A cap table is a chart that shows who owns what in a startup. It lists all the company’s securities, like stock and options, and shows how much each investor paid for them and their percentage of ownership. In this post, we’ll guide you through understanding and preparing a cap table for your startup.
In this blog post, we’ll go over what a cap table is and how to create one. We’ll also show you how to use it effectively and keep it up to date. By the end of this post, you’ll have the knowledge and skills to create and manage a cap table for your startup.
What is a Cap Table?
A cap table is basically a breakdown showing who owns what part of your company. It lists all the shares and other securities your startup has issued, along with how much investors paid and what percentage of the business each investor owns.
Having a clear overview of who owns what part of your company is very helpful for a couple of reasons. First, it shows in a simple picture who the shareholders are and exactly what percentage each owns. That makes it effortless to keep an eye on the value of all the stock and loan money that’s gone into your business.
Second, a cap table helps you manage your stock options. When you grant stock options to employees, the cap table shows you how much is left in the stock pool to give out. This ensures you don’t grant more shares than actually exist.
Key Terms and Instruments
Before diving into creating a cap table, it’s important to understand some key terms and instruments related to cap tables. These include:
- Securities: Stocks, bonds, and options are examples of securities. Securities represent either partial ownership of a company through shares of stock or debt owed by the company through bonds and notes.
- Stock options: Stock options are a form of employee incentive that provides the opportunity for workers to purchase company stock at a predetermined price. This is one way in which companies can reward their employees, in addition to other methods such as granting ESOPs (Employee Stock Ownership Plans).
- Warrants: Warrants are similar to stock options but they are typically issued to investors rather than employees. A warrant gives the holder the right to buy new shares of stock in the future at a specified price.
How to Create a Cap Table
Most capitalization tables are created at the inception of a business in the form of a spreadsheet carefully structured around a few variables. Ownership stake is a crucial element of any cap table. It refers to who (founders, investors, or employees) owns what percentage of a business and who has the majority stake.
Here’s how to create a cap table:
Step 1: Open up a spreadsheet – We recommend Excel or Google Sheets.
Step 2: Make a list of all the different types of security your company’s ever sold – common stock, preferred stock, employee stock options, warrants. Give each type its own column.
Step 3: Enter each shareholder on a new row. Include their name, what security they own, how much they paid for it, and what percentage of the company they actually own.
Step 4: Use spreadsheet formulas to calculate ownership percentages automatically. All you gotta do is divide how many shares an investor has by the total shares outstanding – the spreadsheet will do the math for you!
This simple process will get you a cap table that shows who owns what stake in your company.
The Role of Valuation
Valuation plays an important role in cap tables because it determines how much ownership new investors get for their investment. When calculating percentage ownership, we always need to assess a valuation for the business.
It’s important to understand the difference between pre-money and post-money valuation when looking at startup valuation and cap tables:
- Pre-money valuation: The valuation of your business before a funding round.
- Post-money valuation: The valuation of your business after adding up the new funding round investment.
Maintaining Your Cap Table
It’s important to keep your cap table up-to-date as your business grows and evolves. This means updating it regularly with new investments and changes in ownership.
Here are some tips on how to maintain your cap table:
- Keep close track of all share and option grants: Make notes of every time you issue new shares or options to employees or investors. Record these changes in your list of owners.
- Recalculate everyone’s ownership after each change: Whenever new equity is issued, double-check that the percentage of the company owned by each person is accurate based on the new total shares outstanding.
- Go over your list periodically: Set a schedule where you review your list of owners and their percentages on a regular basis, like once a quarter. During these reviews, correct any errors or omissions you find.
Cap Table Examples
To help you better understand how cap tables work in practice, here are some examples of cap tables for different stages of a startup’s lifecycle :
- Early stage: At this stage, the cap table may only include founders and early employees who have received stock or options as part of their compensation.
- Seed stage: After raising a seed round, the cap table will include new investors who have purchased preferred stock in the company.
- Series A and beyond: As the company raises additional funding rounds, the cap table will become more complex, with more investors and different types of securities.
A cap table is an essential tool for any startup founder to understand and manage their company’s ownership structure. By following the steps outlined in this post, you can create and maintain an accurate and up-to-date cap table for your startup.
Remember to regularly update your cap table as your company grows and evolves. If you need further assistance or have any questions, don’t hesitate to reach out to a financial advisor or consult online resources for more information.
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