What it means
A cap table is crucial for understanding the structure of a company's equity. It lists all the company's securities such as common shares, preferred shares, warrants, and other convertible instruments, providing clarity on ownership distribution.
This is important for both existing and potential investors, as it shows how much control they have, or could have, in the company. Cap tables are dynamic; they change as the company raises more capital, issues new shares, or when existing shareholders sell their stakes.
For entrepreneurs, a cap table helps in making informed decisions about fundraising and understanding dilution, which is when the percentage of ownership for existing shareholders decreases due to new shares being issued. In practice, cap tables are used during funding rounds, mergers, acquisitions, and employee stock option planning, among others.
A cap table normally shows two views. The basic view counts only the shares that exist today, while the fully diluted view also counts options, warrants and convertible notes as if they had already turned into shares.
Investors usually price a deal on the fully diluted view, because that is the number of shares that could exist once everything is exercised. Cap tables also show how much each investor paid per share, and what class of share they hold.
Preferred shares often carry extra rights, such as being repaid first if the company is sold, and these rights can matter as much as the percentage owned. A table that shows only percentages may therefore hide who receives what in a sale.
Keeping an accurate and updated cap table ensures transparency and helps prevent conflicts among shareholders. Think of a cap table like a pie chart that shows how a cake is divided among different people.
Each slice represents a person's share of the cake.
In practice
Real-world examples
Example 1
A tech startup, Innovate Ltd, has a cap table showing 1,000,000 total shares. The founder owns 600,000 shares (60%), an early investor owns 200,000 shares (20%), and an angel investor owns 200,000 shares (20%). This distribution helps determine control and decision-making power in the company, since the founder holds a majority of votes.
Example 2
GreenGrocer Ltd, a small business, has taken on a new investor who buys 25% of the company for $50,000. Their cap table changes to reflect this new ownership, showing the founder with 75% and the investor with 25%, which helps in decision-making and profit-sharing calculations. The deal also implies that the whole company is valued at $200,000 after the investment.
Example 3
A medium-sized manufacturing company issues stock options to employees as part of their compensation. Their cap table now includes these options, which are yet to be exercised, showing potential future dilution and planning for employee incentives. When a manager leaves before the options vest, the unvested options return to the pool and the table is updated.
Think of it
Think of a cap table like a pie chart that shows how a cake is divided among different people. Each slice represents a person's share of the cake.
Formula
Calculation
Ownership Percentage = (Shares Held / Total Shares) x 100
Price per Share = Investment / New Shares Issued
Post-money Valuation = Price per Share x Total Shares After the Round
Worked example. Founders hold 1,000,000 shares. An investor puts in $250,000 for 250,000 new shares.
- Price per share = $250,000 / 250,000 = $1.00
- Total shares after the round = 1,000,000 + 250,000 = 1,250,000
- Investor ownership = (250,000 / 1,250,000) x 100 = 20%
- Founder ownership = (1,000,000 / 1,250,000) x 100 = 80%
- Post-money valuation = $1.00 x 1,250,000 = $1,250,000
The company then reserves 150,000 shares for employee options. On a fully diluted basis the total is 1,400,000 shares: founders 1,000,000 / 1,400,000 = 71.4%, investor 250,000 / 1,400,000 = 17.9%, option pool 150,000 / 1,400,000 = 10.7%. The percentages add up to 100%.Case study
Seen in the real world
This is a fictional, illustrative scenario. Let's consider BrightFuture Ltd, a fictional renewable energy startup. Initially, the founders owned 100% of the company with 1,000,000 shares. They decided to raise capital by bringing in an angel investor, who purchased 250,000 new shares for $250,000, or $1.00 per share. This reduced the founders' ownership to 80% (1,000,000 of 1,250,000 shares) and gave the investor a 20% stake.
Later, the company set aside 150,000 shares as stock options to attract top talent, potentially diluting existing ownership. Their updated cap table now reflects founders with 71.4%, the investor with 17.9%, and potential employee ownership of 10.7% if all options are exercised. When BrightFuture began talks about a second funding round, the new investors asked for the fully diluted cap table first. Because the founders had kept it accurate, with each share class, price paid and option grant recorded, due diligence took days rather than weeks. The table also let the founders see that a further 20% issue would take their stake below 60%, which helped them decide how much to raise.
Watch out
Common mistakes
- Failing to update the cap table after each funding round.
- Not including all types of equity instruments such as warrants or options.
- Ignoring the impact of dilution when issuing new shares.
Questions
People also ask
Why is a cap table important?
A cap table is important because it shows the equity structure of a company, helping in decision-making and demonstrating control and ownership to investors.
How often should a cap table be updated?
A cap table should be updated whenever there is a change in ownership, such as a new funding round, stock issuance, or transfer of shares.
Can a cap table help in planning for future investments?
Yes, a cap table provides insights into ownership dilution and helps strategise how much equity to offer in future funding rounds.