What is a Cap table?
A capitalization table is used to track a company's ownership and equity splits.
In other words, a cap table (short for "capitalization table") is a detailed record of a company's equity ownership, including who owns how much of your company and additional information like liquidation preferences and conversion rights.
Every founder should have a cap table from day one. Investors and advisors also rely heavily on cap tables; it is crucial for founders to know what goes into them.
Understanding Cap Table
A cap table is a spreadsheet that summarizes the monetary value of ownership in a company. Below are common share classes and preferred share classes to understand the cap table better.
Common Share Classes
Common shares are the most basic and most popular stock form; therefore, common shareholders have more voting rights than preferred shareholders.
Common shares also represent ownership equity in a company instead of debt as found with bonds. Common shares also represent a residual claim on assets and earnings after bond obligations have been fulfilled and thus offer greater upside than bonds but also greater risk of loss.
Preferred Share Classes
Preferred shares can be thought of as hybrid securities that combine common stocks and bonds characteristics. Preferred stock typically does not carry voting rights.
However, it may entitle the holder to receive dividends at a specific fixed rate or liquidation preference before issuing dividends to other classes of shareholders, including common shareholders.
Moreover, preferred stock usually has priority over common stock with respect to dividend payments and claims on assets in case of liquidation; however, they are subordinate to bonds for claims on assets and earnings if the firm faces bankruptcy or liquidation.
How do you make a cap table?
You will need to list the company's shareholders, securities, financing rounds, option pools, employee equity, and option grants for your cap table.
In addition to the list of shareholders, securities and financing rounds, you should also include a summary page that calculates the ownership for each shareholder based on their security type. This will make it easy for anyone to quickly understand what percentage of ownership they have in the company at any given time by simply looking at this summary page.
Maintaining the cap table
Keep your capitalization table up to date.
It's a good idea to have a system that alerts you when updates need to be made and sends out notifications when changes happen. This makes sure your cap table is accurate to make informed decisions.
Keep your investors and employees in the loop.
In addition to sending periodic updates about equity vesting schedules, employees and investors need to be notified of any changes in their equity or the amount of funding raised by the company. This way, they can also stay informed about how their equity is diluted.
Make it easy for everyone involved with your startup to read and understand your cap table.
Suppose there are any other stakeholders who ask you questions about the company's capitalization. In that case, they should be able to look at the cap table themselves and quickly understand what they are looking at — that way, you don't have to respond every time someone asks how much money has been raised or how much ownership an investor has in the startup.
How Cap Tables Evolve Over Time?
The cap table evolves over time. As the company grows in size, it usually experiences multiple funding rounds. More equity holders are added to the capitalization table.
Investors and advisors are added as early-stage employees receive additional shares of stock options or restricted stock units (RSUs).
The seed round, Angel investors, Series A, Series B, Series C funding rounds repeat this pattern of adding new equity holders to the cap table. As more investors get involved at higher valuations and at greater company ownership percentages, existing shareholders see their percentage ownership reduced over time.
Typically, the founders' percentage ownership declines significantly while they remain employed by the company until an acquisition occurs or an IPO is done with a listing on a public exchange like NASDAQ.