Definition (short)
– A capitalization table, or cap table, is a structured spreadsheet or table that records who owns a company’s equity and in what amounts. It displays each investor or stakeholder, the types of securities they hold (common or preferred stock, options, warrants, convertible instruments), the share counts and implied values, and the ownership percentages both on a basic and fully diluted basis.
Why cap tables matter
– They are the central reference for ownership and control decisions in private companies, especially startups. A cap table lets founders, investors, and advisors see how ownership changes after funding rounds, option grants, exercises, transfers, or other transactions. Accurate cap tables are essential for valuation discussions, negotiating financing terms, allocating option pools, and planning exits such as an acquisition or IPO.
Key terms (definitions)
– Common equity: Ordinary shares typically held by founders and employees.
– Preferred equity: Shares with special rights (e.g., liquidation preference) usually held by investors.
– Option: A right to buy shares in the future at a set strike price, often used for employee compensation.
– Warrant: Similar to an option, often issued to investors as an extra incentive.
– Convertible security: A debt- or equity-like instrument that can convert into shares under specified conditions.
– Dilution: The reduction in an owner’s percentage stake when new shares are issued.
– Fully diluted: A view of ownership that counts all shares outstanding plus all shares that could be created by exercising options, converting securities, or other contingent rights.
What a typical cap table tracks
– Holder name (founder, employee, investor, institution)
– Security type (common, preferred, option, warrant, convertible)
– Number of shares (issued and outstanding)
– Option pool size and granted/available amounts
– Issue price or strike price where relevant
– % ownership (basic and fully diluted)
– Dates (grant, vesting start/expiration, issue, conversion)
– Special terms (liquidation preferences, conversion ratios, anti-dilution)
– Transaction history (funding rounds, transfers, exercises)
Short maintenance checklist
– Record each financing round and calculate new post-money share counts.
– Update option grants, exercises, expirations, and cancellations.
– Recalculate basic and fully diluted ownership percentages after every change.
– Note special contract terms (liquidation preferences, conversion triggers, anti-dilution clauses).
– Maintain an audit trail (who made each change and when).
– Limit access; share only with authorized parties or serious investors.
– Reconcile the cap table with shareholders’ equity on the balance sheet periodically.
Worked numeric example
Assume a startup before Series A has the following:
– Founder A: 6,000,000 common shares
– Founder B: 2,000,000 common shares
– Employee option pool (unissued): 1,000,000 options
Total basic outstanding (issued common only): 8,000,000 shares
Series A investor purchases 3,000,000 new preferred shares.
Step 1 — Compute post-money outstanding shares (count issued shares plus new issuance; if you treat unissued options as already in the fully diluted base, include them in the fully diluted base below):
– Basic outstanding after Series A = 8,000,000 (existing common) + 3,000,000 (new preferred) = 11,000,000 shares
Step 2 — Basic ownership percentages (exclude unissued options if you want basic; include them in fully diluted)
– Founder A: 6,000,000 / 11,000,000 = 54.55%
– Founder B: 2,000,000 / 11,000,000 = 18.18%
– Series A investor: 3,000,000 / 11,000,000 = 27.27%
Step 3 — Fully diluted view (count the 1,000,000 options as if exercised)
– Fully diluted total = 11,000,000 + 1,000,000 = 12,000,000 shares
– Founder A fully diluted: 6,000,000 / 12,000,000 = 50.00%
– Founder B fully diluted: 2,000,000 / 12,000,000 = 16.67%
– Series A investor fully diluted: 3,000,000 / 12,000,000 = 25.00%
– Employee option pool (if exercised): 1,000,000 / 12,000,000 = 8.33%
This example shows how a new financing round dilutes founders and how the difference between basic and fully diluted views affects perceived ownership.
Special considerations and good practice
– Track conversion mechanics and liquidation preferences for preferred stock (these can change who gets paid first and how much
is distributed to each class upon a liquidity event. Those mechanics can dramatically change who ultimately benefits from an exit.
