Understanding Cap Tables: What Your Cap Table Must Have
A capitalization table, more commonly known as a cap table, is a critical tool for startups. It provides an overview of the company's equity ownership, helping track who owns what, and how each stakeholder's position might evolve over time.
At Redwood, we work with thousands of cap tables for our valuation engagements every year. We receive – and decode – all types and variations, from highly detailed Excel workbooks to back-of-the-napkin scribble from busy founders.
What is a Cap Table?
A cap table is a spreadsheet or document that outlines the equity ownership of a company's stakeholders, including investors, founders, and employees. It typically includes details like the number of shares owned, the type of equity (common or preferred stock, options, warrants), and the percentage of total ownership.
In essence, a cap table is the ledger of your company's ownership. It's an invaluable resource for startups, as it helps illustrate the company's potential valuation at various funding stages, the potential impact of future funding rounds, and equity dilution.
How Does a Cap Table Work?
Cap tables provide a detailed breakdown of who owns what in your company. They can be simple in the early stages of a startup, but they tend to become more complex as the company grows, more shares are issued, new equity types are introduced, and more rounds of funding are secured.
Cap tables evolve with every change in your company's equity structure. For example, if you issue new shares, the cap table will be updated to reflect this. Similarly, if an employee exercises their stock options, this change is recorded in the cap table.
Key Elements of a Cap Table
While every startup client will require some customization, here’s what we’ve identified as the must-have, bare essentials for cap tables:
Investors: Detailing each investor, the number of shares they hold, the price at which they bought these shares, and their overall percentage ownership is crucial. This allows everyone involved to understand who holds significant influence over the company's future.
Equity Classes: All investors will fall under an equity class or as part of a grant of options or warrants. Start by presenting equity classes in distinct, separate groupings – we’ve shown these horizontally across in our cap table examples below. Add total shares and the percent of the total class and overall equity they represent. For preferred, include the per share price. Finally, add the options and warrants because both represent a potential future claim on the equity of the company.
Options and Warrants: Many companies include a detailed "Option/Warrant ledger". This tracks the total options or warrants outstanding, how many remain in the option pool, and their respective exercise prices.
Dealing with More Complex Cap Tables
Remember, an accurate and clear cap table is integral to your startup's success. It ensures transparent communication with your investors and provides valuable insights into your company's equity structure. As your company evolves and your share structure becomes more intricate, your cap table might grow more complicated. In these cases, turning to a trusted cap table management service can be a worthwhile investment. They have the specialized knowledge to ensure your cap table remains accurate and clear, even as the equity structure becomes more complex.
Here at Redwood Valuation, while we don't directly manage cap tables, we work with them regularly in our valuation engagements. We're well-versed in the nuances of cap tables, and we're always ready to guide you to reliable cap table providers we trust. Reach out for a referral today!