When it comes to startups, you’ll likely have a thousand balls in the air at once. And, if your startup has started the business of going through different funding stages, there will be plenty of people involved in the structure of your company.
Capitalisation (cap) tables are vital for any startup to make sure that you — and all those involved — are clear about who’s involved and to what extent.
In this article, we’ll cover:
- What exactly cap tables are
- What a cap table looks like
- Why you may need a cap table for your business
- How to create a cap table
- What potential investors look for in your cap table.
Let’s get started!
What is a Capitalisation (Cap) Table?
A cap table is a spreadsheet or chart showing a full list of who has a stake of ownership in your business.
Typically used by startups, it’s an essential document that will help investors get a fuller picture of your business later down the line. It can also help the company founders and directors make informed decisions when they need to.
As your startup grows, your cap table will likely become a lot more complex.
What Does a Cap Table Look Like?
A cap table may only be an Excel spreadsheet, or similar to begin with. However, as operations and the startup grow, it may be difficult to continue to maintain a DIY spreadsheet.
There are a multitude of cap table templates out there, which are specifically designed to scale with you.
What Do Cap Tables Include?
Typically, a cap table will include:
- Securities in the company (ie, options, stock, warrants, etc)
- Valuation details
- The names (or groups) who have a stake in your business
- What they own (percentage of ownership)
- How much they paid.
Generally, founders will be listed first in a cap table, followed by executives, employees who have equity, and then any investors.
Why Do You Need a Cap Table?
As we’ve already noted, a cap table is an essential document for any startup. But why exactly is that?
Let’s go into it in a little more detail.
To Help Make Informed Decisions
Knowing exactly what the stakes are in your business means that you have a fuller picture of your financial responsibilities and investments.
That means when it comes to cash flow, growth, or other essential business decisions, you can make them confidently – knowing that you know exactly what the ins and outs of your startup are.
Monitor Equity Ownership
If you’ve found yourself going through several rounds of funding, or have grown exponentially, then you may find yourself with several individuals who now have equity in your company.
Having a cap table is an easy, visual tool that can clearly show you exactly who is involved, how much, and what they have invested.
By having all of the information in one place, not only does it make it easy to see what’s happening with your startup, but it also saves you time.
And — as we all know — time is money! That’s particularly the case when it comes to startups. Your time will be better spent elsewhere in the business, especially as the founder.
Establishing Clear Organisational Structure
Due to the fact that you have a list of people involved in the business from the top down, that helps you to establish who exactly is in charge.
You may be surprised to know that you’d even need to do so, but when multiple individuals have a stake in your business, that also means they have a say in how you spend their money!
Having a document that establishes that hierarchy could prove invaluable.
Legally Binding Record
While cap tables are not technically a legal document, it is a record of who is involved in your business and their financial responsibilities.
Sometimes, the mere process of having a name on a dated document is a good enough incentive for the person involved to make sure that they follow through on their promises!
While it wouldn’t necessarily hold up in court, a cap table is an essential business tool for investors to understand what the workings of your business look like.
How to Make a Capitalisation Table
While we highly recommend using a cap table template, here’s some things you’ll need to pay attention to if you want to create your own from scratch:
1. Create a new spreadsheet
You can use Excel or any other spreadsheet software you like.
2. Consider ownership stakes
This is the part of your cap table that lays out exactly who owns what, how much (percentage), and who holds the majority. This may be shown on your cap table as a list of names and number of shares.
3. Define your shareholders
Some of your shareholders may have common shares; others will have preferred stock.
4. Consider convertible debt
If you have any debt that can convert to equity, it’s important to include this in your cap table as it’ll be distributed across all owners.
5. Know your valuation
This will become an essential part of your cap table when investors are involved. They’ll want to know what the total amount of shares is worth, and it also helps you understand where your startup is placed.
6. Include other information about shares
This may be the total of authorised shares (how much your business can sell), the number of outstanding shares (the number held by everyone who has a stake in your startup), and reserved shares (shares that you keep back for employees).
You’ll also need to make sure that your cap table contains:
- The shareholder’s name (as written on the security)
- The date of issue
- How many units or shares were distributed.
Generally, the left-hand column of your spreadsheet will contain the names of your stakeholders, while the top cells (from left to right) will contain information around stock and shares.
What Do Investors Look For in a Cap Table?
There are multiple things an investor may look for in your cap table. It’s a key part of their due diligence, as it can help them make decisions about whether or not — and how much — to invest.
They may look to see:
- How much of a stake the founders still hold, and therefore how invested they are in their own startup
- Whether or not investor holdings have the potential to become diluted in the future
- Whether the employee option pool may attract, motivate, and retain talent
- Who the other investors are, and their stake in the startup.
As you can see, making sure that you have an up-to-date cap table that clearly shows who’s involved is an essential part of your startup – especially when it comes to investor interest!
The Bottom Line
Cap tables are a spreadsheet or table that startups need to establish when they first found their company.
They’re an essential document that clearly shows who is involved in the financial side of the business, how much of a stake in the company they have, and what they have invested.
Not only is it a document that can help those running the company make sound financial decisions, but it’s also a key part of the due diligence any investor considering your startup will want to see.
While you can start a cap table using a simple spreadsheet, our best advice is to use a cap table template. This will be able to scale with you more easily as you grow your startup and your cap table needs to become more complex.
The opinions on this page are for general information purposes only and do not constitute legal advice on which you should rely.