What is a cap table and why does it matter to startups?

When it comes to starting and investing in a company, understanding equity and ownership is crucial. One tool that entrepreneurs and investors use to keep track of these details is a cap table, short for "capitalization table."

A cap table is a spreadsheet that outlines the equity ownership of a company, detailing who owns what percentage of the business and how that ownership changes over time. In this article, we'll dive into cap tables, discuss how to create one, and provide an in-depth cap table example to help you better understand this important tool.

What is a capitalization table

A capitalization table, or cap table, is a document or a system that details who owns how much of a company. It outlines the ownership structure of a company and tracks changes to that structure over time.

The cap table typically includes information such as the names of shareholders, the number of shares they hold, the price paid for those shares, and the percentage of ownership each shareholder has in the company. It is therefore one of the first

Setting up a capitalization table is one of the first things you want to do as a startup, especially if you’re planning to build an investor-backed business and offer employee equity compensation.
^{—Nan Meka, Fellow at AfterWork Ventures, Ex-Simply Wallstreet}

It's a living, breathing document that's likely to change very often — any time you give equity to employees, bring on new investors in a funding round, or distribute equity in another way, your cap table will need to be updated.

In other words, it's ideal that you treat your cap table as a single source of truth where stakeholders can find up-to-date information about their equity, ownership percentage, the value of their ownership, and its dilution over time. Any financial information necessary to compute a shareholder's ownership should be included in your cap table.

Why do you need a cap table

As your startup grows, your cap table will grow too.

Your cap table shows all of the investments made in your business over time, along with the principal shareholders of the company (usually the founders and/or early stage investors, like friends and family). If you set up an ESOP and begin distributing equity to employees and contractors, the cap table should reflect these distributions too.

To keep track of your equity

If you’re not keeping track of who owns what, how can you make clever business decisions? This is one of the many reasons you need an effective cap table.

And it’s something investors might call upon at any time, to understand the equity position of your company.

Founders and investors use cap tables as scorekeeping of significant equity events in their company’s history.
^{—Nan Meka, AfterWork Ventures}

It may seem fairly straightforward when there are minimal equity holders. But imagine an angel investor comes along offering you a certain sum of money for 10% of your company. This is going to dilute everyone’s equity by 10%. Without a detailed and well-organised cap table, you won’t be able to quickly determine the result of the dilution nor be able to communicate it to other shareholders.

You want a cap table ready at your fingertips to enable clear, detailed, smart decision-making. This only becomes more important as your business grows and your company’s equity position becomes more complicated.

To discuss initial equity distributions

Before investors or employees gain access to the equity of your company, there’s likely to be some big conversations around initial equity distribution between founders. These conversations can be lengthy and sometimes difficult. It’s your collective blood, sweat and tears on the line, after all.

Creating a cap table, where you break down your company's equity structure can help facilitate productive and meaningful conversations from day one.

To offer and manage equity

Other than founder equity distribution, you should be able to bring up your cap table to help you make hiring decisions. A quick glance at an accurate cap table will help you make informed decisions that affect present and future equity holdings in your company.

Offering equity (such as stock options) to employees has become a norm within the startup ecosystem. But it’s not always straightforward to explain the mechanics, maths, and logic behind what is being offered to an employee and why.

Utilising a cap table helps explain how you have matched an employee’s contribution with an appropriate equity compensation and how that stock vests over time. A cap table can give insight to the employee, at any moment in time, as to how many stocks have been issued to them and at what dates.

Remember: transparency inspires confidence.

To negotiate term sheets

At Cake, we’ve worked with thousands of founders, VCs, and lawyers globally to make capital raising as seamless as possible. Part of that process requires having a clear snapshot of your company’s equity structure. Take note that a clean cap table is one of the things that investors look for.

At any point in time for the fundraising process, you're going to have an investor reach out and say, what's the cap table look like today? And what's the exact amount of shares that have been vested within your ESOP pool?
^{—Ellen Dinsmoor, COO at Vow}

As you’re negotiating, you can easily run various scenarios through the cap table, allowing you to see what happens to your company’s equity structure at different valuation levels, and evaluate other factors such as if new options are issued before or after financing. This gives you insight into what situations you're happy with and where to draw your line in the sand, before you sign off on a term sheet.

How does a cap table work

A cap table displays every equity holder’s stake in the company, calculated by multiplying the share price by the number of shares owned.

Sounds simple, right? Well, it is… But only if you keep it up to date.

