As you raise more money and grow your team, the cap table tracks every change – new investors, updated share classes, exercised options, and evolving ownership percentages. Dilution typically happens when new shares are issued, consequently reducing the percentage ownership of existing shareholders. By analyzing the cap table, shareholders can anticipate how future financing events, stock option grants, or conversions of convertible securities might dilute their stakes. New investors entering the company while growth occurs cause equity dilution. A proper tracking system for changes proves essential to business operations.
A cap table is the single source of truth for who owns what in a startup. At a glance, it tells you how equity is split between founders, team members, investors, and anyone else holding stock, options, or convertible instruments. Cap tables are dynamic documents that transform and evolve as a company progresses. This evolution occurs from a company’s inception, through various funding rounds, up to any potential exit events. The structure and complexity of a cap table grow over time, mirroring the company’s journey.
Pre-Money vs. Post-Money Valuation
In the example below, the founders, who currently own 100% of the company, want to add an option pool for key hires equal to 7.5% of the company. The new shares added to provide ownership results in dilution for the existing owners. When negotiating with investors for new funding, investors are interested in seeing how the company’s ownership is structured and the changes that have occurred in the previous financing rounds. For large public companies, “cap tables” are pointless because these companies mostly have common shares with a small number of employee-owned options, restricted stock units (RSUs), and other dilutive securities.
After a few rounds of financing, the cap tables become complex and list the potential sources of funding, initial public offerings, mergers and acquisitions, and other transactions. The more advanced features, such as option pools, convertible debt, and liquidation preferences will also be introduced, which should be very applicable to anyone interested in a career in venture capital. For this reason, a cap table must be used and kept up-to-date to calculate the dilutive impact from each funding round, employee stock options, and issuances of new securities.
But when they convert, usually at a discounted or capped valuation, they can cause unexpected dilution. Failing to model their impact leads to surprise ownership drops for founders and misalignment across the board. By Series B, the cap table includes multiple classes of preferred stock, each with its own terms. The governance structure matures, with a formal board and voting mechanics that reflect investor influence.
Using Software to Manage Cap Tables
Every company has unique equity arrangements that reflect its specific goals and growth stages. Tailor your cap table to capture these specifics, such as different stock classes, option pools, vesting schedules, and any investor preferences or special terms. The platforms provide important functions to generate accurate records for both investors and regulators when performing fundraisings and exits. The use of software minimizes mistakes while saving time and providing complete openness to operations. Any startup that obtains funding from multiple investors during multiple funding rounds needs a digital cap table to maintain operational efficiency and regulatory adherence.
What is a VC Term Sheet?
Unvested equity is their insurance policy that you won’t check out when things get tough. The spreadsheet below contains two sections – valuation and ownership. All numbers in blue are hard-coded assumptions and all numbers in black are formulas. Below is a cap table example from one of CFI’s many free excel templates. Get instant access to video lessons taught by experienced investment bankers.
In practice, we’ve found that accurately tracking this potential dilution helps both founders and investors understand the long-term effects on equity distribution. It details who owns what, how much they own, and the value of their ownership at any given time. This document is important for startups and growing companies as it helps manage equity accounts, anticipate potential dilution from future investments, and make informed decisions about fundraising rounds.
A cap table should be updated every time there is a change in ownership—such as a new investment round, issuance of employee stock options, or any equity transactions. Regular updates are critical for maintaining accurate records and supporting informed decision-making. Pro rata rights are a valuable tool for existing shareholders, allowing them to maintain their ownership percentage in future funding rounds. These rights give shareholders the opportunity to purchase additional shares in proportion to their current ownership. Initially, most startups rely on spreadsheets, but as they grow, many transition to specialized software. This shift highlights the importance of efficient cap table management tools in supporting a company’s growth and ensuring accurate equity tracking.
A capitalization table shows the total market value of a company and its components. It’s considered a key point of reference for business managers in every financial decision that has an impact on market capitalization and the company’s market value. When the company decides to sell the business to another company, the proceeds from the sale are divided among shareholders. The cap table outlines how much each shareholder gets from the proceeds and in what order. An updated cap table helps eliminate any disagreements and lawsuits that may arise from the proceeds distribution. The VC cap table for a start-up can start off quite simple at first, initially including just the founders and/or the first handful of employees.
- Thus, all stakeholders can accurately calculate their share of the proceeds in a potential exit (i.e. liquidation event such as a sale to a strategic or IPO).
- That’s when it’s time to graduate to a dedicated equity management platform.
