Rock Your Investors With A Cap Table They’ll Love

A Cap Table is an ownership document listing the names and stake amounts of the shareholders of a company.  Stocks, options, convertible notes, warrants, and other securities, all appear in this document. 

Having a Cap Table by which all investors have clear knowledge of what their stake in a company is critical. It reflects the previous investor’s amount of shares acquired, the price they paid for them, and the total percentage of ownership they represent. 

Finally, you must be aware of what your Cap Table is expected to look like during the early stages of your startup. Here, the advice is simple: founders shouldn’t get too diluted before a Series A, as it reduces the value and life expectancy of the company. 

The art of acquiring  investment and avoiding too much dilution is called Cap Table Management, and we will discuss it in depth at the end of this article.

Cap Table Creation

A capitalization table is usually created in a spreadsheet and it will include at least these 5 columns: 

👉 Name of the investor

👉 Amount of shares

👉 Type of shares*

👉 Price per share

👉 % of ownership they represent

*There are two types of shares: common shares without any special treatment and preferred shares that usually have liquidation priority. 

Remember: the Cap Table must include debt that converts to equity. Convertible debt is factored into all ownership calculations on a fully diluted basis. In a fully diluted calculation, all warrants, options, and convertible notes are exercised.

Other variables that, if they are relevant, you may include in your Cap Table document are pre-money valuation, total of authorized shares, and shares outstanding (held by all stakeholders) vs shares reserved (restricted, held by employees).

Cap Table Maintenance

Updating your Cap Table is essential because your business is in constant evolution. Increased investments, more funding rounds, and more employees can affect the numbers in your chart, so keeping it up to date ensures that you always have the right information.  

👉 Valuation: keep your stock price updated whenever it changes.

👉 Investors: add them as soon as you bring them onboard.

👉 Reserve restricted Stock: make sure the number of shares offered to employees is updated when they are hired.

👉 Convertible debt: include dates or conditions in which it will be converted. 

👉 Shares outstanding: update the total number after each round.

👉 Shares remaining: honor your shareholders agreements and don’t exceed the amount in the the authorization list.

Cap Table Management 

What is the reasonable amount of dilution before each fundraising round? In general terms, investors don’t like to see founders that lost control of the majority of shares before the Series A. But being too much in control will also mean that you may not be experienced enough. 

Always consider that for VCs, it’s all about risk and return. Your startup, while fascinating and exciting for your customers, is part of a larger pool of diversified investments in a Venture fund. Adding a company that is too unpredictable to the mix, due to lack of control or to little experience, messes up their projections and compromises their ROI. 

So, when planning your fundraising roadmap, a general rule of thumb is to cap the founders dilution at 51% before the Series A.

Key Takeaways: 

1. Understand your equity

In any stage of the company’s life cicle, if you are fundraising you need to know exactly what you and other shareholders are giving up. You will also be able to see the company’s proposed new structure through the Cap Table.

2. Discuss initial equity distributions whit co-founders

A Cap Table is the written breakdown of a company when you create it. When forming a business, equity distributions must be discussed. It’s a difficult conversation, but it’s necessary. Use the Cap Table to facilitate the conversation on day one about distributions to the founding team.

3. Manage employee options

Incentives should be aligned with the company’s objectives when hiring new employees. This is exactly what stock options allow you to do. Stock can be matched to an employee’s contributions.

A Cap Table shows how many options are authorized or available to be issued at any given time. Additionally, it shows how many options have been used to date. Make sure you have enough options in your Cap Table to cover a rolling 12-month period.

4. Negotiate term sheets

It is possible to run a what-if analysis of a financing round if you have a clear view of your company’s ownership structure. Assess what happens to your ownership stake and control over the company at various valuation levels. It will also give you an idea of what situations you are comfortable with and where a line needs to be draw.

To sum up:

Cap Tables aren’t just legal documents; they are decision making snapshots of ownership. Your next fundraising decision or employee hire will be made easier if you know the information it contains and how to use it.