If your startup were a web series, the cap table would be the credits rolling at the end of each episode. The cap table provides all the information for startup founders to understand who owns the company at a certain stage. Whether you’re doing due diligence for a fundraising or incorporating a new company, cap tables help you to understand who has the company’s control. This article explores what cap tables mean for startup founders and how to manage them.
What is a cap table?
A cap table or capitalization table is a chart detailing all of a company’s securities. It lists securities like common shares, preferred stock, and warrants, the people who own them, and the amount paid to each stakeholder in owning them. Each row may list a shareholder, their ownership percentage, the relative number of shares, and a total value.
How to make a cap table?
If your startup has been through a few funding rounds, you must have noticed the confusion in equity at every phase. To simplify the terms, here’s the breakdown of the most common types of equity you’ll find in a cap table –
- Common stock: Owning a share of common stock means owning a share of the company. The percentage of ownership shares and the rights entitled to the owner depends on factors like the total number of shares and the company’s corporate charter.
- Preferred stock: With rights and privileges different from common stock, preferred stockholders are the first to be paid out in dividends or at the encashment stage. The point of difference between common and preferred stock is the voting rights. Preferred stock can also be converted to common stock if specific conditions are met.
- Employee stock options: Employees are offered company shares with conditions to be fulfilled before encashing them. This is popularly known as the vesting period and its conditions. Employee stock options or ESOPs, are startup employees’ most prevalent equity-based compensation.
- Restricted stock units (RSUs): RSUs come with a vesting period until the stocks are restricted to the holder. RSUs convert to common stock when time restrictions and liquidity conditions are met. Learn more about the different types of employee compensation plans in our blog guide to equity incentive plan for businesses & startups.
- Restricted stock awards (RSAs): RSAs are awards of company stock and are similar to RSUs in case of being restricted till the vesting period. Unlike RSUs, RSA shares are legally held by the shareholders, and the vesting conditions are meant for the company to repurchase them if the holder is leaving or fired.
- Warrants: Warrants are like a stock option, which grants the right but does oblige the shareholder to purchase stock shares in the future. Warrants are not generally granted to employees, though investors can buy or trade them over-the-counter.
There are also other key equity elements, but this list is a good start to understanding the typical ones in a cap table.
Other key terms: pre-money valuation vs. post-money valuation
If you’d want to familiarize yourself with how investors value your startup, you should know pre-money and post-money valuation. In the case of early-stage startups, pre-money valuation is how much your company is worth before raising a financing round. Post-money valuation refers to the company’s value once a financing round has occurred.
Post-money valuation is calculated as – Financing raised.
Percentage of equity ownership
Here’s a detailed difference between pre and post-money valuation
|Pre-money valuation||Post-money Valuation|
|Value before the next financing round or before an investment.||Value after the financing round has occurred.|
|Startup founders own 100% of the pre-money value.||Investors become shareholders after a financing round|
|Calculated from the post-money valuation, figuring out the company’s worth before the investment||Calculated from an investor’s offer or terms of investment|
How is a cap table different from a balance sheet?
A balance sheet and a cap table are equally essential in understanding your startup’s financial outlook, but they differ. A balance sheet includes the assets and liabilities of your company, whereas a cap table focuses on the ownership of your company. The Cap table shows the equity ownership while balance sheets focus on the business side.
Why do startup founders need a cap table?
Maintaining and updating stakeholder information in a cap table is essential for a business’s future course of action. Here’s how cap tables help startup founders:
- Company stocks and voting rights: Stakeholders are entitled to voting rights based on the ownership share. This analysis not only helps startup founders to decide the involvement of shareholders as signatories but also in important company decisions.
- Company valuation and investors: Authorized shares (total shares issued by the company), outstanding shares (shares issued and held by shareholders), unissued shares (shares not issued), option pool (shares allocated for employee incentives), etc., determine the company valuations. Company valuation acts as the foundation for funding rounds. Thus having an efficient cap table helps founders attract the right investors.
- Option pool and hiring: Option pool in a cap table helps founders understand the equity available for new hires and talent retention. As a business grows, a startup needs to hire fresh talent and retain the important ones. Option pool keeps track of equity incentives for employees even after employees exit and hires talent.
- Outstanding shares and dilution: A cap table structure provides a snapshot of all outstanding shares held by stakeholders. Founders need this information to decide on the extent of dilution a business can afford in any circumstances. Thus an updated cap table is a quick reference guide for companies to take stock of how much equity can be spared. We discuss more dilution in the following sections.
Who creates a cap table?
Founders invest a lot of time learning the ropes of startup management before launching one. However, no real learning happens without practice. Managing cap tables is one such chapter in the startup story. What you entrust to cap table creation and management depends on your startup’s phase. Opening a google sheet and doing it yourself is certainly not a good way to start. Cap tables tend to get complicated as your company grows and raises financing rounds, so choosing a cap table software can take the load off your shoulders when issuing securities or shares to investors.
trica’s flexible data models simplify cap tables regardless of the stage of your startup. Get customized views of your cap table and multi-functional dashboard to manage and convert securities. Manage and communicate with shareholders and see how future rounds impact your team and investors. Check out all of our plans on our cap table management page.
How to create a strong cap table: 3 tips for startup founders
1. Don’t try to do it all yourself
As a startup founder, you’re wearing multiple hats, and cap table management is never the right place to cut corners. If your startup has the potential to grow exponentially in the coming months, it’s high time you get the right cap table strategy in place. Entrust this work to a team of trusted lawyers and accountants to manage and audit your cap table from time to time.
2. Use a Cap Table software
Cap table software provides basic information on the company shares, options, warrants, and convertible notes. It also ensures that it is adhering to all the regulations related to company shares and organizing shareholders’ agreements.
A platform like trica simplifies understanding your cap table and can help you avoid manual error and oversee potential growth. Get a demo today.
3. Update your cap table regularly
An outdated cap table is as good as nothing. Entrust it to the right team to make up-to-the-minute business, investment, and hiring decisions. You can get proactive with your cap table management with proper consideration, communication, and processes.
Managing your cap table as your company grows
Whether automating issuing securities, raising a round, or getting an ESOP valuation, trica is your source of truth for equity ownership. trica’s advanced investor reporting suite ensures that mission-critical financial information and cap table data is gathered, analyzed and organized. trica equity’s cap table product has helped BobbleAI strengthen its investor relations by providing accessible, secure, and relevant information. Explore how trica can help your startup grow. Book a demo today!