All You Need to Know About Capitalization Tables
What is a Cap Table?
Cap Table is a spreadsheet for an early-stage venture or a start-up that lists all the company’s securities, their holders and the price paid by the investors to hold these securities. It shows each stakeholder’s percentage of ownership and how it can be diluted over time. In short, your Cap Table is a standing summary of who owns what in your company. It is a crucial part of your data room file for early-stage investment. For the full package, check out our previous article: What to Include in an Investment Package.
Why is a Cap Table Important?
I wouldn’t be writing this article if it isn’t. Most important to investors, they will want to look at your Cap Table. How you have raised money and who owns the company. In fact, this might be the only thing investors would care about, aside from your ideas. It is also interesting for them to know who else has already invested. They may be interested because the other investors have a strong reputation and are very hands-on or they are competitor investors.
Shareholders want to keep track how much of the company they own; founders and investors would like to know how much of the shares they are giving away if the company issues more shares.
So, founders, do not screw up your Cap Tables! Because screwing-up your Cap Table is like getting a face tattoo when you’re drunk!
How to Use a Cap Table?
Understanding Your Equity
One of the uses of the Cap Table is to make decisions on should you raise funding for another round. Cap Table also shows how certain decisions can affect the company’s ownership structure and by how much.
Managing Stock Options for Employees
When the company expands, and more employees are hired, you would want to introduce incentive plans such as incentivizing them by giving them stock options. By offering some degree of company ownership to employees, it gives them the incentive to contribute more so their contribution can be monetized as the company’s stock price rises.
Cap Table then come in handy in situations as such. Cap Table can easily calculate out by adding in an extra stakeholder, by how much would current stakeholders’ share change. Also, by showing you how many shares are available to be issued with an addition stakeholder.
How to Make a Basic Cap Table?
I was looking around the net and realized most cap tables are more complicated than it should be. There should be a basic Cap Table template out there but seriously, it seems to me that every template seems to overcomplicate things. Cap Table can be quite tricky sometimes if you have never worked with one before. Hence, for those entrepreneurs out there who are looking for a basic Cap Table, fret not! This article is for you.
I have quickly put together a basic Cap Table template using Excel for you to reference on. Please remember with every additional round of funding, you must update your Cap Table. For example, and not limited to — changing stock options for stakeholders, issuing new shares and transfer of shares. Without further ado, I present to you the basic fits all Cap Table.
A basic cap table should be divided into two sections: ownership and valuation. Using the example above, highlighted fields are variables for you to fill in whereas the rest are automated using formulas. In the ownership section, enter each investor’s name and the dollar value each of them contributed and the rest of the fields will be automatically generated for you!
Same goes to the valuation section, enter the current company value, the current number of shares and new equity raised. The screenshot should be an easy way for you to follow and generate your own basic cap table template.
I personally do prefer a simplified and transparent cap table as I certainly do not think you need a complicated cap table at an early stage in order to run a startup. I strongly encourage to try it out yourself. The template can be found here! Modify, if you have to in order to create a cap table that a story about your company!
Remember, there is no “right” way to format your cap table, but to keep it organized and simple. The right cap table for a founder might look entirely different than the right cap table for another founder.
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