What Is a Cap Table? The Complete Guide to Equity Management

So you’ve started a company and are ready to bring on investors or hire employees. But before you do, you need to get your equity management in order. What does that even mean? Simply put, you need to create a capitalization table, or cap table for short. A cap table tracks who owns shares of your company and details like the type of shares, percentage owned, and value. It’s one of the most important documents for any business.

Why do you need a cap table? For one, it shows investors exactly who owns what before they put money into your company. It also helps ensure that equity is distributed properly to employees and everyone has a clear understanding of their ownership. Creating and maintaining an accurate cap table from day one will save you a ton of headaches down the road.

In this guide, we’ll walk you through what a cap table is, why you need one, how to create your own cap table, common mistakes to avoid, and cap table examples. By the end, you’ll be fully equipped to set up and manage your company’s equity. Let’s dive in!

What Is a Cap Table?

A cap table is short for capitalization table. It’s a record of who owns shares in a company and details about those shareholdings.

Why do I need a cap table?

As a founder, you need to know who has ownership in your company and how much. A cap table provides this crucial information at a glance. It’s essential for managing equity, compliance, and investment.

How do I make a cap table?

You have a few options:

• Use a spreadsheet like Excel or Google Sheets. This works for small, early-stage companies but can be messy and inefficient as you grow.
• Get cap table management software. Platforms like WOWS Cap Table streamline the process. They handle version control, ownership changes, and compliance with securities laws. Many are free for small companies.
• Hire legal counsel. For more complex situations, it may be best to get help from a lawyer experienced in startup equity. They can create customized documents to meet your needs.

What’s wrong with Excel-based cap tables?

Spreadsheets are prone to errors and formula issues which can lead to inaccurate records and non-compliance. They also lack:

• Version control: It’s easy to lose track of changes which can cause disputes over ownership percentages.
• Automation: Managing an increasing number of shareholders and ownership changes becomes extremely tedious and time-consuming in a spreadsheet.
• Legal compliance: There are many regulations around equity issuance and transfer that spreadsheets don’t account for. This can put you at serious risk.

How to manage a cap table

• Record issuances of shares, transfers of ownership, conversions, and other changes as they happen.
• Conduct periodic audits to ensure all records match actual ownership certificates and other documents.
• Keep fully diluted and non-diluted share counts up to date.
• Maintain proper legal filings like 83(b) elections, notices of exemption, and more depending on your jurisdiction.
• Issue share certificates, statements of ownership, and cap table summaries to shareholders.
• Restrict access and backups to authorized individuals only.
• Review and update your cap table during financing rounds and when raising capital.

How to Create Your Startup's Cap Table Step-by-Step

A cap table, or capitalization table, is a spreadsheet that tracks the ownership of your startup. To make one, follow these steps:

1. List your company’s securities. This includes common stock, preferred stock, warrants, and options. For each security, include details like the number of shares, share price, and percentage ownership.
2. Add your company’s founders and their shareholdings. Include each founder’s name, number of shares owned, percentage ownership, and share class. Make sure the total shares add up to 100%.
3. Include any investors and their investments. Add details like the investor’s name, investment amount, security type (common stock, preferred stock), number of shares received, and percentage ownership.
4. Track any changes in ownership. Note important events like new investments, share transfers, option exercises, and shareholder vesting. Update share counts and ownership percentages accordingly.
5. Review and audit the cap table regularly. Double check that all share issuances, cancellations, and transfers have been properly recorded. Make sure share counts and percentages are accurate for all shareholders. Look for any errors or omissions.
6. Consider using cap table management software. As your company and shareholder base grow, Excel can become difficult to manage. Software solutions like WOWS Cap Table offer more robust cap table tools to help ensure accuracy as your startup scales.
7. Keep your cap table up to date. Update the cap table promptly anytime there are changes in share ownership. An accurate, real-time cap table is crucial for managing your startup’s equity and governance.

Why do you need a cap table? A cap table gives you a snapshot of your startup’s ownership and equity distribution at any given time. It’s an important tool for managing shareholder relationships, raising new funding, and ensuring good governance. Keep your cap table organized and you’ll have a solid foundation for startup equity management.

Cap Table Mistakes to Avoid - The Drawbacks of Excel-Based Tables

Excel-based cap tables may seem like an easy solution, but they often end up causing major headaches down the road. Here are some of the major drawbacks to watch out for:

Lack of Version Control

With Excel, there’s no way to track changes or revert to previous versions of your cap table. Any mistakes made are permanent. If multiple people are editing the sheet, it’s easy for changes to get overwritten or lost, and nearly impossible to determine who made what changes when.

Prone to Errors

Excel cap tables require manual data entry, and we all know that people make typos and mistakes. When it comes to legal documents like a cap table, errors can have serious consequences. Things like incorrect share counts, missing information, and inconsistent formatting are common in Excel and can undermine the integrity of your records.

