If you are a new startup or a company taking in an investment or thinking of taking in investment. You need a cap table. This is the one method of tracking who owns what. Most importantly cap tables are super important because all members / investors should have a copy of this table. This is a check and balance of who owns what. How much money has come in. And also when there is a new person investing, shows if and when there will be a dilution. I will explain dilutions later. But first..
Read the excerpt from Wikipedia:
A capitalization table (or cap table) is a table providing an analysis of a company’s percentages of ownership, equity dilution, and value of equity in each round of investment by founders, investors, and other owners.
In its simplest form, a capitalization table, or “cap table” as it is often abbreviated, is a ledger that tracks the equity ownership of a company’s shareholders. However, the term can refer to the way in which any company keeps track of all of the relevant information related to all of its stakeholders (including debt, convertible debt, option, warrant, and derivatives holders) and their claims on the company. Public companies primarily use transfer agents and a wide array of technologies and systems to keep track of their stakeholder information and therefore it is uncommon for public companies to refer to their stakeholder records and accounting as a “cap table”. Private companies typically have a much simpler capital structure and more limited stakeholder accounting requirements. In the earliest stages of their development, private companies may track their shareholders in a simple document or spreadsheet. Cap tables are widely used by entrepreneurs, venture capitalists, and investment bankers to model and to analyze events such as ownership dilution, issuing employee stock options, or issuing new securities. After several rounds of financing, a cap table can become highly complex.
Relationship to company shares
In the past, companies would issue shares on paper stock certificates and then use the cap table as an accounting representation and summary of share ownership. Public companies have increasingly eliminated all paper stock certificates in a process called “dematerialization” to simplify and decrease transactions costs. Most global regulators have made and encouraged financial system changes to encourage dematerialization.
In the US and many other countries, companies can use their cap table as the only system of record for recording stock ownership. US state laws support a concept of uncertificated, or book entry shares where the cap table is the formal legal record of equity ownership.
Stock dilution, also known as equity dilution, is the decrease in existing shareholders’ ownership of a company as a result of the company issuing new equity. New equity increases the total shares outstanding which has a dilutive effect on the ownership percentage of existing shareholders.
Basically if your company is worth $100. And you own 100%. If someone else invests $100 in your company. Then technically with a straightforward dilution, your equity share is now 50% and the new investors share is 50%
Basic Cap Table
A basic cap table model like this one includes these main components:
- Left column: A list of all stock holders, with the column growing as the company gains new investors
- Across the top: Details of the initial founders’ shares, then stock options, each investor round, the effect of subsequent dilution from any ratchet adjustments, and a potential positive exit.
- The cap table also shows: the pre-money valuation and raise amount for each round, leading to a post-money valuation that also computes the number of shares and price per share for investors.
If you want a free sample Excel template click here
Also remember boys and girls at the end of the day: “Show me the money!”