Everything a startup should know about Cap Tables

If you're a UK-based startup founder with dreams to build a thriving company, you know cash flow and funding are crucial.

Though funding is great for company growth, it dilutes your shares, meaning that the more equity you part with, the less control you'll have over your company. Cap tables help founders to easily track and manage equity, while saving time for other important tasks like talking to users and finding investors.

In this guide, we will show you what a cap table is, how to build one and best practices for maintaining one. You'll also learn how Wise Business helps receive and send payments in 40+ currencies.

Key takeaways:
A Cap Table is a document that outlines a company's ownership structure, detailing who owns shares, their percentage of ownership, and future equity agreements like stock options and convertible notes Key components include: shareholder info, equity types, no. shares and ownership percentage, and valuation.

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What is a Cap Table?

A cap table is a document that outlines your company's ownership structure. It records who owns shares, how many shares they own, and each shareholder's percentage of ownership. It also lists agreements that'll become equity in the future, such as stock options, convertible notes, and warrants.

Cap tables help you to better manage equity and understand how ownership is shared among the company's shareholders. Though it's not legally required, it's a crucial document in funding negotiations and company valuations. It typically shows how shares are distributed across founders, investors, employee stock options, and warrants.

Here's why you should create a cap table for your startup:

• It shows investors how equity is shared in the company, who owns the shares and what they’ll likely get in return for providing funds.
• It communicates transparency and builds trust with existing and prospective investors and shareholders.
• Cap tables simplify ownership calculations by helping you track and manage equity as your startup grows. Without a cap table, it would be difficult to calculate the number of shares each shareholder owns, their percentage ownership, and dilution.
• Cap tables help you project the impact of selling equity to new investors and to negotiate realistic investment terms.

Now that you know what a cap table is, here are some sections you should always include in your cap table.

What are the Key Components of a Cap Table?

To provide the information investors and employees need to understand your company's equity and ownership structure, cap tables should include key sections.

While creating one, balance transparency with discretion. Think deeply about how much information to share with investors and employees. Keep it simple and easy to go through.

Here are key components to include in your cap table:

Shareholder Information

This part of the cap table lists all entities and persons that own shares in the company. It includes shareholder information, like their names and contact details. Always keep the list of shareholders up to date and accurate. Use shareholders' legal full names, not nicknames or abbreviations, to avoid delays when negotiating events like IPOs (initial public offerings).

Types of Equity and Share Classes

A cap table should include the different equity types and share classes the company has. Each share class has different voting rights and liquidation preferences. For example, Though founders and employees have common shares, a founder’s shares might belong to a different class (say, class A), giving them additional rights and terms.

Some types of equity include,

• Ordinary shares: Also called common stock, these are shares that grant shareholders a fraction of company ownership, access to shareholder meetings, voting rights and claims to dividends (residual profits). They vary in amount depending on the company's profits and potential reinvestment, and usually receive dividends after preferred shareholders have been paid.
• Preferred shares: Preferred stock is a form of equity that represents shareholders' ownership in a company and their rights to receive regular fixed dividends from the company. They have no or limited voting rights and receive payouts after bondholders and before common shareholders in the event of a liquidation.
• Warrants: Usually offered to partners or investors, warrants grant the right to buy stocks (preferred or common stocks) at a predetermined price over an agreed period. Once the partner exercises these warrants, they become shares.
• Options: These are agreements between a company and its employees that give them the right to buy shares at a fixed price (strike price), usually with a fixed vesting schedule.

For example, a company might offer its Chief Technical Officer (CTO) options equal to 1% of the company, vesting over four years with a one-year cliff. No options vest until the CTO completes one year of work, at which point 25% vest.

The remaining options vest gradually over the next three years. Once options vest, the CTO has the right (but not the obligation) to exercise them.

Number of Shares and Ownership Percentage

A cap table outlines the total number of shares. This includes the number of shares that each shareholder owns and the percentage of the company those shares represent.

Valuation Information (Pre-Money, Post-money, 409A)

Depending on the stage of your company and how many funding rounds it has undergone, you can add the valuation information to your cap table.

This informs investors on the monetary value of their shares. An up-to-date cap table captures valuations as they change following events such as funding rounds.

Some valuations to include on your cap table are:

• Pre-money valuation: Your company's value before a new funding round.
• Post-money valuation: Your company's value after a funding round.
• Price per share: this is the cost a single share of a company's stock
• 409A: is an independent and unbiased assessment of the fair market value of your company's common stock on the day it is issued.

If you have a founder or employee from the United States, intend to raise funds from US venture capitalists, have a US subsidiary, or plan an acquisition or IPO linked to the States, you need a 409A valuation.

💡 Read more about pre-money vs post-money valuation

Equity transaction history

This is a detailed record of how your company's equity and ownership have evolved following events such as funding rounds and the exercise of stock options.

With these key sections of the cap table in mind, here's a breakdown of how to build one.

How to Build a Cap Table

Building a cap table depends on your company's stage and ownership structure. Here are some ideas to begin with:

Gather equity and ownership data

Bring together all the documents and information on equity, ownership, including relevant legal documents. Accurately gathering these documents helps you create a complete and up-to-date cap table.

