A capitalization table (cap table) specifies who owns what portion of a startup. The document provides a clear snapshot of the company's ownership structure, including details about shareholders, the types and quantities of shares they hold, and any associated rights or restrictions.

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Several parties rely on the information in a cap table. Founders use it to understand their current equity position and to make decisions about issuing new shares or bringing in investors. Investors examine the cap table to assess their ownership stake and to evaluate the impact of potential dilution from future funding rounds.

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This guide will provide an in-depth overview of how to create a cap table for your startup. This will help you manage equity ownership, attract potential investors, and plan for your company’s growth.

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What is a Cap Table?

A cap table is a document that details the equity ownership structure of a company. It provides a clear image of 'who owns what,' comprising all shareholders (founders, employees, investors) and the various equity instruments they hold.

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It’s important to maintain an accurate cap table for effective equity management, fundraising, and strategic decision-making processes.

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Components of a Cap Table

The components of a cap table include:

• Shareholder Details: Names and roles of all equity holders, including founders, employees, advisors, and investors.
• Equity Types: Details of issued securities such as common stock, preferred stock, stock options, warrants, and convertible notes.
• Number of Shares Owned: The specific quantity of shares each shareholder owns.
• Ownership Percentage: The proportion of total company equity that each shareholder's shares represent.
• Valuation Details: Information on the company's valuation at various funding stages and the price per share during these rounds.
• Option Pool Allocation: Shares reserved for future issuance to employees or consultants as part of equity compensation plans.

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These components offer a transparent view of the company's equity distribution and are important for managing ownership stakes and understanding the impact of potential financing events.

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Types of Equity Tracked in a Cap Table

Startups use different equity instruments to allocate ownership and incentivize stakeholders. The main types include:

• Common Stock: Usually held by founders and employees, common stock often carries voting rights. This allows holders to influence corporate decisions.
• Preferred Stock: Generally issued to investors, preferred stock comes with specific rights and privileges, such as priority in dividend payments and during liquidation events. 
• Stock Options: These grant employees and consultants the right to purchase common stock at a predetermined price, serving as a tool for attracting and retaining talent. 
• Convertible Notes: A form of short-term debt that converts into equity, usually during a future financing round, often used in early-stage funding. 
• Warrants: Similar to stock options, warrants give holders the right to purchase company stock at a specific price before expiration, often issued to investors as part of financing deals. 

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Since each of these equities has unique implications for control, financial returns, and the company's capital structure, it’s important to accurately track them in the cap table.

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How to Make a Cap Table for a Startup

As stated earlier, an accurate cap table helps startups manage equity ownership and prepare for future investment opportunities. It provides clarity on the distribution of startup shares among founders, investors, and other stakeholders.

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The steps below discuss how to make a cap table, including the best practices and factors you must consider for accuracy and transparency.

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Gather Necessary Information

The foundation of a reliable cap table lies in gathering accurate data: Compile a list detailing all individuals and entities with equity stakes in the company. This includes founders, angel investors, venture capitalists, employees with stock options, and advisors.

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Details of equity distribution include:

• Shares Issued: Document the total shares issued to each stakeholder.
• Ownership Percentages: Calculate the percentage of total equity each stakeholder holds.
• Vesting Schedules: Note any vesting terms associated with equity, particularly for employees and advisors, to track when shares become fully owned.

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Also, record details of any convertible securities, such as SAFE notes or convertible debt, including terms like conversion conditions, valuation caps, and discount rates. 

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Choose a Cap Table Format

Choosing the appropriate format for your cap table is necessary for ease of use and accuracy. Tools like Microsoft Excel or Google Sheets are common for early-stage startups due to their accessibility and flexibility.

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These tools are cost-effective, customizable, and familiar to most users. However, they are prone to human error, lack advanced features, and can become cumbersome as the company grows.

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Dedicated platforms offer advanced features like automated calculations, scenario modeling, and compliance tracking. These enhance accuracy and scalability. They also have features like real-time updates and compliance management. However, they may involve subscription costs and a learning curve.

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If your startup is anticipating rapid growth or complex equity structures, investing in specialized software will provide long-term benefits.

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Organize Data in a Structured Manner

A well-organized cap table ensures clarity and makes it easy to make the right decisions. The most important columns in a cap table include:

• Name: Full name of the shareholder or entity.
• Shares Owned: Number of shares held by the shareholder.
• Ownership Percentage: Proportion of total shares represented by the shareholder's holdings.
• Share Class: Type of shares owned (e.g., common stock, preferred stock).
• Price per Share: Purchase price per share, if applicable.
• Date of Issuance: When the shares were issued.
• Vesting Schedule Details: Specific terms of any vesting arrangements.

