Whether you are looking to attract more investors or make key appointments for your start-up, you need a strong, up-to-date cap table. An accurate cap table gives potential investors the information they need to decide whether they will invest in your venture. It also helps current stakeholders to keep track of their interests and shows potential employees what you can offer as stock options. A good cap table can help founders make sound business decisions quickly and lead to many positive outcomes for their start-ups.
- What are cap tables?
- Why are cap tables important?
- Elements of a good cap table
- What is a proforma cap table?
What are cap tables?
In simple terms, a cap table, or capitalisation table, is a table for a start-up or an early venture that sets out who owns what, how much of each, and the value of the equity they own.
It sets out all the shareholders, including the founders, employees, and outside investors.
The cap table also sets out all the different types of company securities, who owns each type, and the price investors paid for them. For example, the founder may hold shares of common or preferred stock, and employees may hold stock options. This must be accurately recorded in your cap table.
A good cap table thus keeps track of the equity ownership in your company. It can also keep track of other relevant stakeholders and their claims or potential claims on the company. After a few financing rounds, your cap table will become more complicated as more investors get on board.
Founders must document all transactions as soon as possible to ensure that the cap table is up-to-date and accurate at all times.
Here is an example of a cap table on the Clara platform. Try it for free
Why are cap tables important?
Cap tables are equally important to founders and investors.
Potential investors use cap tables as important due diligence documents when deciding whether to invest in your start-up or venture. It helps investors understand precisely what they are buying into.
Cap tables help investors understand the following:
• It shows them who the investors are.
• It shows what percentage of the company each stakeholder owns – investors want to know the equity split.
• It helps investors decide on an investment amount.
• It gives an idea of future dilution and the dilution rate, i.e., the value each shareholder will lose when new shares are issued.
You can work out the dilution rate by looking at the total value of the company, the number of outstanding shares, and the share price. For example, many SAFEs on the cap table could signal substantial dilution in the future. The cap table should also indicate if any shares are subject to anti-dilution provisions.
• It shows incentives to attract talent.
Start-ups need talent to grow. Investors want to see if the start-up has a good amount share options for employees to attract and retain talent.
• It also shows how motivated the founders are to stay.
Founders who hold significant equity are motivated to drive the company’s future growth. Investors want to know that the founders are invested in the company’s future development.
• It provides information to do a waterfall analysis.
Waterfall analysis shows the percentage of proceeds that will go to each shareholder if the company gets liquidated. The cap table will indicate the amount available to equity in the event of liquidation.
Cap tables are important to founders for the following reasons.
• It helps founders make the right business decisions.
Cap tables provide the information to make the right decisions to run the company effectively when deciding whether to issue more shares or share options.
• It is an excellent tool for managing employee stock options effectively.
• It assists with audits and compliance checks.
An accurate and up-to-date caps table ensures a smooth process. In some countries, like the US, cap tables are used as the formal legal record of equity ownership. Tax authorities can also rely on cap tables to check if stakeholders are paying the correct taxes.
• It helps with raising funds.
When negotiating with potential investors, cap tables can answer questions about how the company’s ownership is structured. It shows how percentages have changed in each financing round and how the new investment will impact current investors. Investors also want to know where they will rank in case of liquidation.
• It can attract and retain talent.
Giving future employees insight into your cap table can help motivate them to perform and stay with the company.
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Elements of a good cap table
There is no “standard” form for cap tables, but you should include essential information to understand the business comprehensively. Generally, it should include shareholder information, stock information and the company valuation.
Whether you use a spreadsheet or other tools, you should include the following information:
• The number of shares the company is allowed to issue.
• The total amount of shares/equity issued to a shareholder, plus any share options that the shareholder may still exercise.
• Shareholders’ names as it appears on share certificates or other investment instruments.
• The date the equity was acquired.
• The price of each share.
• The type of equity owned by each shareholder, for example:
• Common stock – a share of the company, also called ordinary stock.
• Preferred stock – preferred stockholders are usually paid first when dividends are declared or if the company is liquidated. It should also indicate if the preferred stock is convertible to common stock and what events would warrant a conversion.
• Employee stock options – options allow employees to buy ordinary shares at a fixed price as a form of compensation.
• Warrants – similar to stock options, it grants the warrant holder the right to buy shares at a future date at a fixed price.
The number of unissued shares.
• SAFEs or other convertibles are sometimes listed separately. If so, you should include the full name of the holder, the amount, and the maturity date (if any).
• The company’s total value – the company’s “value” depends on how and when it is valued. You should include a pre-money and post-money valuation.
• Pre-valuation – the value of the start-up or venture without including outside investment.
• Post-money evaluation – the value after outside investments is included. This gives investors a good idea of what percentage they will own after investing.
What is a proforma cap table?
Founders sometimes prepare a proforma cap table during financing negotiations. A proforma cap table shows what the company’s ownership will look like after the financing round closes. A proforma cap table must, for example, indicate any potential conversions of SAFEs if the financing round triggers conversions. Potential investors can then see exactly how ownership percentages will change after the financing round.
The pro-forma cap table might be adjusted as the parties negotiate financing.
Cap tables sound complicated, but it is actually a way to turn what could be a complex scenario into a straightforward and easy-to-understand structure. Founders should take their time to create an accurate cap table and keep it up to date.
As your company grows, your cap table may get very complicated very quickly. Getting professional help to update and maintain your cap table could be a good business decision.
Or you can simply use Clara to manage your cap table the right way from the outset. Stay organised and impress your investors with a clean, organised, accurate and a nicely visualised cap table.