What is a Cap Table? Understanding Business Ownership Structure

Written By Maigen Berg

A capitalization table, or "cap table," is a detailed breakdown of who owns what percentage of your business. It's like a ownership map that shows every investor, founder, and employee who has equity in your company. Understanding cap tables is crucial for any business with multiple owners or investors.

What is a Cap Table?

A capitalization table (cap table) is a spreadsheet or document that shows the ownership structure of a business. It lists all securities holders – including founders, investors, employees with stock options, and anyone else with an ownership stake – along with their ownership percentages and the type of securities they hold.

Simple Definition: A cap table shows who owns how much of your business and what type of ownership they have.

Components of a Cap Table

1. Shareholders/Owners:

  • Founders: Original business creators

  • Investors: People or firms who invested money

  • Employees: Staff with equity compensation

  • Advisors: Consultants with equity stakes

2. Securities Types:

  • Common Stock: Basic ownership shares

  • Preferred Stock: Shares with special rights

  • Stock Options: Rights to buy shares later

  • Warrants: Long-term rights to purchase shares

3. Key Information:

  • Number of Shares: How many shares each person owns

  • Ownership Percentage: What percent of company they own

  • Share Price: What they paid per share

  • Investment Amount: Total money invested

  • Vesting Schedule: When ownership rights are earned

Why Cap Tables Matter

1. Ownership Clarity:

  • Shows exactly who owns what

  • Prevents disputes about ownership

  • Provides legal documentation of equity

2. Investment Tracking:

  • Records all funding rounds

  • Tracks dilution over time

  • Shows return on investment

3. Decision Making:

  • Determines voting rights

  • Shows control structure

  • Guides governance decisions

4. Exit Planning:

  • Shows how sale proceeds would be distributed

  • Calculates potential returns for each owner

  • Supports valuation discussions

5. Future Fundraising:

  • Shows current ownership structure to new investors

  • Demonstrates how previous rounds were structured

  • Helps plan future equity raises

Types of Securities in Cap Tables

Common Stock:

  • Who gets it: Founders, employees, early investors

  • Rights: Voting rights, residual claims

  • Risk: Last to be paid in liquidation

Preferred Stock:

  • Who gets it: Professional investors (VCs, angels)

  • Rights: Liquidation preferences, anti-dilution protection

  • Benefits: Priority over common stock

Stock Options:

  • Who gets them: Employees, advisors

  • How they work: Right to buy shares at set price

  • Vesting: Earned over time (typically 4 years)

Convertible Securities:

  • What they are: Debt that converts to equity

  • Common types: Convertible notes, SAFEs

  • Conversion: Typically converts during next funding round

Cap Table Evolution

Pre-Money vs. Post-Money:

  • Pre-Money: Company value before investment

  • Post-Money: Company value after investment

  • Formula: Post-Money = Pre-Money + Investment Amount

Example of Investment Impact:

Before Investment:

  • Founder A: 50% (5,000,000 shares)

  • Founder B: 50% (5,000,000 shares)

  • Total: 10,000,000 shares

After $1M Investment at $4M Pre-Money:

  • Pre-Money Valuation: $4,000,000

  • Investment: $1,000,000

  • Post-Money Valuation: $5,000,000

  • New Shares Issued: 2,500,000 (20% of post-money)

New Ownership:

  • Founder A: 40% (5,000,000 shares)

  • Founder B: 40% (5,000,000 shares)

  • Investor: 20% (2,500,000 shares)

  • Total: 12,500,000 shares

Creating Your First Cap Table

Step 1: List All Owners

  • Identify everyone with equity

  • Include founders, investors, employees

  • Note advisors with equity stakes

Step 2: Determine Share Amounts

  • Decide total number of shares

  • Allocate shares to each owner

  • Reserve shares for future employees

Step 3: Document Investment Details

  • Record money invested by each person

  • Note the price per share paid

  • Include investment dates

Step 4: Set Up Tracking System

  • Use spreadsheet or cap table software

  • Include all relevant details

  • Plan for regular updates

Cap Table Management Tools

Spreadsheet Solutions:

  • Excel/Google Sheets: Basic tracking

  • Pros: Free, customizable, familiar

  • Cons: Manual updates, error-prone, limited features

Specialized Software:

  • Carta: Professional cap table management

  • Capshare: Equity management platform

  • Shareworks: Comprehensive equity solutions

  • Pros: Automated calculations, compliance features, professional reports

Key Features to Look For:

  • Automatic dilution calculations

  • Scenario modeling capabilities

  • Compliance and reporting tools

  • Integration with legal documents

Common Cap Table Scenarios

Founding Team Equity Split:

  • Equal Split: Each founder gets same percentage

  • Contribution-Based: Based on money, time, or expertise invested

  • Role-Based: Based on responsibilities and future contributions

Employee Equity Pool:

  • Typical Size: 10-20% of company

  • Purpose: Attract and retain talent

  • Vesting: Usually 4-year vesting with 1-year cliff

Investment Rounds:

  • Seed Round: Early investment, often $100K-$2M

  • Series A: Larger round, typically $2M-$15M

  • Series B+: Growth funding, $10M+

Cap Table Mistakes to Avoid

1. Not Creating One Early:

  • Problem: Confusion about ownership from the start

  • Solution: Create cap table when business is formed

2. Informal Agreements:

  • Problem: Verbal agreements lead to disputes

  • Solution: Document all equity arrangements legally

3. Not Planning for Dilution:

  • Problem: Founders surprised by ownership reduction

  • Solution: Model future funding rounds and dilution

4. Ignoring Vesting:

  • Problem: Co-founders leave with full equity

  • Solution: Implement vesting schedules for all founders

5. Poor Record Keeping:

  • Problem: Outdated or inaccurate cap tables

  • Solution: Regular updates and professional management

Cap Table Best Practices

1. Keep It Updated:

  • Update after every equity transaction

  • Review quarterly for accuracy

  • Maintain historical versions

2. Professional Documentation:

  • Use legal counsel for equity documents

  • Ensure compliance with securities laws

  • Maintain proper corporate records

3. Clear Communication:

  • Share cap table with relevant stakeholders

  • Explain ownership changes clearly

  • Provide regular updates to investors

4. Plan for the Future:

  • Model different growth scenarios

  • Reserve adequate employee equity pool

  • Consider impact of future funding rounds

The Bottom Line

A cap table is your business's ownership blueprint – it shows who owns what and how ownership changes over time. Whether you're a solo founder planning for growth or a startup with multiple investors, maintaining an accurate cap table is essential for legal compliance, investor relations, and strategic planning.

Make good with your time by setting up a proper cap table early and keeping it updated. This investment in organization will save you countless hours and potential legal issues down the road, while providing the clarity you need to make informed decisions about your business's future.

Remember: Your cap table tells the story of your business ownership – make sure it's accurate, up-to-date, and tells the story you want it to tell.

Maigen Berg
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