- It’s built from actual fundraising scenarios, shaped by term sheet mechanics and real-world cap table data.
From the perspective of an entrepreneur and existing investors, there are several advantages and disadvantages of raising outside capital. The right time to make the switch is as soon as you’re managing more than one funding round, issuing options regularly, or bringing in outside investors who expect clean, shareable reports. If your cap table doesn’t reflect the current state of ownership, you’re already behind. Missing updates from past rounds, forgotten option grants, or SAFEs that haven’t been accounted for can lead to disputes and broken trust. Founders, employees, advisors, angels, VC funds; they’re all listed with their respective equity holdings.
Investors often scrutinize cap tables to evaluate the financial health and distribution of equity before committing resources. Learn more about the intricacies of investment rounds in this guide to understanding term sheets. In addition to Excel templates, many digital platforms provide comprehensive solutions for managing cap tables. These software tools often come equipped with advanced features, such as automated regulatory compliance, real-time collaboration among stakeholders, and detailed analytics for tracking equity trends.
Demystifying Term Sheets and Cap Tables
They’re analyzing your efficiency, control structure, and the math behind future returns. By the time you reach Series B, the conversation shifts from potential to performance. He has a track record of exits and Unicorns, and is backed by 1400+ LPs. After that, the key components, terms and finally a Complete Exercise. After experiencing a COVID-19 related dip in Q deal count, Q3 showed signs of improvement. As you can see from the figure below, the deal sizes have trended up pre-COVID despite the drop is deal count.
Key Components of a Cap Table
The simplest form of cap tables lists the shareholders at the beginning and their respective share ownership. Cab tables are capitalization table vc example used by venture capitalists, entrepreneurs, and investment analysts to analyze important events such as ownership dilution, employee stock options, and the issue of new securities. The importance of cap tables becomes particularly evident during funding rounds, as they reveal the impact of new investments on the ownership and control of the company.
- Cap tables serve an essential role in strategizing future funding rounds.
- Whether you’re new to funding rounds or looking to refine your financial acumen, understanding how to leverage Excel for cap table management is an invaluable skill for steering your company towards success.
- In this comprehensive guide, we’ll break down everything you need to know about VC cap tables, from basic structure to complex scenarios involving convertible notes and employee stock options.
- The issue of ESOPs requires an update to the cap table which includes new potential shares.
- Mastery of cap table templates in Excel is essential not only for tracking investments but also for strategic planning and ensuring transparency during fundraising.
- These platforms automate updates, reducing the need for manual intervention and minimizing errors.
When the company raised their Series A round, they issued another 1,000,000 shares, further diluting the founders and seed investors’ ownership. The founders now own 40% each (4,000,000/10,000,000), and the seed investors’ ownership has been diluted to 10%. When they raised their seed round, they issued 1,000,000 new shares, diluting their ownership to 80% (8,000,000/10,000,000).
Cap tables track these rights by outlining each investor’s share of the company and indicating their ability to participate in follow-on investments, helping prevent unwanted dilution. These examples demonstrate how cap tables serve as essential tools for managing equity ownership, understanding dilution impacts, and maintaining transparency with stakeholders throughout a company’s growth journey. Startups must create their cap table as one of their first operational step. The document maintains clarity between the founders along with their initial workforce and their investors. Regular updates to the cap table help business stakeholders stay properly informed as the company expands.
Ignoring Convertible Instruments
In the ever-evolving landscape of startups, a fundamental tool to decode equity ownership is the ‘cap table’, or capitalization table. This essential document provides a comprehensive breakdown of ‘who owns what’ in a startup, playing a vital role in decision-making for both founders and investors. It serves as a key component in due diligence, illustrating how each stakeholder’s equity position shifts in response to fundraising events. As a startup grows, the complexity of its cap table intensifies, making understanding cap table interpretation indispensable for potential investors.
Cap tables serve an essential role in strategizing future funding rounds. The pro-forma cap table provides a projection of post-funding ownership structure changes, thus enabling stakeholders to foresee potential dilution of their stakes. This critical insight allows startups to negotiate better terms with potential investors and make informed decisions. A cap table functions beyond being just a document, because it serves as a fundamental tool for monitoring shareholding patterns and investments. It will also help founders and investors to make decisions on future rounds.
The standard of operation should remain straightforward while frequent updates are important alongside software utilization for streamlined operations. We encourage you to download the provided template and practice creating your own cap table. Stay tuned for upcoming posts in this series, where we will delve deeper into cap table management and advanced concepts.