As a startup founder, you’ve probably heard of a Cap Table, but what is it and what does it mean for your business?
As a startup founder, you’ve probably heard of a Cap Table, but what is it and what does it mean for your business?
Cap Table, short for Capitalization Table, is a spreadsheet or document that serves as a ledger that tracks the allocation and distribution of ownership stakes in a company. Basically, it’s a document that illustrates the ownership structure of a company. It details who owns what percentage of the company's equity and what type of equity they hold, such as common stock, preferred stock, options, etc. – providing a clear picture of ownership. It is an essential document to any and all businesses that may range from a simple single-class, single-owner structure to a complex multi-class, multi-owner, and variable-rights structure.
Just like everything else in the startup landscape, deciding how to maintain your Cap Table is crucial. Often, when a company is in its early stages, the Cap Table is managed by the company’s legal counsel. This is a cost effective and straightforward solution that keeps the Cap Table close to the company and its key advisors. Once the company has raised its first couple rounds, we typically see a transition from the lawyers to a dedicated Cap Table provider, however, deciding when and which provider to go with is nuanced and depends on circumstance.
Typically, a Cap Table includes the following information:
Whether you need a Cap Table manager or not depends on the stage of your startup. Generally speaking, a Cap Table is important for any company with more than one shareholder. If you’re considering pitching to investors, an accurate Cap Table is crucial as it provides clarity on your company’s ownership structure and the distribution of equity among stakeholders. It will directly influence the terms at which an outside investor will offer as it is critical in evaluating their potential return on investment and assess the risks associated with equity ownership.
However, Cap Tables can also prove to be more hassle than they’re worth, particularly for early-stage startups. They can be expensive and complex to maintain, and if an early-stage startup has limited financial activity to begin with, a Cap Table could glean very little to no value anyway. It’s best to prioritize the development of your product or service first and consult with legal counsel as the company structure evolves.
Overall, a Cap Table, when it becomes necessary to have one, serves as a comprehensive record of a company's ownership structure and is an important tool for understanding the distribution of equity and the potential impact of future financing.
Deciding on if and when to implement a Cap Table is nuanced and can seem like a daunting step to take. There are plenty of Cap Table providers out there to assist in the process, but that option comes with a caveat as well. Cap Table providers will commonly provide a “free” 409A valuation with their service, however, this can require substantial time, effort, information, and money that early-stage startups just don’t have. While the offer may seem alluring and can certainly be beneficial to some, a free 409A is often a gimmick, one that can be risky because the startup gets a less-than-optimal valuation. And yet, it’s commonly used to entice founders to pay for a pricey Cap Table service that they often do not yet need. Instead, founders should consider seeking a 409A from a valuation provider that specializes in early-stage valuations.
