Machine learning in accounting is changing how startups manage their finances. Learn how it could apply to your business.
September 3, 2020
Every startup needs a capitalization table, or cap table as it's commonly known. But, because they involve so many technical financial terms, setting up and maintaining a cap table can be a daunting prospect for startup founders. Even if your startup cap table is already being managed by a founding team member or your legal team, you may not be entirely sure how it works or what role it plays in your company’s finances.
This quick guide will help you understand the basics around cap tables—no financial expertise necessary.
A startup capitalization table is a record of all the shareholders of your company, including founders, venture capitalists, angel investors, and any employees or advisers who are involved in the business plan and own shares in your business. The cap table shows your business’s ownership structure, providing an analysis of the percentage of ownership, equity dilution, and value of equity at each round of funding for your company.
The cap table is a living document: As your startup grows and progresses through rounds of funding, your cap table needs to be updated to reflect those changes. It should show who invested in each new financing round, and reflect each new valuation of the company.
Some businesses start by building their own cap tables with spreadsheet software, or use a template as a startup cap table model (Y Combinator offers a popular (and free!) cap table template). However, most companies quickly find that working with cap table management software like Carta or Captable.io makes the process easier and more accurate. Cap table management software also helps organize the legal documents relating to the transactions captured within your cap table, such as stock issuances, transfers, cancellations, exercises of options, conversions of debt to equity, and more.
Some founders assume that because their business is just starting out, they don’t need a cap table right away. However, even if you don’t have any investors yet and the founding team owns 100% of the equity, it’s still important to have a cap table for your startup to set out what proportion of the company each founder owns. Down the line, when you’re speaking to potential investors, you need to have a clear outline of the ownership opportunities you can offer.
Your startup’s cap table is also a key source of information for other financial statements, including the equity section of your balance sheet. Sharing an accurate cap table with your finance firm allows them to properly categorize transactions by cross-referencing incoming investment payments against the amounts listed in the cap table.
Startup cap tables can be as complex as the business needs, but all cap tables should include the same basic information about every shareholder:
In addition to shares owned by founders or investors, most startups set aside 10 to 20 percent of the total shares as stock options to attract or reward future key employees. To give a full picture of the company’s ownership, the cap table also includes the number of stock options that have already been exercised, and the option pool (the number of shares still available to allot to future employees or advisors).
Glossary Of Key Cap Table Terms
As you’ll see in the startup cap table example above, there are some startup-specific finance terms it’s helpful to understand in order to read a cap table.
If your startup is growing and you’re looking to outsource your finance management, Zeni can handle all your bookkeeping, accounting, and CFO needs on one platform. Zeni is a modern, full-service finance firm that takes care of all your finance functions, from daily bookkeeping to taxes to real-time reporting. Our experienced team of accountants, tax advisors, and CFOs know the world of startup finance inside and out, so we’ve seen the challenges many founders face and can recommend effective solutions for every scenario. If Zeni sounds like the right fit for your business, get in touch with our team to learn more.