Cap table explained: How to make one and mistakes to avoid

What is a capitalization (cap) table?

As mentioned earlier, a cap table is a means to show the ownership structure of a company. It lists all the shareholders and their percentage of ownership in the company. The term comes from the phrase "capitalization table," which refers to the total capitalization of a company.

• A typical cap table will include the following information:
• Name of shareholder
• Number of shares owned
• Type of shares - e.g. common or preferred
• Percentage of ownership
• Any special rights or privileges associated with the shares

Why is it important to have a cap table?

Cap tables for startups and early-stage businesses are especially important for a number of reasons.

Facilitates investment decisions

First and foremost, they help startups keep track of their ownership structure, which is essential for making informed decisions about financing and investment. For example, if a startup is looking to raise money, they will need to know how much of the company is already owned by existing shareholders. For help with investment, check out our ultimate guide to seed funding.

Promotes efficient business management

Cap tables can also help startups identify potential problems with their ownership structure. For example, if one shareholder owns a disproportionately large percentage of the company, it could create issues down the line if that shareholder decides to sell their shares or leave the company.

Ensures tax and regulation compliance

By maintaining an accurate cap table, a company can ensure that it is in compliance with tax laws and regulations. For example, those related to the issuance of stock options or the allocation of profits and losses. Additionally, cap tables can help companies ensure that the issuance of securities is done in compliance with relevant regulations. Cap tables are an important tool to manage equity ownership and ensure compliance with various tax and regulatory requirements.

Contributes to audit accuracy

These tables play a critical role in ensuring audit accuracy. They enable auditors to verify the accuracy of financial statements and assess the company's compliance with applicable accounting standards. By providing a comprehensive overview of the company's capital structure, they help auditors identify potential errors or inconsistencies in financial reporting. Accuracy and integrity of financial reporting are essential for maintaining investor confidence and supporting the long-term success of a company.

How to make a cap table

You can use a spreadsheet program, such as Excel or Google Sheets, to create a table. This needs to display your company information below in a clear and organized manner. Some of the key elements are detailed below.

• Investor information is a critical component of a cap table. This section lists details of all investors in the company. It includes the name, number of shares and the percentage of ownership held. It may also include information about the type of securities held by each investor, such as preferred stock or common stock.
• Founder information is another essential element of a cap table. This section includes the names of the company's founders and the number of shares they hold. Founders often hold a large share of the company's ownership. This stake has a great influence on the company's decision-making and strategic direction.
• Stock value includes the price paid for each share of stock, as well as the current value of the stock. This information is used for two purposes. Firstly, to calculate the total value of the company. Secondly, to calculate the value of each shareholder's ownership stake.

A cap table can also include the following elements:

• The date of each stock issuance
• Any restrictions or limitations on the sale of shares
• Any outstanding stock options or warrants.

Cap table example

Let's take a look at a very simple example cap table to illustrate how they work. If you're wondering how to read a cap table, looking at the below you can read from left to right to see each individual shareholders information, or with a summary row added to the bottom of the numerical columns, you can see at a glance the total for each column.

In this example, John Smith owns 50% of the company, Jane Doe owns 25%, and ABC Ventures owns 20%. The "Other" category represents any other shareholders who may own a small percentage of the company.

This level of detail can be maintained in a spreadsheet; how to build a cap table like this is pretty self-explanatory. You will, however, need to include a lot more information to make this document useful as your business grows.

Cap table template

When you're just getting started, it can be helpful to start with a cap table template and then build it out for your company. There are a number of free templates available online; a template can help you get started and ensure that you include all the necessary information. This template from Carta is a good place to start.

The trouble with Excel-based templates is that they don't scale with you as your company grows and can become difficult to manage once things begin to get complicated. Cap table software can help companies which have evolved a complicated ownership situation to keep accurate track of this vital information and all its intricacies.

Cap table management

Managing a cap table can be a complex process, especially as a company grows and takes on new investors. Fortunately, there are a number of tools and resources available to help manage this important business document.

One of the most important things startups can do is to keep their cap table up-to-date. This means adding new shareholders as they come on board and updating the table with any changes in ownership. It's also important to keep track of any special rights or privileges associated with different types of shares.

There are a number of management software options available, such as Carta, Capshare, and Shareworks. These tools can help automate the management process, making it easier to keep track of changes and updates.

