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Who Uses and Views a Cap Table?
What are Cap Table Best Practices for Scaling Startups?
Steps to an Organized Cap Table
A cap table, (the shorthand name for a capitalization table), is a structured record of a company’s ownership, shares, and other forms of equity. The core purpose of a cap table is to track equity distribution among founders, employees, and investors, which is why many startups also refer to a cap table as an equity ownership table. In short, a cap table defines who owns stock in your company and how much stock.
A cap table often begins as a simple spreadsheet, but as your startup grows, so does the complexity of the capitalization table. Transitioning to a specialized platform, like a cap table software service, helps keep your cap table updated, organized, and easy for investors to understand.
From day one, your startup cap table is critically important, as it guides early equity decisions (think: founder splits, employee options). A cap table also sets the foundation for fundraising and investor negotiations. Investors can use startup cap tables to identify possible red flags and risks, get a sense of the impact of an investment or simulated investment, and provide an overall mirror into the inner workings of a startup. A cap table is also critical to preventing equity missteps and disputes.
What Goes Into a Cap Table?
At first glance, a cap table might seem like it’s just a list of shareholders. But a cap table is so much more than that. A cap table provides a structured snapshot of a company’s ownership, from day one to the present.
Whether you're just incorporating or preparing for a funding round, understanding the components of your cap table can help you plan for growth while staying organized and investor-ready.
What are the key components of a cap table?
Every startup cap table includes six key components:
- Founders equity
- Employee stock options
- Preferred vs. common shares
- Transaction Records
- Option pools
- Valuations / share price
Let’s explore each of these elements a bit more.
Founders’ equity (also known as founder's stock) is the category of equity ownership stakes issued to a company's members during its formative phase. These shares often come with unique privileges and advantages unavailable to other shareholders.
Employee stock options is equity granted to employees, including the total number of options granted, vesting schedules, and exercise prices. This allows the company to maintain visibility into the size and usage of the option pool.
Preferred vs. common shares clearly distinguishes between classes of shares. Founders and employees typically hold common shares, which can be riskier, but offer more financial reward. On the other hand, investors often receive preferred shares with specific rights and preferences that offer less risk and more consistent returns. Maintaining clarity between these share types is critical during fundraising and exit events.
Transaction Records show the history of all equity related transactions in a company’s life span.
Option pools are a reserved portion of equity set aside for future hires, and are often created in connection with a funding round. While option pools are a vital tool for talent attraction and retention, option pools also offer a key negotiation point with investors since size can affect founder dilution.
Valuations / share price are an outline of company ownership structure and are used by investors to understand the structure of your company.
Who Uses a Cap Table? And Why Is a Cap Table More Than Just a Document?
Your cap table is a dynamic tool that will grow in importance and complexity as your company scales, and can be considered the ultimate source of truth about your company’s ownership structure. Multiple parties will rely on an accurate cap table throughout the lifecycle of a company. Capitalization tables are used by founders, investors, and other stakeholders like legal and finance teams.
For founders, a cap table is typically the primary document to understand and monitor ownership control (i.e. who owns stock in your company, how much stock, and what kinds of stock). For founders, a startup cap table is a tool that can guide decision making, employee hiring, and fundraising rounds — which is why founders should always aim to have an investor-ready cap table.
What does an investor ready cap table look like? An investor ready cap table is accurate, organized, and consistently updated. For the investor, a cap table should paint a picture of a company’s current status, as well as the growth so far. Investors use startup cap tables to assess deal terms and post-money valuation, as well as ownership breakdown, stock options, potential risks and red flags, possible financial gain (or loss), and the future of the company to retain top talent..
Legal and finance teams also have a stake in an accurate, updated cap table. The capitalization table is used by legal and finance for help with maintaining compliance (including both governmental law and individual shareholder agreements), filing taxes, and preparing for fundraising readiness.
With such a diverse array of needs from your cap table, it's clear companies must create, monitor, and manage their cap table to accurately and transparently reflect the current reality of the company. Regardless of the stakeholder, everyone relies on accurate, up-to-date equity records for trust and alignment, which is why cap table management is so important from day one. The startup capitalization table helps diverse stakeholders, from founders, investors, and legal and finance make strategic decisions, prep, and plan for fundraising and ownership changes.
Cap Table Management: What are Best Practices for Scaling Startups?
When it comes to a startup cap table, the name of the game is to always have a clean, scalable, and consistently updated cap table. What are best practices for a cap table? For starters, start early! Don’t wait until your first term sheet to create a cap table. Keep track of ownership and stocks/equity from day one, to avoid common mistakes down the line.
Once you’ve created a cap table, it’s critical to keep the cap table updated and accurate for investors (especially at Series A and beyond) and the company. In the beginning, manually updating and managing your cap table might be possible, but this challenge can become increasingly complex with scaling.
Steps to an Organized Cap Table
How do you create an organized cap table? There’s six steps and six key sections to include in your capitalization table
First, list all equity holders, including founders, early team members, advisors, and any other stakeholders with ownership.
Next, add record share details. Capture the number and type of shares issued (common vs. preferred), issue dates, and ownership percentages for this section.
Third, account for the option pool. Include any reserved equity for future hires, even if this is currently unallocated.
Track fully diluted ownership. Factor in all outstanding shares plus those that could convert.
Moving forward, keep it updated. Reflect changes as you raise funds, issue new grants, or restructure ownership.
Finally, be sure to choose a scalable platform that will automate your startup equity management operations and financings into a single collaborative hub as you grow.
Get Started With This Cap Table Template
To create your own cap table, check out this free template from Fidelity Private Shares to get you started. This free cap table template built for early-stage teams can help you build your cap table in the right direction.
Why Cap Table Hygiene Pays Off
Beyond serving as a transparent document that represents the current and past history of a startup, an updated cap table also helps various stakeholders make strategic decisions, maintain compliance, and attract and retain top talent. That’s why cap table management is so important.
For founders, an updated, error-free cap table that’s shareable to investors can speed up due diligence and help potential investors more easily understand the potential of your company. Founders with a clean cap table also have stronger negotiating potential with investors, since painting a picture of your company can be done simply, with access to the key components of your cap table.
Additionally, a clean cap table helps founders with strategic planning around dilution and employee incentives. A clean cap table provides a window into current ownership, and a clear view into the future, where changes like new employee stock options, fundraising series, or new investors could upend current ownership status.
Cap Table Tools Built for Growth
While the importance of an accurate cap table from day one is clear, error-riddled, out-of-date, and messy cap tables are all too often a casualty of startup growth. As your company grows and there’s more and more to do, managing the cap table can fall to the wayside. But, cap table management should remain a priority. A lack of version control, spreadsheets peppered with human-made mistakes or old information, and the lack of an audit trail for all the documents related to a cap table (which could be a nightmare for legal and finance) can have huge ramifications down the line, including frustrated or turned-off investors.
Founders, investors, and company employees alike need an accurate and updated cap table, to have a clear understanding of where your company’s been and where it’s headed.
Fidelity Private Shares is a platform built to manage equity from day one to scaling, by automating your startup equity management operations and financings into a single collaborative hub. With our platform, your cap table is automatically updated and dynamically linked directly to all supporting documents, in a secured data room, so it’s investor-ready.
The Fidelity Private Shares platform offers centralized record-keeping, integrated legal workflows, easy updates, and clear visibility which enables seamless, accurate report generation, next round planning, and scenario models for companies.
Ready to streamline and update your cap table management process? Schedule a demo of Fidelity Private Shares today.
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