Wamda and Clara have teamed up to bring you, startup founders, this essential guide to capitalisation (cap) tables.
If you are looking to attract more investors or make key appointments, you will need a solid cap table. Having an accurate cap table is crucial for any startup as it provides potential investors with the necessary information to determine whether they should invest in your venture. It also helps current stakeholders to keep track of their interests and shows potential employees the stock options available. In short, with a strong cap table, founders can make informed business decisions quickly and set their startups up for success.
What is a cap table?
You want to know who owns what in your startup? That is where a cap table comes in.
Think of it as a roadmap that shows you the equity ownership and value of your company's shares. The cap table outlines the shareholders, from founders to employees to investors, and the different types of company securities they hold. It is important to keep an accurate record of all transactions as your cap table becomes more complex with each financing round. Failing to do so could lead to costly mistakes and misunderstandings. Luckily, there are tools available.
Here is an example of what a cap table looks like on the Clara platform.
Why are cap tables important?
Cap tables are equally important to both founders and investors.
Potential investors use cap tables as important due diligence documents when deciding whether to invest in your startup or venture. It helps investors understand precisely what they are buying into.
A cap table helps investors understand the following:
• It shows them who the investors are.
• It shows what percentage of the company each stakeholder owns - investors want to know the equity split.
• It helps investors decide on an investment amount.
• It gives an idea of future dilution and the dilution rate, i.e., the value each shareholder will lose when new shares are issued.
• It shows incentives to attract talent. Startups need talent to grow. Investors want to see if the startup has a good amount of share options for employees to attract and retain talent.
• It also shows how motivated the founders are to stay. Founders who hold significant equity are motivated to drive the company's future growth. Investors want to know that the founders are invested in the company's future development.
• It provides information to do a waterfall analysis. Waterfall analysis shows the percentage of proceeds that will go to each shareholder if the company gets liquidated. The cap table will indicate the amount available to equity in the event of liquidation.
A cap table is also important to founders for the following reasons:
• It helps founders make the right business decisions. Cap tables provide the information to make the right decisions to run the company effectively when deciding whether to issue more shares or share options.
• It is an excellent tool for managing employee stock options effectively.
• It assists with audits and compliance checks. An accurate and up-to-date cap table ensures a smooth process. In some countries, like the US, cap tables are used as the formal legal record of equity ownership. Tax authorities can also rely on cap tables to check if stakeholders are paying the correct taxes.
• It helps with raising funds. When negotiating with potential investors, cap tables can answer questions about how the company's ownership is structured. It shows how percentages have changed in each financing round and how the new investment will impact current investors. Investors also want to know where they will rank in case of liquidation.
• It can attract and retain talent. Giving future employees insight into your cap table can help motivate them to perform and stay with the company.
Elements of a good cap table
While cap tables do not follow a standard format, you still need to incorporate essential information for a comprehensive understanding of the business. Typically, cap tables comprise shareholder details, stock information, and company valuation.
Regardless of the tools used, the following information should be included in your cap table:
• The number of shares the company is allowed to issue.
• The total amount of shares/equity issued to a shareholder, plus any share options that the shareholder may still exercise.
• Shareholders' names as it appears on share certificates or other investment instruments.
• The date the equity was acquired.
• The price of each share.
• The type of equity owned by each shareholder, for example:
• Common stock - a share of the company, also called ordinary stock.
• Preferred stock - preferred stockholders are usually paid first when dividends are declared or if the company is liquidated. It should also indicate if the preferred stock is convertible to common stock and what events would warrant a conversion.
• Employee stock options - options allow employees to buy ordinary shares at a fixed price as a form of compensation.
• Warrants - similar to stock options, it grants the warrant holder the right to buy shares at a future date at a fixed price.
• The number of unissued shares.
• SAFEs or other convertibles are sometimes listed separately. If so, you should include the full name of the holder, the amount, and the maturity date (if any).
• The company's total value - the company's "value" depends on how and when it is valued. You should include a pre-money and post-money valuation.
• Pre-valuation - the value of the startup or venture without including outside investment.
• Post-money valuation - the value after outside investments is included. This gives investors a good idea of what percentage they will own after investing.
What is a pro-forma cap table?
During financing negotiations, founders sometimes prepare a pro-forma cap table to illustrate the company's ownership structure post-financing rounds. This type of cap table takes into account any potential conversions of (SAFE) notes triggered by the financing round. This enables potential investors to understand precisely how ownership percentages will shift once the financing round concludes.
It is worth noting that the pro-forma cap table may be subject to adjustments as parties negotiate the terms of the financing round.
Although cap tables may seem complex, they can simplify what might otherwise be a complicated scenario into an easily understandable structure. Founders should take the time to develop an accurate cap table and keep it up-to-date.
As the company grows, the cap table may become increasingly complex. Therefore, seeking professional help to maintain and update it can be a wise business decision.
Alternatively, you can also use Clara to stay organised and impress investors with their visually appealing, accurate, and organised cap table.