Cap table software or equity management software

While these two types of software can have some similarities, they serve different functions and cater to different needs of a company. Cap table management software, as the name suggests, mainly focuses on the management of the capitalization table. It keeps track of changes as the company raises capital, issues new stock options, or experiences changes in ownership structure. You can track changes and manage stock options with just a few clicks.

Equity management software streamlines the process of managing stock-based compensation plans. These plans may include stock options or restricted stock units. The software automates the administration and accounting of these plans.

Cap table software provides a high-level view of the company's ownership structure and helps with compliance reporting. Equity management software provides a more detailed view of stock-related compensation plans for employee stock options and other stakeholders. Companies sometimes use both types of software in tandem, but often equity management software will have an integrated cap table. This will stay automatically updated based on other data inputs.

Cap table modeling

Cap table modeling involves creating a hypothetical cap table that reflects different scenarios, such as new investments, stock grants, and stock options. This modeling helps startups understand the impact of these scenarios on ownership and value and can inform decision-making around financing and equity.

Whether you're preparing for a financing round, considering issuing stock options to employees, or just want to understand your ownership structure better, cap table modeling can help. For help with valuations, take a look at our SaaS valuations guide.

Four mistakes to avoid when managing cap tables

Cap tables are a vital component of any startup, as they help determine the ownership structure and value of the company. However, even seasoned entrepreneurs can make common mistakes that can have significant implications down the line. Here are some of the most common cap table mistakes and how to avoid them.

1. One of the most common mistakes is not updating regularly. As your company grows and evolves, the startup cap table should reflect changes in ownership, such as new investors, stock grants, and stock options. Failing to keep the cap table up to date can lead to misunderstandings and disputes among stakeholders.
2. Not fully understanding the terms of the securities issued. Different types of securities, such as common stock or common shares, preferred stock, and options, can have different rights and preferences that affect ownership and value. It's essential to understand the terms and implications of each security before issuing them.
3. Not planning for future financing rounds: Startups often need to raise multiple rounds of funding to reach their goals, and each round can dilute existing shareholders' ownership. Failing to plan for future financing can lead to unexpected dilution and can make it challenging to attract potential investors.
4. If you're using a cap table template for Excel for now, then watch out for rounding errors. Spreadsheets have a habit of rounding things which do not need to be rounded.

By taking the time to get your cap table right, you can avoid misunderstandings and disputes down the line and ensure your startup is set up for success.

Venture capital

When a startup raises money from venture capitalists, they typically issue preferred stock, which gives investors certain rights and preferences, such as a guaranteed return on investment. These rights and preferences can impact the ownership and value of the company and should be reflected in the cap table.

Venture capitalists often require certain provisions in their investment agreements, such as the right to participate in future financing rounds or the ability to convert their preferred stock to common stock. These provisions can also impact the cap table and should be carefully considered when structuring the deal.

Navigating the world of cap tables and venture capital can be overwhelming, but it's essential to get it right. A well-structured cap table can help attract venture capital firms and angel investors to position a startup for success, while a poorly structured one can lead to issues down the line.

At Paddle, we're excited to help startups navigate these complex issues and achieve their goals. Get premium advice and strategic recommendations from our expert advisors.

Cap table FAQs 

What do investors look for in a cap table? 

Investors typically look at a few key things in a cap table. Firstly, they want to see an accurate and up-to-date representation of the ownership structure of the company. Investors then look for details about any outstanding stock options, warrants, or other equity-based instruments that may impact ownership in the future.

Is technical debt bad? 

While technical debt is not entirely bad, it can have negative repercussions if not properly managed. 

How to calculate dilution in a cap table? 

Dilution refers to the reduction in ownership percentage that a shareholder experiences as a result of the issuance of new shares. To calculate dilution, you need to determine how many new shares will be issued and then divide that number by the total number of shares outstanding before the new shares are issued. For example, if a company issued 100 new shares and had 1,000 shares outstanding before the issuance, the dilution would be 10%:

(100 / 1,000) * 100 = 10%

Is a cap table a legal document?

Yes, a cap table is a legal document that serves as an accurate and up-to-date record of the ownership structure of a company. It is important for founders, investors, and other stakeholders to have access to a well-maintained cap table, as it can help facilitate decision-making around equity transactions and other corporate actions.