What is a Cap Table? At its core, a capitalization table (known as "cap table", "startup cap table") shows who owns what in your company, at what point of time; clarifying how much equity each shareholder holds.
Let's explore the significance of an accurate cap table and share stories from pre-seed entrepreneurs.
Why Cap Tables Matter: Important Financial Decision
Understanding a cap table and ownership stakes is fundamental. Entrepreneurs must establish an ownership structure concerning their company split and clearly identify what is given to advisors, investors and /or talent that has been assigned sweat equity.
In early stage companies, getting the skill set your require can be done via on-boarding advisors and employees that may receive stock options or equity, as a reward for their contributions. That is a common practice.
The cap table brings transparency to this process. It also allows to capture funding, current and future rounds, co-founder ownership splits, and various incentives. A cap table includes:
Entrepreneurs' ownership.
Investments from family/ friends, angels, VCs, or other backers, if any.
Employee stock options and / or equity holdings.
Convertible notes, SAFEs, or other equity-like instruments, if any.
Cap Table Goals
Cap tables foster transparency among shareholders and sets the stage for future growth. By staying updated on ownership stakes, legal terms that can be found in memorandum of understanding between co-founder or advisor agreement for example, align specifically with the cap table.
The main goals for cap tables include the following:
Assign Equity Strategically: The cap table helps to allocate shares tactically, ensuring control is retained, while rewarding team members. Entrepreneurs should be very careful about how much equity to give away.
Understand Voting Rights: Your governance framework will outline voting rights based on equity ownership. By stating the amount and types of shares owned, it is easier to see the extent of the voting power. Entrepreneurs must understand this dimension to best navigate decision making and approvals.
Motivate Team members: Sweat equity is used to attract and retain top talent, at the same aligning company interest with team interest. Entrepreneurs should provide equity carefully and ensure the "sweat" is commensurate to the amounts of equity given.
Earn Investor Confidence: A clean, transparent cap table builds trust and simplifies the fundraising process. Investors will review the cap table before and after investing. A messy or incomplete cap table can turn them away.
Compliance: Keeping the cap table up-to-date enables alignment with tax and legal requirements.
Cap Table Excel Spreadsheet
Start early with a simple cap table excel spreadsheet or cap table google sheets. It will be easier to edit and maintain from the beginning. If you are just getting started, check out our Simple Cap Table Template.
Be sure to include the complete list of shareholders with the number of shares each of them owns, the percentage of ownership stake, outstanding shares and the shares reserved for stock options.
Update Regularly. Update your cap table each time you make changes—whether bringing on new investors, issuing stock options, or altering ownership percentages. At fiscal year-end, update your balance sheet based on the final cap table equity position.
Dos and Don’ts of Cap Table Management
DO:
Set Up a Vesting Schedule: Key hires should earn their equity over time. This protects the company if someone leaves early and ensures only active contributors retain significant ownership.
Vesting Schedule so everyone is clear & knows when they can start exercising their options. Create an Employee Stock Option Pool: Allocate shares for future employees before raising funds. This avoids diluting investors unexpectedly later-on, and ensure everyone is aware of the available stock options. Assess how many shares you’ll need to set aside.
Use Standardized Terms: Protect your business with legal agreements that you can find in our Legal Template library to avoid issues later on. Standardized terms allow fairness in the distribution of equity.
DON’T:
Issue Equity to the Wrong Hires: It’s important to take the time to understand how people work best, what motivates them and how to approach motivation of each contributor and build together a practical innovative team. For example, avoid allocating equity to inactive co-founders or early advisors without clear terms.
Over-Dilute: Equity dilution refers to the decrease in equity percentage ownership for existing shareholders as a result of the issuance of new shares.
Give up Too Much Equity Too Soon: Timing matters. Little impact for equity distributed hinders the business, particularly as the business moves towards funding rounds.
Lessons from Pre-Seed Entrepreneurs
1. The Early Mistake
Take the case of Sara, a tech entrepreneur who launched her app startup. Sara was eager to bring her product to market and neglected to set up her cap table until six months post-launch. By then, she had raised funds from several friends and family members.
When she finally documented her cap table, she discovered she had assigned a larger ownership stake to one investor, sparking disputes among her supporters. Sara could have avoided the misunderstandings early-on.
2. Clarity with Co-Founders
Let’s look at Ahmed and Mia, co-founders of a sustainable fashion brand. They established clear roles early on, but when it came to splitting equity, they relied on verbal agreements. After months of work, they began to feel uneasy about their contributions and whether their equity reflected their efforts fairly.
By creating a sample cap table, they discovered they had different understandings of the percentage split. The visual representation helped them renegotiate their deal, leading to a fair agreement that allowed them to move beyond resentment.
3. Planning for Future Rounds
Lastly, there’s Vihaan, a health tech entrepreneur who understood the importance of tracking his cap table for future funding. From day one, he planned his cap table, factoring in potential dilution from future investment rounds.
When approaching investors for his Series A, Vihaan presented an updated cap table that included existing shareholder agreements, option pools for employees, future funding and board role and composition. This preparation impressed investors, who valued his transparency and foresight.
Mistakes You Can Avoid on Startup Cap Table Template
Learning from others’ experiences helps entrepreneurs avoid common pitfalls. Here are a few things to watch out for:
Not Documenting Early Investments: As shown in Sara's story, documenting all funding from the outset helps prevent conflicts later on.
Avoiding Difficult Conversations: Open discussions with co-founders about equity distribution can prevent misunderstandings, as Ahmed and Mia discovered.
Ignoring Future Plans: Planning for future cap table changes is beneficial for upcoming funding rounds, as Vihaan demonstrated.
Resources to Help You Get Started
Missed the Founder Round table & speed networking? No worries. Let's start with basic concepts and definitions:
Seed / Pre-seed Funding Rounds
Seed refers to the first round of funding that you will get. This round of funding usually comes after the pre-seed funding and is followed by the Series A, B or C funding rounds.
Valuation
How much is your business worth? Pre-money valuation refers to the value before raising funds. Post-money valuation refers to the value after raising funds.
Common Stock
Common stock can be referred to as the most basic type of shares in a company, providing ownership to its holders.
Preferred Stock
Preferred stock, like common stock, signifies an ownership stake, but they grant special rights to holders, such as dividends and asset distribution claims.
Stock Options
Stock options are an investor's contractual right or agreement to buy or sell a stock at a date and price previously agreed upon.
Few more things you may need to familiarize yourself with, to create your Cap Table.
Cap Tables and valuations rely on basic assumptions. Be sure to support the various chosen assumptions.
Learn to estimate your company’s worth. Learn Valuation Basics here so you are prepared to negotiate.
Data points: Be sure to access performance metrics and funding benchmarks in your geographical location.
Build a Cap Table that Works for You.
Your Next Move: Build a Cap Table That Works for You
A cap table isn’t just a document—it’s a tool to help manage growth, attract investors, and retain control of your company. The clearer and stronger your equity strategy, the more momentum you’ll have to build something extraordinary.
Ready to take charge? Start with our free resources and build the foundation for your company’s future.
If need be, seek professional help. Consult financial advisors and attorneys who specialize in equity ownership and cap tables, or contact us.
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