Important data to collate are:

• Shareholder details
• Funding rounds
• Total authorised shares
• Equity types
• Option pool details
• Issued and outstanding equity

Inputting Founder Shares and Investor Contributions

Next, create a spreadsheet and input the amount of common shares assigned to each of the company's owners. Include vesting schedules that show when founders and employees have the right to fully own shares. This provides a basis to track ownership percentages and dilution.

Add details about investor funding from funding rounds (Series A, Series B and Series C). Include how many shares were sold, at what price and on what liquidation terms. This helps future investors accurately value your company.

Accounting for Employee Stock Options

Some agreements, such as stock options, warrants, and convertible notes, don't become fully owned equity until a set time. But to avoid future disputes and confusion, they should be reflected on your cap table.

Option pools are stocks reserved for employees and partners. These are incentives to encourage service providers and team members to stick around longer and be more committed to your company's success.

Reflecting this on your cap table helps investors calculate the pre-money valuation and shows you're ready to attract new talent without diluting the shares of new investors.

Convertible Instruments

Next, list all convertible securities like convertible notes, Simple Agreements for Future Equity (SAFEs), and Advanced Subscription Agreements (ASAs) in a separate section of the cap table. Record the invested amount, discount, maturity date (for convertible notes), and valuation cap. After they become equity, you can integrate them back into the cap table as equity.

Convertible notes are recorded as debt until they convert to equity, but it's important to reflect them in the cap table so that shareholders and prospective investors can know how their shares will dilute over time.

💡 See our full guide on SAFEs vs CLNs

Calculating Total Outstanding Shares and Dilution

This section calculates the total shares (preferred and common shares) that have been issued, plus warrants and stock options that have been exercised.

It can also include convertible notes, SAFEs, unexercised stock options and warrants. These show investors and shareholders the current potential dilution of the shares.

Some cap tables include models of possible future dilution. For instance, if a company wants to raise a Series B round of £10 million at a £40 million post-money valuation, the cap table can calculate how much each shareholder’s percentage ownership will decrease.

Such projections inform better decisions and prevent disputes.

The Importance of Regular Updates

Regularly reflect equity-related events in the cap table to avoid inaccuracy, confusion, and missed opportunities in the future. Update your cap table when you

• Issue options or exercise options
• Transfer shares
• Convert notes
• Receive funding from priced rounds

An accurate and up-to-date cap table helps you negotiate term sheets during funding rounds. You'd have a clear idea of what your company's ownership structure really looks like and what funding terms you can reasonably agree to.

How can you ensure you're building your cap table correctly? Here's how to get it right from the start.

Best Practices for Cap Table Management

Equity is one of your startup's most strategic tools when it is managed well. At the onset, cap tables are simple and easy to manage, but as stock options, funding rounds and ownership changes occur, inaccuracies and oversights compound.

Delegate ownership of the cap table

As a founder, take ownership of the cap table. With time and growth, you can assign a team member or an expert, for example, a lawyer, to update your company's cap table.

Avoid letting more than one person manage your company's cap table. Allowing different people to edit and update it might lead to more errors and confusion, especially since the cap tables of growing companies require interpreting legal documents and using formulas.

Accuracy and compliance

Your cap table should always be accurate and updated. As your company grows, maintaining a cap table becomes more complicated and identifying and fixing errors becomes more expensive. Fix inaccuracies as soon as you spot them.

Also, update the cap table once there's an event that affects the ownership of the company.

Inform all stakeholders of the cap table updates

Let all shareholders be aware of changes to the cap table. Keeping everyone on the same page helps you manage expectations and prevent legal disputes.

Keep shareholders recent information

Ask your investors and employees who own shares to always inform you of any changes to their personal data, such as phone numbers and email addresses. Keeping outdated records of shareholders might delay some deals.

Software and spreadsheet

If your startup is small, you might find spreadsheets adequate to manage cap tables. But as it grows and more changes to equity and ownership happen, they'll need automated cap table solutions to improve accuracy and model dilution and liquidation scenarios.

Common cap table mistakes founders make

Some common mistakes founders make in their cap tables include:

• Not vesting shares, which leads to founders and employees walking away after a few months with a significant ownership stake in your company.
• Giving away too much equity too early and not realising how much the founders' shares have been diluted.
• Not keeping shareholders informed about ownership changes.
• Keeping outdated or incomplete shareholder names. Using nicknames and shortforms for shareholder details
• Dead equity
• Maintaining an inaccurate or unstructured cap table through several ownership changes

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FAQs

What cap table management software is best?

This varies from business to business. Some companies use online cap table management software, while others use Excel sheets.

Who should be included in a cap table?

All equity owners should be included in a cap table, including investors, founders, employees who have exercised options, and advisors.

How do you calculate percentage ownership on a cap table?

Divide each shareholder's shares by the total shares and multiply by 100.

(Your shares/total shares) × 100

When should a startup create its first cap table?

It's best to create a cap table from the time you legally register a startup. This prepares you to document crucial information on funding, options, and general company ownership.