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To ensure clarity and accuracy:

• Use uniform formats and terminologies throughout the document.
• Reflect any changes in equity, such as new issuances or transfers.
• Maintain records of previous versions to track changes over time.
• Ensure all stakeholders have access to the most current version of the cap table.

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Consider Dilution and Future Investments

It’s important to understand and plan for dilution to maintain control and anticipate the impact of future financing.

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Dilution occurs when new shares are issued, thereby reducing the ownership percentage of existing shareholders. While dilution can decrease individual stakes, it often accompanies capital influx that can increase the company's value.

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Use your cap table to project how various funding rounds affect ownership percentages and control. Also, potential outcomes during acquisitions or initial public offerings (IPOs) should be evaluated to understand how proceeds would be distributed among shareholders.

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Cap Table Example

Although there is no standard format, the image below is an example of a cap table from one of CFI’s free Excel templates.

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The spreadsheet is divided into two parts: valuation and ownership. Values displayed in blue are preset assumptions, while those in black are calculated using formulas.

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In the valuation section, input the company’s current value (e.g., $1 million) and the total number of outstanding shares (e.g., 200,000). For the ownership section, input the investment amount each investor is contributing to the funding round (e.g., Investor 1 contributes $100,000, Investor 2 contributes $250,000, and so on).

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Source: CFI

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Why Startups Need Cap Tables

Cap tables are indispensable for startups that want to effectively manage equity ownership and boost growth. Highlighted below are why startups need cap tables:

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Transparency in Ownership

Maintaining a clear and up-to-date cap table ensures transparency in equity ownership, which prevents disputes among founders, employees, and investors. By documenting each stakeholder's equity stake explicitly, startups can minimize misunderstandings and establish trust.

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A transparent cap table reflects the company's commitment to openness, fostering confidence among current and potential stakeholders.

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Preparing for Fundraising

An organized cap table is important when approaching potential investors. Investors scrutinize the cap table to assess the current ownership structure, understand how their investment will affect equity distribution, and evaluate potential dilution.

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A well-maintained cap table demonstrates professionalism and readiness, facilitating smoother negotiations and enhancing investor confidence.

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Tracking Dilution and Equity Changes

As startups progress through various funding rounds, issuing new shares can lead to the dilution of existing shareholders' equity.

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Regularly updating the cap table allows founders and investors to monitor these changes accurately. Startup founders must understand the impact of new investments on ownership percentages so that they can make the right decisions and maintain equitable stakeholder relationships.

Compliance and Legal Considerations

Accurate cap table management ensures compliance with securities laws and regulations. An accurate record of equity transactions helps startups avoid legal complications and demonstrates adherence to regulatory requirements.

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This diligence not only protects the company against potential legal issues but also enhances its credibility with investors and regulatory bodies.

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How to Use Cap Tables

Here’s how the various stakeholders who benefit from a cap table can use it.:

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For Founders: Making Informed Decisions About Equity Allocation

A cap table provides a clear overview of the company's equity distribution for startup founders. This enables strategic decisions regarding equity allocation. By maintaining an accurate cap table, founders can:

• Plan for future funding rounds. Understanding current equity distribution helps founders anticipate dilution effects and negotiate favorable terms with potential investors.
• Structure employee equity incentives. A detailed cap table helps design employee stock option plans (ESOPs) that align with the company's growth objectives and retain top talent.
• Ensure compliance and transparency. Regularly updating the cap table ensures compliance with legal requirements and fosters transparency with stakeholders.

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For Investors: Assessing Risk and Valuation Before Investing

Investors rely on cap tables to evaluate the potential risks and returns associated with investing in a startup. A comprehensive cap table allows investors to:

• Analyze ownership structure. Reviewing the cap table helps investors understand the proportion of equity held by founders, employees, and other investors, providing insights into the company's governance and control.
• Evaluate dilution impact. Investors can assess how future funding rounds might dilute their ownership percentage and affect their investment's value.
• Determine valuation accuracy. By examining the cap table, investors can verify the company's valuation claims and ensure they align with the equity distribution and funding history.

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For Employees with Equity Compensation: Understanding Stock Options and Vesting Schedules

Employees granted stock options benefit from a clear understanding of the cap table, since impacts their potential earnings and commitment to the company. Access to the cap table enables employees to:

• Understand vesting schedules. Understanding the timeline and conditions under which stock options vest helps employees make the right decisions about their tenure and financial planning.
• Assess equity value. By reviewing the cap table, employees can estimate the current and potential future value of their equity compensation. This helps them align their expectations with the company's performance.
• Plan for tax implications. When employees know their equity position, they can anticipate tax obligations associated with exercising stock options and strategize accordingly.

