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How to Create a Cap Table — the A-Z Guide for a Startup

Answering the 3 Ws about a capitalization table: What is it? Why does a startup need one? What should it look like? Let’s make a cap table template together.

This material will be useful for those who only start digging into the issue.

What is a cap table and what is it used for?

A capitalization table (or a cap table) is a table providing the key data about the company’s stakeholders, including the investment dates and amounts, as well as ownership interests and a range of other information. Each new investor has a row in a table that covers all the data on them, such as their share, its current value, and its dilution* affected by the changing value of the company. 

*Share dilution is the decrease in the existing shareholders’ ownership against the updated value of the company. The dilution of the share occurs as a result of the company issuing a new round of shares when the nominal value and number of cofounders’ shares stays unchanged. It usually happens after attracting additional investment.

In addition to being crucial for a startup’s internal accounting, the table is necessary for potential investors. The information from the cap table allows owners and investors to analyze the vital financial transactions since the foundation of the company, understand who owns what and how investments are affecting shares of employees and founders. 

A full-fledged capitalization table should contain the following:

  • registration of share interest, 
  • stock issues, 
  • capital receipts, 
  • options,
  • vesting schedules,
  • debt obligations,
  • convertible loans.

Additionally, the table includes supporting legal documents.

It is recommended to create the cap table simultaneously with the startup launch since each funding round adds some new data and keeps complicating the big picture. While at an early stage the table consists only of the actual financial statements and info about the founders, later on, it will include potential funding sources, investment rounds, mergers, acquisitions, and other capital transactions.

What the capitalization table should look like 

It is essential to fill in the following data step by step: 

  • company’s founders, 
  • managers and employees who own shares, 
  • investors.

After that, you can add investment rounds, M&As, issues, and other financial data. Each column should be filled in with the corresponding information: 

  • shareholders’ names,
  • the number of shares owned by each holder,
  • types of securities involved in capitalization (issued options, warrants, convertible loans, etc.), 
  • the total number of shares in circulation (helps shareholders determine the degree of their shares’ dilution),
  • the number of free shares available for purchase.

Star Trek Enterprise, Ss.

Person

Type of securities

Sum

The number of shares

Price

Ownership

Incorporation

James Kirk

01-01-2010

Common shares

500

500 000

0.001

50%

Spock

Common shares

500

500 000

0.001

50%

Total

1 000 000

Employees’ options

01-10-2010

Leonard McCoy

Option

15 000

=V1

Scott Montgomery

Option

15 000

=V1

Nyota Uhura

Option

15 000

=V1

Hikaru Sulu

Option

15 000

=V1

Pavel Chekhov

Option

10 000

=V1

Retained shares

Option

30 000

=V1

Total

100 000

=V1

Angel round

01-02-2010

Gene Roddenberry

Convertible loan

100 000

=V1*0.8

Total

100 000

Accelerator

01-04-2010

Paramount combinator

Warrant

20 000

10 000

2.00

Table 1. Cap table for the Star Trek Enterprise project.

Additional data should be entered as soon as it becomes available. It includes the total number of the placed securities issued by the company, as well as the number of shares in current circulation. Along with the new funding rounds, a lot of new data should be added to the table, including data about issuing new shares, stock options for employees, attracting convertible loans, issuing discounts, and etc. The shareholders’ withdrawal from the equity participation, the transfer of shares from one investor to another, as well as employees dismissal — all of this will also show in the capitalization table.

How to make a capitalization table 

A simple solution for an early-stage startup is to create a table in Excel, Numbers, or Google Sheets or use one of the free templates. You can download themhere or here.

Table 2. Example of the capitalization table template. Sections highlighted in blue are the set values.

This Excel template has two sections: Company Valuation and Company Ownership Cap Table. Under Company Valuation, you should state the current cost of the project (in this case, $1,000,000) and the actual value of shares in circulation ($200,000). The Equity participants section contains the amounts put into by each investor in the current funding round (for example, the first businessman invested $100,000, the second investor did $250,000, and so on). All other indicators are calculated using formulas. 

Such a template is the simplest solution for a startup at the beginning of the road. But over time as new financial factors and influencing elements are added, the table will become much more complicated. 

How to read capitalization tables

The information from the cap table helps you understand what profit each shareholder will receive based on equity participation or a liquidity scenario. For example, let’s revise the example in Table 1. 

At the first stage, the founders of the company (Kirk and Spock) own one million shares of Series A (the first issue of securities), with a par value of $1,000, thus giving them 50% of equity participation in the capital. A month later, the company attracts angel investments of $100,000 as a convertible loan* with a 20% discount for preferred shares of the first venture round.

*A convertible loanis an investment mechanism when a lender provides a loan on certain conditions. For example, a small percentage with the right to convert the debt into company shares when someone else invests in the project (in our case, within the first round). At the same time, the loan amount is usually converted into securities at a pre-money valuation. This gives investors certain advantages, i.e. eliminating risks, the ability to return funds at any time, the right to a conversion discount (see our example), or a conversion valuation cap. 

The conversion discount gives some investors financial advantages over others. This means that if the remaining investors will have to pay $10 per share at the venture stage, then the discount will provide the angel investor with a price of $8. For the same amount, they can buy more securities and, accordingly, a larger share in the company.

The conversion valuation cap is another bonus negotiated at the investment stage. If the company valuation at the next investment round is bigger than agreed (for example, over $5,000,000), the lender will still be able to convert its loan into shares at the company’s initial cost. 



Venture round I

01-10-2010

Vulcan Ventures

Preferred shares

3 000 000

30%

Total

3 000 000

30%

Venture round II

01-04-2012

Vulcan Ventures

Preferred shares

3 000 000

10%

Klington Investments

Preferred shares

5 000 000

10%

Total

8 000 000 

20%

Table 3. With equal amounts of investments, venture investments of $3,000,000 provide different shares (30 % and 10 %) in the project.

The valuation cap is important in allocating equity participation of investors. For example, at the second and the following rounds, investors rely on the conversion valuation cap (see Table 3) to understand the possibilities of their equity participation that will decrease in each next round. 

Summing up

The data we included in our example tables is just a small part of the information reflected in real ones. By the way, here’s an interesting fact: in US-based companies, submitting a capitalization table is one of the few ways of registering ownership rights to shares. US laws allow using capitalization tables as official legal documentation of property rights.

Even if your country has other legislation rules, the cap table can still be used in the internal accounting of the company. It also helps you communicate with investors interested in your startup.

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