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 daunting for startup founders. Even if a founding team member or legal team already manages your startup capitalization table, 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.
What Is A Startup Cap Table?
A startup capitalization table is a record of all your company’s shareholders, including founders, venture capitalists, angel investors, and any employees or advisers who 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 funding rounds, 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.
Some businesses start by building their 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 shown within your cap tables, such as stock issuances, transfers, cancellations, exercises of options, conversions of debt to equity, and more.
Why Are Cap Tables Important For Every Startup?
Some founders assume that because their business is just starting, 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.
What Information Does A Cap Table Include?
Startup cap tables can be as complex as the business needs, but all cap tables should include the same basic information about every shareholder:
- The number and type of stocks they own from each funding round
- The value of those stocks
- The proportion of the company they own
In addition to shares owned by founders or investors, most startups set aside 10 to 20 percent of its total number of 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).
Example Startup Cap Table
Below is a quick example of what a cap table could look like:
Glossary Of Key Cap Table Terms
As you’ll see in the example startup cap table above, there are some startup-specific finance terms it’s helpful to understand in order to read it.
- Pre-money valuation — The value of the company before including the value added in the most recent funding round.
- Post-money valuation — The value of the company after including the value added in the most recent funding round.
- Common stocks (or common shares) — The standard stock that is created when your company forms and usually the type of stock founders and employees receive.
- Preferred stocks (or preferred shares) — The type of stock most investors buy. Preferred stock, or preferred shares, is a lower risk investment: If your company is liquidated or pays dividends, preferred stocks will be paid out as a priority, so investors with preferred stocks will receive their money before those with common stocks.
- Options — Stock options are the right to buy shares at a set share price. An employee can choose to exercise a stock option and buy shares, reducing the number of stock options left in the pool.
- Convertible notes — A type of debt that exchanges investment up front for the right to redeem shares when the company hits an agreed milestone. Convertible notes are a common way for early-stage startups to raise money.
- SAFE — Simple Agreement for Future Equity. Similar to convertible notes, a SAFE agreement exchanges investment up front for the promise of future equity ownership. However, unlike convertible notes, SAFE doesn’t have a maturity date or carry interest.
- Outstanding ownership (or outstanding shares) — The percentage of the company each investor or founder owns out of all the stocks that have been issued, including total common stocks and preferred stocks but not including stock options that haven’t been issued yet.\
- Fully diluted ownership — The percentage of the company each investor or founder owns out of all the available security types, including common stocks, preferred stocks, available stock options, and any convertible notes or SAFE.
Need More Finance Expertise?
If you found this article helpful, you can read dozens of other guides to startup finance on the Zeni blog, including how to read a profit & loss statement and how to calculate your burn rate.
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.