In most cases, the names of the equity holders (sometimes referred to as security holders) will be listed on a Y-axis and the types of equity on the X-axis. Types of equity can include convertible notes, stocks or preference stocks. All of the equity holdings of each individual or company, should be listed separately, in a single row.

There is no set order by which equity holders need to be listed but many will place the founders first, followed by directors and executives then key employees with equity then other investors, such as angel investors or VCs who have invested in the company. Another option is to list investors in descending order by ownership, showing the largest holders at the top. It’s never a bad idea to stroke the ego of your biggest investors!

Every single time you issue new equity, your cap table must be updated. Cake makes this particularly easy if you already use the platform to run your raise and distribute your ESOP. It’s a single source of truth, with all moving parts speaking to one another.

Similarly, if you buy back options when an employee leaves the business, options expire, vested options are exercised or there is any transfer or sale of stocks or shares -these updates need to be reflected in the cap table.

How to create a capitalization table

First things first, take a moment to celebrate. 🎉

Creating your first cap table is a milestone. It means you are taking the first steps into establishing a startup and/or pursuing a dream! You're in for a ride!

Now on to the actual cap table construction.

There are 3 ways to create cap tables, depending on what stage your business is at:

1. Create your cap table from scratch

Most startup founders create their first cap table from scratch. This is because, initially, it only holds a small amount of data and an Excel sheet can do the job.

Moreover, knowing the ins and outs of your cap table from its earliest version is a good context to have as you build on top of it. Starting your cap table (or starting anything, really!) from scratch is usually a good learning experience.

To build your own cap table, start with the names of equity holders on the Y-axis and the types of equity on the X-axis. Other financial information you include in your cap table will vary, depending on your company's equity position and what you need from your cap table.

With this method, you'll need to manually update your cap table any time new funding is added, when new employees join the option pool, when existing shareholders exit the company, or any other time that equity changes hands.

The faster your company grows, the faster your cap table evolves too.

2. Customise a cap table template

The internet is full of sample cap table templates! There are many different options (both paid and free), which makes a template an attractive choice for those who lack the knowledge to start a cap table from scratch, or to update one to meet a company's growing requirements.

Using a cap table template is as simple as downloading one and filling it out with your data. However, keep in mind that you might not find a cap table template that fits your exact requirements.

It might also take a lot of time searching, comparing what's available, and choosing the right one that's closest to what you need.

In other words, expect to heavily customise an excel template downloaded from the internet.

In any case, whether you start a cap table from scratch or you utilise an existing template, you will reach a stage of growth where you need to rely on a software and/or a professional to set up and manage your cap table.

Past your first round of funding, it's ideal to use a cap table management software that will automate some of the time-consuming manual computations and processes, and keep your cap table clean and up-to-date.

3. Use a cap table management software

Many companies choose to keep their cap table in a spreadsheet. It's a fast, easy option, but there are several disadvantages to using a spreadsheet as a cap table management tool.

First, a spreadsheet can't track and check your cap table data in real time. It will be a logistical challenge to keep all versions of your cap table up to date.

That's what makes a cap table software such a great option, even for small and early-stage companies.

If you have an existing cap table in a spreadsheet, you can import it into a software. If you're starting from scratch, most software will help guide you through the set up process. At Cake, we have onboarding specialists to help you set up your cap table and learn how to manage it.

Building your cap table is only the first step. As you've read in this article, updating, maintaining, and sharing your cap table comes with ongoing challenges. By using a software, you can build a cap table that scales with you as your company grows.

Being a founder means juggling a thousand tiny and enormous tasks at any given time. Your cap table is one you can’t afford to drop. Cap tables can become quickly complicated, particularly as you scale and undergo new funding rounds and issue equity to employees.

Cake is committed to bringing cap table best practices to founders everywhere with the perfect blend of accreditation, automation, and expertise. Cap table and equity management doesn't have to be complicated. Get started today

Cap table FAQs

1. Why is a cap table important?

A cap table is important because it helps founders and investors understand the ownership structure of a company. It provides a clear picture of who owns what percentage of the company and how ownership changes over time.

2. Who should use a cap table?

Cap tables are typically used by startups and investors. However, anyone who wants to understand the ownership structure of a company can benefit from a cap table.

3. How often should a cap table be updated?

A cap table should be updated whenever there are changes to the ownership structure of a company. This includes issuing new shares, raising capital, and buying back shares.

4. What is dilution in a cap table?

Dilution is the process by which the percentage ownership of existing shareholders is reduced when new shares are issued. This can happen when a company raises capital or issues stock options.