Written by Equity team 03 February 2023 | 4 min readUnderstanding a company's Cap Table is a critical aspect of due diligence for investors and potential acquirers. Understand why accurate and up-to-date Cap Tables are essential for fundraising, mergers and acquisitions, and other critical business decisions.
One simple way to understand the Cap Table is who owns the Company and what is the pie of the total company’s worth each individual is holding. All the securities, shares, warrants, convertible notes, ESOPs, etc.
A Cap Table contains the list of individuals or shareholders of a company on an outstanding or fully diluted basis. Who owns what and in which form is another simple version of explaining the Cap Table.
For Example – there are 3 founders in a start-up whose ownership or shareholding in the company is divided at 40:30:30 (holding shares as 40k, 30k, and 30k respectively). So the Cap Table be like below: -
| Shareholders | No of Shares | % of Stake |
| Founder 1 | 40,000 | 40% |
| Founder 2 | 30,000 | 30% |
| Founder 3 | 30,000 | 30% |
| Total | 1,00,000 | 100% |
The above example is how a traditional cap table looks like when we prepare the same manually on an Excel or Spreadsheet, Now let us see the below Cap Table on how it will look in a Digitized environment.
The Cap Table is a statement that tells the % stake every promoter or founder or investor holds in the company at a given point of time and the stake of ownership is required in many corporate matters (voting rights, passing a resolution, key decision making, fundraising.
A Cap Table software is also helpful for a new or prospective investor in any startup or company as with the Cap Table the upcoming investors can get a taste or glimpse of the existing shareholding in the company and this will also help the investors in knowing who all are current stakeholders in the company, what is their individual o/s or diluted shareholding, how much my % of holding will be in the company post the funding round and much more.
On the other hand, the founder can check the cap table to understand how much can be diluted in the future round of funding and which investors should be invited first and what % of stake can be given to any new or existing investors post the funding round. They can also check the terms & conditions in respective SHA (Shareholding Agreement) with different investors/shareholders.
How you want to manage the Cap Table also decides on the stage of your organization (Early Stage, Seed Stage, Series A, B, C etc.) You can create the same at an early stage on an Excel Sheet or G-Sheet (Download our Free Template), but once more and more investors start coming on to your cap table then it becomes very complex to manage and have an up-to-date Cap Table on real-time basis catering to all the requirements from Compliance, Taxation, Investors, etc.
Want to get in-depth knowledge about ESOPs - How Employee Ownership Can Transform Your Company
Managing a cap table is crucial for startups as it reflects ownership and equity distribution. However, common mistakes can cause significant issues. Here are key ones to avoid:
1. Relying on Spreadsheets:- Spreadsheets can introduce errors, especially with complex ownership structures, leading to inaccurate equity and dilution data.
2. Inaccurate Share Calculations:- Not updating share prices or valuations can mislead ownership percentages and confuse funding rounds.
3. Missing Shareholder Data:- Incomplete shareholder information can complicate transactions and hinder communication. Keep an updated record of all shareholders.
4. Multiple Cap Table Versions:- Having different versions causes inconsistencies. Maintain one regularly updated and accessible cap table for all stakeholders.
Let’s learn from Social Network:- A popular topic in many startup circles is the scene from The Social Network, which highlights the early years of Facebook.
As a startup founder, the goal of cap table modeling is to make informed decisions about external funding. The aim is to maximize capital investment while minimizing share dilution, ensuring a worthwhile payout for both you and your early-stage investors.A key mistake for startup founders was highlighted in the scene where co-founders Mark Zuckerberg, Eduardo Saverin, and Sean Parker clashed over company ownership.
Remember this scene?
Eduardo Saverin discovered his ownership stake had been drastically diluted following multiple funding rounds.
Keeping your cap table updated is necessary for effective equity management and ensuring stockholders' transparency. Here are some best practices to maintain an accurate and current cap table
Conduct periodic reviews of your cap table, especially following key events like funding rounds, share issuances, or employee stock option exercises. This ensures all updates are recorded accurately and on time.
Maintain thorough records of vesting schedules for employee stock options and restricted stock units (RSUs). Keep this information alongside the main cap table for easy reference, ensuring clarity without overcrowding the primary document.
Prior to any funding round, use your cap table to simulate potential dilution scenarios. This analysis helps assess the impact on existing shareholders and aids in negotiating with investors.
Switch from spreadsheets to specialized cap table management software. These tools offer real-time updates, automate calculations, minimize human error, and simplify scenario modeling for future funding rounds.
Verify your cap table regularly against legal documents, such as shareholder agreements, to ensure consistency. This is crucial for compliance and helps to catch discrepancies early.
Plan for future funding by reserving shares for potential investors or employee stock options. This proactive strategy helps manage dilution and maintain investor confidence.
Once you start growing or expanding your business, raising money in frequent tranches and rounds, the best solution to your challenges will be to have an Equity Management Platform . This will help you in sending faster updates to your investors as and when required and better transparency & real-time visibility can be provided to all the stakeholders.
Vega Equity offers companies an effective, intuitive, and paperless platform for managing equity. It provides accurate cap table management, customized user experiences, and precise information. Additionally, it assists in measuring KPIs, analyzing data, and tracking performance towards goals.
