financing. It will help you make a proper decision based on situations you are happy with.
How do I make a Cap Table?
There are a lot of ways to both create a cap table and manage it, with each way being better for the different stages of your company. Here are the ways by which you can easily create a cap table.
#1 Use the Excel sheet or template
Most startups for some time now have always used a spreadsheet to create their cap table. And it is okay at this stage as the ownership is simple and easy to track. But things get more complicated and as the company grows, the spreadsheet would not be able to hold all the information easily. That is why it is always better to use cap table software, which would allow you to scale easier as your business grows, and save you time later on when making the switch to a more robust cap table system.
#2 Use Cap Table Softwares
Cap tables become complicated quickly, so starting with cap table software early in your company’s life cycle can save you time and money as your business grows. You might have to pay a bit to use it, but it would help you save money later on when dealing with accountants to help you manage it.
In fact, with Eqvista, you do not have to spend anything to use our cap table software until you have more than 20 shareholders in the company. We believe in a pay-as-you-grow system, and our cap table system will benefit you more as you have more funds in your business. In short, the main idea is to use cap table software instead of a spreadsheet so that your cap table is up to date and organized all in one place.
Why use Cap Table software instead of Excel Sheets?
A long time ago, everything we did was on paper. Even the legal ownership of a private company was given through paper shares that were issued to founders, investors and employees. But as technology has advanced, everything has come online including the issuing of electronic shares and not paper shares. This is because this method is outdated and inefficient.
To a newly formed startup, the idea that a cap table can become a massive headache might seem ridiculous. But it does happen, and you wouldn’t realize when it does. As you keep giving out shares for your company, the cap table becomes complicated as it adds more rows to your share list.
Now let us say that you are about to give employee options with vesting schedules. How will you fill the vesting schedules in. Yes, there is a way you can fill it but it would take most of your time and you would not be able to concentrate on your business. There are also other things than can occur. What if an employee leaves in between? Well then, you would need to delete some data and if you make a mistake in all this, as other connected data may be messed up as well.
Basically, with Excel, you will be spending a lot of time and it can turn out to cost you a lot. And if your company goes into a larger strategic shift like an acquisition, change in corporate structure, or merger, the Excel sheet may break.
Here are some to the point reasons why a cap table software is better than Excel:
- Excel sheets would consume a lot of time in managing and mistakes are bound to happen. With cap table software, you will just need to add in the details once and let the software take care of the rest, leaving you enough time to focus on your business. It also helps you in avoiding any mistakes.
- You cannot share the sheet with someone without noticing what changes they make to the document. For instance, you might have to share the sheet with new investors for them to see what they are getting into. If they edit something in it, you will not be able to view it. You usually need many people who have to keep a tab on the cap table, which is why cap table software is better for collaboration than excel sheets.
- If there is a corporate structure change, things can become messed up when you are trying to make a cap table with the new structure. Using cap table software can help you here avoid such complexities.
- They are expensive. It may sound funny that an excel spreadsheet is expensive, but doing things manually requires lots of review and checking to make sure all the details are up to date and correct. Both your lawyer and tax accountant would need to go over the cap table in detail to make sure everything is correct, which takes more time and costs you more money. With cap table software, the company’s share ownership can be reviewed in no time, and shared easily with any third party.
- Spreadsheets can look really confusing when the company grows and it can end up being difficult to comprehend. If you have to make a decision, it would take you hours to make one using it. Moreover, if an investor asks to see it, the over complexity might not leave you in a good position for the deal and you might lose the investor if they find things confusing. This does not happen with cap table software as things are much more clear and organized.
How does Eqvista help?
Eqvista helps you easily create a cap table and even manage it with ease. Plus our app is free to use for small companies (up to 20 shareholders), and you can onboard your company’s cap table in minutes! Check out the support article here on how to create a cap table and manage other things on our app. Sign up now!