What is a Cap Table? Do you need one?
A capitalization table or cap table is a document (usually an excel spreadsheet) that tracks who owns how much of a company.
Founders maintain a cap table as they grow and raise money for the startup venture and frequently reference the cap table to help answer questions such as:
- How much equity does each founder owns?
- How much money has been invested in the company so far?
- Who owns what type of shares?
- How is the option pool plan structured?
- What is the valuation of the startup at each funding stage?
- What would be the return in an exit scenario?
As a startup grows and undertakes various fundraising activities and investment rounds, the cap table becomes increasingly crucial. It enables founders to answer vital questions related to equity ownership. This information is invaluable during discussions with potential investors or when considering new investment opportunities.
In addition to providing clarity on founder equity, the cap table also plays a pivotal role in accommodating new investors. When a startup embarks on a fundraising journey, it often attracts external investors who inject capital into the company in exchange for ownership stakes. The cap table helps founders determine the impact of these investments on existing ownership and equity distribution.
By maintaining an up-to-date cap table, founders can accurately assess the dilution of existing ownership caused by new investments. This understanding empowers them to make informed decisions regarding fundraising terms, valuations, and the overall impact on the company’s ownership structure. Moreover, it enables founders to evaluate the implications of potential investment scenarios, ensuring they negotiate effectively and protect the interests of existing shareholders.
In summary, your cap table contains sensitive information abour your startup, its investors, your investment rounds tracked in detail and an exit valuation estimate in the horizon. Read the below FAQ to learn about the importance of having an updated cap table, even prior to incorporating your startup company:
Most frequent questions and answers
- Shareholders: Who owns shares in the company and what percentage they hold. This reflects the economic and voting interests of your shareholders.
- Shares issued: The number of shares issued till date, who they’re issued to, and the price per share.
- Option pool: The quantity of share options set aside to motivate and reward your team, typically cofounders or early employees.
You need a cap table when deciding how to divide company shares among the co-founders.
You’ll need a cap table when planning how to secure funds for your startup’s growth.
Before you start talking to potential investors, prepare a cap table to showcase your company’s share structure.
If you’re considering funding through convertible debt, a cap table will help track these transactions.
A cap table helps you visualize potential outcomes when planning for possible company exit scenarios.
A cap table is necessary when setting up a stock option plan for your employees.
Yes, absolutely. It’s crucial to establish and maintain a cap table even when initial investments come from friends, family, or early-stage angel investors. This documentation ensures transparency and aids in tracking ownership stakes and dilution over time. Remember, your startup’s share structure can significantly impact future fundraising, investors’ decisions, and even your exit strategy. A well-maintained cap table can provide a clear and detailed snapshot of your company’s equity at any given time.
A comprehensive cap table is an essential tool for exit planning and calculating potential Return on Investment (ROI). Exit scenario calculations form a critical part of a professionally constructed cap table template. With this, you can model various ‘what-if’ scenarios, ranging from funding rounds to company sale events. The cap table enables you to keep a consistent eye on the potential returns for each shareholder, factoring in any dilution effects. This means you can quickly see the financial impact for all parties involved based on different exit scenarios.
Creating a cap table can be quite complex and there are numerous guides available online. However, if you’re looking for a cap table specifically tailored for a UK-based company, we at Valuefinex are more than happy to provide you with a customized template and detailed guide to fit your needs. Feel free to reach out to us for assistance, as we’re committed to making this process as smooth and understandable as possible for you.