A capitalization table, commonly called a "cap table," is a detailed breakdown of a company's ownership structure, showing who owns what percentage of the company through shares, options, warrants, and other securities. Cap tables are essential tools for founders, investors, and employees to understand equity distribution, dilution effects, and the potential value of their stakes in the company.
What Is a Cap Table?
A cap table is a spreadsheet or database that tracks all securities issued by a company, including common stock, preferred stock, stock options, warrants, and convertible securities. It shows the ownership percentage of each stakeholder and how ownership would change under various scenarios such as new investment rounds, option exercises, or liquidity events.
Purpose and Importance
- Ownership Tracking: Shows who owns what percentage of the company
- Decision Making: Helps determine voting rights and control
- Valuation Analysis: Critical for determining equity value and dilution
- Fundraising: Essential for investor due diligence
- Exit Planning: Shows how proceeds would be distributed
- Equity Compensation: Tracks employee stock option plans
Key Stakeholders
- Founders: Track their ownership dilution and maintain control
- Investors: Monitor their ownership percentages and returns
- Employees: Understand the value of their equity compensation
- Board Members: Make informed governance decisions
- Legal and Finance Teams: Ensure compliance and accurate reporting
Components of a Cap Table
Common Stock
- Founder Shares: Typically issued to founders at incorporation
- Employee Shares: Issued to employees through stock purchases
- Advisor Shares: Granted to advisors and consultants
- Common Rights: Voting rights, residual claims on assets
Preferred Stock
Preferred Stock Features
- • Series A, B, C, etc.: Different rounds of preferred stock
- • Liquidation Preferences: Priority in exit proceeds
- • Anti-Dilution Protection: Protection against down rounds
- • Dividend Rights: Preferential dividend treatment
- • Conversion Rights: Can convert to common stock
Stock Option Pool
- Reserved Shares: Shares set aside for employee grants
- Outstanding Options: Options already granted to employees
- Available Options: Remaining options available to grant
- Vesting Schedules: Timeline for option vesting
Convertible Securities
- Convertible Notes: Debt that converts to equity
- SAFE Agreements: Simple Agreement for Future Equity
- Warrants: Rights to purchase shares at specific prices
- Conversion Terms: Conditions and mechanics for conversion
Cap Table Structure and Format
Basic Cap Table Example
| Shareholder | Shares | Ownership % | Share Class |
|---|
| Founder A | 3,000,000 | 40.0% | Common |
| Founder B | 2,000,000 | 26.7% | Common |
| Employee Option Pool | 1,000,000 | 13.3% | Options |
| Series A Investors | 1,500,000 | 20.0% | Preferred A |
| Total | 7,500,000 | 100.0% | |
Fully Diluted vs. Outstanding Shares
- Outstanding Shares: Shares actually issued and held by stakeholders
- Fully Diluted: Includes outstanding shares plus all options, warrants, and convertibles
- Treasury Method: Standard method for calculating dilution from options
- As-Converted Basis: Assumes all convertible securities convert to common
Multiple Scenarios
Common Cap Table Views
- Current Outstanding: Only issued and outstanding shares
- Fully Diluted: Including all potential dilution sources
- Post-Fundraising: After planned investment round
- Exit Scenario: Distribution of proceeds in liquidity event
Dilution and Its Effects
What Is Dilution?
Dilution occurs when a company issues new shares, reducing the ownership percentage of existing shareholders. While dilution decreases ownership percentages, it can increase absolute value if the company's total value grows proportionally more than the dilution.