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During Mergers, Acquisitions, or Exits

During a merger, acquisition, or IPO, the cap table is an important document for all parties involved. It serves to:

• Facilitate due diligence. A detailed cap table provides acquirers or underwriters useful information about the company's equity structure.
• Determine payout distribution. The cap table outlines how proceeds from a sale or IPO will be distributed among shareholders. This ensures transparency and fairness.
• Highlight potential liabilities. An accurate cap table reveals any outstanding convertible securities or obligations that could impact the transaction's terms.

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Common Mistakes to Avoid in Cap Table Management

The mistakes below can lead to complications, misunderstandings, and potential legal issues:

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Neglecting Regular Updates

A cap table must reflect the current state of equity distribution. Failing to update it after new stock issuances, option grants, or changes in ownership can result in outdated and inaccurate information.

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This oversight can lead to misunderstandings among stakeholders and complications during due diligence processes. To prevent this, establish a routine schedule to review and update the cap table, ensuring all changes are promptly and accurately recorded.

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Inaccurate Data Entry

Even minor errors in data entry can lead to serious errors in ownership records. Mistakes such as incorrect share quantities, misattributed ownership, or typographical errors can cause confusion and potential legal challenges.

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Double-check entries and use reliable cap table management software to minimize these errors and maintain the integrity of the data.

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Overlooking the Impacts of Dilution

Issuing new shares or granting stock options without considering the effects on existing shareholders can lead to unintended dilution of ownership. This can result in decreased control for founders and dissatisfaction among early investors.

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Before proceeding with such actions, model the potential dilution impact and communicate transparently with all stakeholders to manage expectations and maintain trust.

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Lack of Proper Documentation

Every equity transaction must be accompanied by thorough and accurate documentation. Inadequate record-keeping can lead to disputes over ownership, complicate future funding rounds, and attract regulatory scrutiny.

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Maintaining organized records of all equity-related documents, such as stock purchase agreements and board resolutions, ensures legal compliance and operational transparency.

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Wrapping Up

Mastering how to make a cap table is important for startups that want to maintain clear and accurate records of equity ownership.

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An accurate and well-maintained capitalization table not only delineates the distribution of startup shares among founders, employees, and investors but also helps with fundraising and strategic decision-making processes.

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To ensure the integrity of your startup cap table, update it promptly after any equity-related transactions, such as issuing new shares or transferring existing ones. Regular audits can help identify and rectify discrepancies, thereby preserving the accuracy of your equity ownership records.

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As your startup grows, managing the cap table can become complex. Specialized cap table software can help you improve efficiency and accuracy. These tools offer real-time updates, facilitate scenario modeling for potential funding rounds, and ensure compliance with regulatory requirements.

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Adopting such technology can help you streamline equity management processes, reduce the risk of errors, and focus more on strategic growth initiatives.

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FAQs

What is the standard cap table format?

The standard cap table format usually includes columns for shareholder names, the number of shares owned, the type of shares (common or preferred), and the ownership percentage of each shareholder.

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This format provides a clear snapshot of who owns what within the company, which is required for decision-making, especially during fundraising rounds and strategic planning.

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Although the specific format depends on the company's needs, the main elements are the same to ensure transparency and accuracy in representing the equity distribution.

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What is a cap table in Excel?

A cap table is a detailed spreadsheet that outlines a company's equity ownership structure. Usually maintained in Excel, it provides a comprehensive breakdown of all securities issued by the company, including common and preferred shares, warrants, and other equity instruments.

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Who prepares a cap table?

A cap table is prepared by the company's founders or financial advisors. These individuals compile and maintain the table to accurately reflect the company's equity distribution.

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What are the parts of a cap table?

The parts of a cap table include:

• Shareholder information
• Types of equity
• Number of shares owned
• Ownership percentage

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How do I create a cap table?

Here's how to create a cap table:

• Gather relevant information: Gather the details of shareholders, types of equity issued, and any convertible instruments like SAFE notes or convertible debt.
• Choose a suitable format: Decide whether to use a spreadsheet or specialized cap table management software. Spreadsheets are cost-effective and flexible, while software solutions offer advanced features for scalability.
• Organize the data: Set up your cap table by listing shareholders, specifying the type and number of shares owned, and calculating ownership percentages. Ensure the table is clear and easy to update as changes occur.
• Account for dilution and future investments: Model how new funding rounds or share issuances affect existing ownership percentages.
• Regularly update the cap table: This helps you maintain clarity and control over company ownership, avoid costly mistakes, and make the right decisions.