Difficult to Scale

For early-stage startups, an Excel cap table may work just fine. But as your company grows and takes on more investors or shareholders, an Excel sheet can become extremely unwieldy. With hundreds or thousands of entries, an Excel cap table is tedious and time-consuming to update and maintain accurately.

Lack of Reporting and Insights

With a cap table tool, you get access to powerful reporting and analytics to gain valuable insights into your equity structure. An Excel sheet alone can’t provide interactive reports, ownership summaries, or scenario modeling. You’re left manually crunching numbers to try and understand the implications of events like a new funding round, option grants or shareholder exits.

Not Legally Compliant

For compliance with regulations like 409A, Excel cap tables typically lack critical features like timestamping, audit trails, and e-signatures. They also don’t generate the necessary compliant reports that companies are required to produce. Using Excel for your cap table could put you at risk of penalties if audited.

In summary, while a simple Excel sheet may seem like an easy solution for a cap table, it comes with significant risks and downsides that often outweigh any benefits. For most companies, a dedicated cap table management tool is the smarter choice.

Cap Table Best Practices - Tips for Managing Equity as You Scale

As your startup grows, it’s crucial to implement best practices for managing your company’s equity. A well-organized cap table will make your life much easier down the road.

Use a dedicated cap table management tool

Rather than an Excel spreadsheet, use software built specifically for cap table management. These solutions automatically calculate equity splits, manage legal documents, and provide an auditable record of all changes. They eliminate errors and ensure everyone has the latest information.

Document everything

Keep records of all equity issuances, transfers, and other changes. Upload copies of legal agreements, board consents, and shareholder approvals. These records will be invaluable if questions ever arise or during due diligence.

Maintain accurate contact info

Make sure you have current contact details, including addresses and email, for all shareholders, option holders, and warrant holders. Outdated information can lead to legal issues and complications.

Issue equity properly

Follow the process outlined in your company documents for issuing new shares or options. Get proper approvals and file required registrations to stay compliant. Review requirements under federal and state securities laws.

Communicate regularly

Keep stakeholders in the loop with periodic updates on their equity holdings and company progress. This transparency builds goodwill and trust in the company. Provide year-end tax documents as required.

Plan ahead for major events

Think through the impact of possible future events like new funding rounds, IPOs, acquisitions, and shareholder exits. Work with your legal counsel to make sure your cap table can properly handle such scenarios. It’s easier to address these issues proactively versus reactively.

With some organization and foresight, you can establish cap table best practices that serve your company well through all stages of growth. Keeping your equity data clean and shareholders happy will pay dividends down the road.

Cap table examples

A capitalization table, or “cap table,” details the ownership structure of a company. It shows the percentage of shares owned by each shareholder and equity holder.

As a startup founder, maintaining an accurate cap table is critical to keeping track of who owns what in your company. Here are some of the key reasons you need a cap table:

• It provides a record of all shareholders and equity holders, and the number of shares they own. This includes founders, investors, employees, advisors, etc.
• It helps ensure shareholder rights are upheld by recording important details like vesting schedules, share types (common vs. preferred), voting rights, etc.
• It provides transparency for shareholders and helps avoid confusion or disputes over ownership.
• It's required for most funding rounds and equity transactions to show investors the company's ownership breakdown.

You can create a simple cap table using a spreadsheet, but as your company grows, it's best to use dedicated cap table management software. Some downsides of spreadsheet-based cap tables include:

• Prone to formula and linking errors that can be hard to spot
• Difficult to model complex equity transactions
• Lack of version control and audit trail
• Not secure—anyone with access can make changes

To properly manage your cap table:

-Record all share issuances, transfers, conversions, and other equity events.

-Maintain records of all legal documents like stock option plans, shareholder agreements, etc.

-Regularly audit and reconcile your cap table to ensure it's accurate and up to date.

-Control access and make regular backups of your cap table.

-Consider getting a 409A valuation to determine the fair market value of your shares.

Some examples of cap table events include: founder shares vesting, angel investment, employee option exercise, series A funding, share conversion, share transfer, etc. An accurate cap table will tie all these events together to provide a clear picture of your company's ownership at any given time.

Conclusion

In conclusion, this comprehensive guide equips you with the knowledge and tools necessary for effective cap table and equity management. Understanding the significance of a cap table, its construction, and the importance of maintaining it as your company grows is essential for financial clarity and confidence. To simplify this process, consider utilizing cap table software such as WOWS Cap Table, which automatically updates your cap table with each security issuance and acceptance. Learn more about our features or request a demo today to empower yourself with efficient equity management capabilities. Remember, knowledge is power, and with this guide, you're well-prepared to professionally manage your company's equity.