Capitalization Table, also known as the Cap Table, is one of the best ways to get a snapshot of the company’s ownership structure. In the early stages of the startup, the Cap Table will seem quite simple, with most of the distribution among early investors and founders. However, it won’t be long before the startup starts raising funds at different stages, creates ESOP pools, has to agree to different anti-dilution criterias, warrants, issue shares with different levels of preferences, etc. For startups, keeping track of all these moving pieces will be quite hard, and much harder to understand for any investor who wants in. In such scenarios, Cap Table provides a good representation of how all the stakes are distributed within the company. 

Most of the term sheets include the Cap Table to ensure every investor is aware of the essential information. Founders should have a good understanding of the Cap Tables, so that they are aware of how the distribution of stakes can influence their future decisions. In this article, we’ll provide a brief outline of the Cap Table, and how it can benefit different stakeholders.

Structure of a Capitalization Table

Cap Table can come in different forms, but the underlying intent remains the same: to provide a snapshot of the distribution of stakes. This purpose can be served in different ways, based on the convenience of the players involved. 

In general, a Cap Table is updated after every fundraising event. A standard Cap Table can be organized in three different sections:

1. Valuation: This would cover the valuation of the startup before fundraising, i.e. pre-money valuation, and valuation after fundraising, i.e. post-money valuation. This would also include the number of shares issued, current value of each share, etc. 
2. Distribution before funding: This would provide a snapshot of the stakes distribution before the current round of fundraising, i.e. number of shares among founders, investors, different categories of shares, percentage ownership, ESOP Pool, etc. This will also provide an overview of how much stake is distributed among each founder, co-founder, employee, the unused ESOP pool, etc. 
3. Distribution after funding: This would provide an overview of the distribution of stakes after fundraising, i.e. shares issued to new investors, percentage of ownership amongst each shareholder, different categories of shares, etc. 

Wall Street Prep has shared a good sample of the Cap Table for everyone’s reference.

In general, Cap Table is updated after every fundraising event. After every fundraising, the valuation is updated along with any new class of securities issued and new investors who hold a stake in the company. Moreover, any other changes, i.e. conversion of debt to equity, exit by investors, etc. are also included.

However, the Cap Table might also be updated in between funding rounds, i.e. due to assigning shares to employees, expiration of ESOP pool, warrants exercised by investors, etc.  In such cases, only the distribution of stakes will change, but the company valuation will remain the same.

Sometimes, as the complexity of the issued shares, their warrants, liquidity preferences, etc. increases heavily, the ownership percentage of the startup as a going concern i.e. accounting ownership vs. the amount of proceeds secured by different stakeholders in a liquidity event i.e. economic ownership varies heavily. In such cases, Waterfall Analysis is included, which gives an overview of the payout to different stakeholders based on the different liquidity scenarios. This topic will be dealt with in detail in the future articles. 

Most of the startups use freely available tools like Google Spreadsheets, Excel, etc. to build their Cap Table. However, it becomes difficult to update the Cap Table in the next stages, due to rising complexity of criterias. If the startup has many investors, and has added many levels of complexity, i.e. warrants, categories of shares, etc. it might be difficult to handle in an excel-based cap table. In such scenarios, a startup can consider buying premium cap-table management softwares like Carta, Shareworks, Pulley, etc. However, it’s best to go this route only if it is absolutely necessary. Startups can analyze the efforts required and decide accordingly. 

Benefits of a Capitalization Table

Cap Table provides a lot of benefits to both founders and investors. Beyond providing an overview of the distribution, it is useful for analysis in different scenarios. Different benefits of having a cap table for a startup are listed below:

1. Simplifies Complexity: In case your startup has many stakeholders, with different classes of shares, warrants, anti-dilution rights, with both vested and non-vested stock, it becomes hard to keep track of who owns what. Cap Table acts as a single point of truth, providing a snapshot of changing ownership distribution ownership with time. Bringing all details at one place makes it easier for both investors and founders to understand and make decisions accordingly. 
2. Helps in Analysis: Cap Table provides an easy way to analyze how the ownership is distributed among different stakeholders, and how it might evolve over time. It is quite a useful tool for investors to see if there’s significant equity available to founders to keep them interested, or if the ESOP pool is sufficient for future hires, etc. Moreover, founders can also take critical decisions based on the state of the current cap table. 
3. Acts as an Overview: Explaining the complete details of ownership distribution is quite hard, and sharing all legal agreements for interested parties is both unnecessary and time consuming. However, if the cap table is shared with interested parties, i.e. new investors, important hires, etc. , they can get a good grasp of the current situation in a very short span of time. It improves turnaround time and simplifies the decision making process for everyone involved. 
4. Helps with Compliances: For filing taxes, or for any due diligence related activities, Cap Table is a very useful tool for startups. Audits can be easily done, and legal procedures can be handled more efficiently with the help of a Cap Table. 

There are many other advantages too, like easily identifying unallocated options, planning for any future criterias, i.e. warrants, maturity of convertible notes, etc. Most importantly, it simplifies communication between different stakeholders, which makes it indispensable for both founders and investors.  

In the Final Analysis

The Capitalization Table is one of the most essential parts of a term sheet, which provides a detailed overview of the distribution of ownership of the company. It is quite useful to both startups and investors in different activities, i.e. due diligence, future scope of dilution, etc. Understanding different aspects of the Capitalization Table will be very useful for startups in planning for the future.