Understanding Cap Tables
1. What is a cap table?
A cap table is a summary of a company’s current and potential ownership, including shares that are currently outstanding (common shares, preferred shares, options and SAFEs), as well as potential shares (share options, warrants and convertibles).
It shows how much of each security type each investor owns, the value of their respective stakes, and their current ownership percentage. In other words, a cap table is a comprehensive listing of what an investor would want to know about a company’s ownership. In general, the cap table is an intricate breakdown of a company’s shareholders’ equity.
This is what a blank cap table for a company without external funding looks like:
2. Why do I need a Cap Table?
For investors, understanding the current investment structure of your company is a critical factor that influences their decision on whether or not to invest in your company. It’s often the first thing investors request, and it makes you look very unprofessional if you don’t have one.
Who Owns What Shares?
From your cap table, investors get an instant snapshot of who owns the company and how much of the company is owned, which affects everything from who has control of the company to the pricing of future funding rounds.
As a useful business tool, your cap table should also play a key role in your own management decisions around the distribution of shares.
Cap tables are particularly important during early-stage investment rounds, giving investors insight into what percentage of the company shares is still available, and how much say they would have in the running of the company after investing.
Tracking the Stakes
So, the importance of cap tables cannot be highlighted enough. One of their key functions is that they allow investors to understand what they’re buying, as well as help all shareholders (yourself included) to keep track of their stake as your startup raises more capital.
3. What Investors are looking for in a Cap Table:
A point of concern for investors is small founder shareholding in early-stage investment, as it could mean that the founder won’t necessarily have the financial motivation to stick around for the long haul. The cap table clearly shows the size of the founder shareholding.
On your cap table, new investors can see who your existing significant investors are. The right investors can be a significant reason to invest, the wrong investors can be a potential red flag. Ultimately investors want to work
Existing Dilution Trends
Another revealing insight that new investors can gain from your cap table is whether the startup has taken significant dilution so far. If so, this is a worrying trend as, if this continues in future rounds, the investor’s potential returns are eroded by founders who take too much dilution at each stage.
Dilution occurs when a company issues new shares that result in a decrease in existing stockholders’ ownership percentage of that company. Stock dilution can also occur when holders of stock options, such as company employees, or holders of other optionable securities exercise their options. When the number of shares outstanding increases, each existing stockholder owns a smaller, or diluted, percentage of the company, making each share less valuable.
Red Flags in previous term sheets
Knowing whether a startup has existing investor protection, such as different share classes with anti-dilution, liquidation preference, etc, is of importance to potential new investors. However, this information is more extensively covered in reading a term sheet.
Please see the Floww guide on understanding a term sheet here [insert hyperlink].
4. Key Parts of a Cap Table
While there is no set format for a cap table, every cap table should contain these details to clearly show the equity capitalisation for a company:
- Authorised shares
- Outstanding shares
- Unissued shares
- Shares reserved for stock options
- Valuation details of the last priced round (including pre-money valuation, amount of new equity raised, per-share price, and number of shares)
- Complete list of shareholders (including the type of shares they own, the total number of shares, and percentage ownership stake)
Cap tables generally include all of a company’s equity ownership capital, such as common equity shares, preferred equity shares, warrants, and convertible equity.
5. How to read and understand a cap table
Understanding all of the technicalities of investment — how you should calculate your valuation, what your term sheet actually says, and what a cap table is, let alone should demonstrate — can often feel like the most difficult part of the process. Even more than pitching and finding the right investors, it requires learning and applying what is likely completely new information. The experienced Floww Data Team is here to guide you through the process if you have any questions or need guidance.
So, to recap – a cap table is an actual table that takes all of the shareholders in your business and lays out who owns what, how much each one owns, and what value is assigned to the stock they do own.
Here is an example of a cap table:
In the cap table above, all the key elements are included: post-money valuation, price-per-share, shareholders, how much shareholders paid for shares, and what percentage of ownership it gives them pre- and post-money.
We can break this down into its core components to see where these numbers came from, starting with post-money valuation.
Pre and Post-Money
So, what is the difference between pre-money and post-money? It is all about timing – pre-money and post-money differ in the timing of valuation. Both pre-money and post-money are valuation measures of companies and are crucial in determining how much a company is worth.
Pre-money valuation is the value of a company not including external funding or the latest round of funding, while post-money valuation includes outside financing or the latest capital injection.
During your term sheet discussions with an investor, you will have agreed to a pre-money valuation and how much money will be raised which, added together, will equal post-money valuation. So, with the example above, the post-money valuation equals £5,000,000 because: £4,000,000 + £750,000 + £250,000 = £5,000,000
The other item that is automatically calculated during the term sheet discussions once a pre-money valuation has been agreed upon is price-per-share, which determines how much the investor will pay for shares. The price-per-share is simply the pre-money valuation divided by the number of pre-money shares.
Fully Diluted Shares
Another important factor, when reading a cap table, is what percentage of shares is fully diluted.
Fully diluted shares are the total number of common shares of a company that will be outstanding and available to trade on the open market after all possible sources of conversion, such as convertible bonds and employee stock options, are exercised.
Fully diluted shares include not only those which are currently issued but also those that could be claimed through conversion. This number of shares is needed for a company’s earnings per share (EPS) calculations because applying fully diluted shares increases the share basis in the calculation while reducing the pounds earned per share of common stock.
A convertible bond is a fixed-income corporate debt security that yields interest payments but can be converted into a predetermined number of common stock or equity shares. The conversion from the bond to stock can be done at certain times during the bond’s life and is usually at the discretion of the bondholder.
Floww’s Data Team is standing by to answer any further questions you may have on cap tables.