Sources of Dilution
- New Investment Rounds: Issuing preferred stock to new investors
- Option Exercises: Employees exercising stock options
- Convertible Conversions: Notes or SAFEs converting to equity
- Warrant Exercises: Exercise of warrants by holders
- Stock Splits: Increasing share count while maintaining value
Dilution Example
Pre- and Post-Investment
Pre-Investment:
- Founder: 5M shares (80%)
- Employee pool: 1.25M shares (20%)
- Total: 6.25M shares
Post-$2M Series A at $8M pre-money:
- Founder: 5M shares (62.5%)
- Employee pool: 1.25M shares (15.6%)
- Series A: 1.75M shares (21.9%)
- Total: 8M shares
Anti-Dilution Protection
- Weighted Average: Adjustment based on price and amount of down round
- Full Ratchet: Adjustment to lowest price paid by any investor
- Participating Preferred: Receive liquidation preference plus upside
- Preemptive Rights: Right to participate in future rounds to maintain ownership
Equity Compensation and Option Pools
Employee Stock Option Plan (ESOP)
- Pool Size: Typically 10-25% of fully diluted shares for early-stage companies
- Refresh Rounds: Adding more shares to pool before fundraising
- Exercise Price: Price employees pay to exercise options (409A valuation)
- Vesting Schedule: Typically 4 years with 1-year cliff
Types of Equity Grants
- Incentive Stock Options (ISOs): Tax-advantaged options for employees
- Non-Qualified Stock Options (NQSOs): Options without special tax treatment
- Restricted Stock: Shares with vesting restrictions
- RSUs: Restricted Stock Units that settle in cash or shares
Vesting and Exercise
Standard Vesting Terms
- • 4-year vesting: Total vesting period
- • 1-year cliff: No vesting until 1 year of service
- • Monthly vesting: 1/48th vests each month after cliff
- • Acceleration: Faster vesting upon certain events
Liquidation Preferences and Waterfalls
Liquidation Preferences
- 1x Non-Participating: Get money back OR convert to common (not both)
- 1x Participating: Get money back AND participate in upside
- Multiple Preferences: 2x, 3x, etc. liquidation preferences
- Capped Participation: Participation up to a certain multiple
Waterfall Analysis
The liquidation waterfall shows how proceeds from a liquidity event are distributed among different classes of shareholders based on their preferences and rights.
Example Waterfall ($100M Exit)
- Series B: $20M invested, 1x preference = $20M
- Series A: $10M invested, 1x preference = $10M
- Remaining $70M distributed pro rata among all shareholders
- Series B gets additional share of $70M based on ownership
- Common shareholders split their portion of remaining proceeds
Cap Table Management
Best Practices
- Regular Updates: Update after every transaction or grant
- Version Control: Track changes and maintain historical versions
- Accuracy: Regular reconciliation with legal documents
- Security: Limit access to sensitive ownership information
- Scenario Modeling: Model different fundraising and exit scenarios
Common Tools and Software
- Spreadsheets: Excel/Google Sheets for simple cap tables
- Dedicated Software: Carta, Shareworks, CapTable.io
- Legal Platforms: Clerky, Forge, AngelList
- Features: Automated calculations, scenario modeling, reporting
Record Keeping
Essential Documentation
- Stock purchase agreements
- Option grant agreements
- Board resolutions authorizing issuances
- Convertible note and SAFE agreements
- 409A valuations
- Transfer and assignment records
Cap Table Evolution Through Company Stages
Early Stage (Pre-Seed/Seed)
- Simple Structure: Primarily founders and early employees
- High Founder Ownership: 70-90% founder ownership
- Small Option Pool: 10-15% for early employees
- Convertible Securities: SAFEs and convertible notes common
Growth Stage (Series A/B/C)
- Professional Investors: VCs join the cap table
- Preferred Stock: Multiple series of preferred shares
- Expanded Option Pool: 15-25% for growing team
- Founder Dilution: Founders typically own 30-60%
Later Stage (Series D+, Pre-IPO)
- Complex Structure: Multiple classes and preferences
- Strategic Investors: Corporate investors and funds
- Large Option Pools: Significant employee ownership
- IPO Preparation: Simplification for public markets
Cap Table Mistakes to Avoid
Common Errors
- Inaccurate Records: Failing to update after transactions
- Missing Documentation: Incomplete supporting documents
- Calculation Errors: Incorrect dilution or ownership percentages
- Version Confusion: Multiple versions with different information
- Security Breaches: Unauthorized access to sensitive information
Founder Mistakes
- Ignoring Dilution: Not understanding long-term dilution effects
- Poor Option Planning: Inadequate option pool for hiring needs
- Unfavorable Terms: Accepting unfavorable liquidation preferences
- Timing Issues: Poor timing of option grants and exercises
Prevention Strategies
Best Practices
- Use professional cap table management software
- Regular reconciliation with legal counsel
- Educate team members on equity basics
- Model scenarios before making decisions
- Maintain detailed audit trails
Conclusion
Cap tables are fundamental tools for understanding company ownership, making strategic decisions, and managing equity compensation. While they start simple, they become increasingly complex as companies grow and take on investment. Proper cap table management is essential for founders, investors, and employees to understand their stakes and make informed decisions.
Understanding cap tables helps stakeholders appreciate the effects of dilution, the value of their equity, and how different scenarios might affect their ownership and returns. Regular maintenance, accurate record-keeping, and scenario modeling are critical for effective cap table management.
As companies evolve from startup to scale-up to potential exit, the cap table serves as both a historical record of the company's funding journey and a planning tool for future decisions. Whether you're a founder, investor, or employee, understanding how cap tables work is essential for navigating the equity aspects of company ownership and growth.