Other special considerations (continued)
– Anti-dilution protection: A clause that adjusts the conversion price of preferred shares if later financings occur at a lower valuation (“down round”). Common types are full ratchet and weighted-average adjustments. These change post-money ownership and should be modeled explicitly.
– Participation rights (participating vs non‑participating preferred): Participating preferred may receive their liquidation preference and then share pro rata with common stock; non‑participating preferred choose the greater of (a) their liquidation preference or (b) their pro‑rata share as common. This materially affects payouts in exit scenarios.
– Convertible instruments (notes and SAFEs): Convertible notes and Simple Agreements for Future Equity (SAFEs) convert into equity on qualifying events, often at a discount or with a valuation cap. Treat them as contingent dilution and model both pre‑ and post‑conversion outcomes.
– Warrants and other rights: These give the holder a future right to buy shares at a set price and should be treated like options when calculating fully diluted share count.
– Employee stock option pool (ESOP): Option pools are typically created or increased around financings. Whether the pool is created pre‑money (diluting founders) or post‑money (diluting new investors/others) must be agreed and reflected in the cap table.
– Pro‑rata and anti‑dilution rights: Investors may have rights to participate in future rounds to maintain ownership; model the effect if they either exercise or don’t.
– Jurisdictional/legal requirements: Different corporate law regimes (e.g., Delaware) have formality and filing obligations. Maintain records consistent with charter documents and shareholder agreements.
Worked example — liquidation preference vs conversion
Assumptions
– Founders/common: 9,000,000 shares
– Series A investor/preferred: 1,000,000 shares; invested $3,000,000 (so 1x liquidation preference)
– Fully diluted total (no options): 10,000,000 shares
– Investor pro‑rata share if converted = 1,000,000 / 10,000,000 = 10.0%
Scenario A — Sale price $20,000,000
– If investor converts to common: investor gets 10% × $20,000,000 = $2,000,000
– As 1x liquidation preference is $3,000,000, investor prefers the preference and takes $3,000,000
– Remaining to common holders = $20,000,000 − $3,000,000 = $17,000,000 (to founders)
Scenario B — Sale price $50,000,000
– If investor converts: 10% × $50,000,000 = $5,000,000 > $3,000,000
– Investor elects to convert and receives $5,000,000
– Founders receive $45,000,000
Takeaway: whether preferred converts or takes the preference changes payouts and should be modeled for a range of exit values.
Practical checklist for maintaining a cap table
– Centralize: Keep a single spreadsheet or cap‑table tool as the source of truth.
– Record details for each class/share: authorized, issued, outstanding, price, holder name, grant date, vesting schedule, and legal document references.
– Track convertible instruments: record principal, discount, cap, interest, conversion triggers, and assumed conversion terms.
– Model both basic and fully diluted views: include exercised options, warrants, and in‑the‑money convertibles.
– Date‑stamp each financing round: show pre‑ and post‑money calculations and the effect on each holder.
– Update after every corporate action: new grants, transfers, cancellations, or recapitalizations.
– Keep legal docs linked: board resolutions, stock purchase agreements, option grant letters, and amended charters.
– Audit periodically: reconcile the cap table to SEC filings (if public/required), stock transfer ledgers, and accounting records.
Step‑by‑step modeling guide for a new financing
1. Start with the pre‑money fully diluted share count (include options and expected conversions).
2. Decide how the option pool will be sized and whether it’s created pre‑ or post‑money.
3. Compute new shares to be issued to the investor: investment amount / price per share.
4. Recompute total shares outstanding and each holder’s ownership percentage.
5. Update the cap table with new classes/series and note conversion and liquidation terms.
6. Run sensitivity scenarios: different exit values, exercised options, and convertible conversions.
7. Share a versioned cap table with key stakeholders and store backups.
Common pitfalls and how