This post was written by Alon Amar during his tenure as an Analyst at Viola Ventures (2015-2017).
Ready to begin your entrepreneurial journey with your very own startup? Exciting stuff! Just a small question: What’s your cap table going to look like? It’s a topic that’s been widely discussed in many different blogs and forums, but I still come across cap tables that are disorganized and unclear (and as a VC Analyst, I can assure you that I look at a ton of cap tables all the time). But there’s good news for those of you suffering from Cap Table phobia: It’s not as scary as you think to get your cap table in shape, and today I’ll share some basic tips and terms that will help you “tame the beast” once and for all.
But first thing’s first:
What is a cap table and why do you need one at all?
Simply put, a cap table allows you to keep track of the various owners of shares in your company. There are many critical reasons for maintaining a cap table, but the four most important reasons are probably these:
1. Raising Money: If you are at all interested in raising capital for your startup from VCs, one of the first questions that will most likely be discussed is “Who are the investors in this company? What does the cap table look like?” So if you don’t already have this clearly outlined, these questions will prove to be unnecessarily stressful and you may find yourself in a last minute rush to get your numbers in order.
2. Employee Retention & Hiring: In order to grant options to employees as part of their compensation, there needs to be a central place where you keep track of how many options have been granted and how many you still have left to grant to future employees. The last two lines in the example below serve this purpose.
3. Company Ownership: Without a cap table you wouldn’t know who owns what in your company for legal, strategic and financial purposes. This could have a myriad of implications in the day-to-day managing of a company from a financial and corporate standpoint.
4. Exit: The various numbers, rows and columns in your company also provide the claim to the monetary value of the company. The small differences between percentages when a company is valued at million or billion dollar levels can make a big difference to the check you will receive upon a successful exit of your company.
So let’s take a look at an actual cap table:
You might start off with a simple table, like the one below for example, which shows the number of shares and corresponding percentages that each investor/employee has.
Additionally, at the bottom is the ESOP (Employee Stock Option Plan) where shares are set aside as equity incentives to be given to employees that are currently at the company or for future hires.
The cap table also details the various “classes” (Ordinary, Series A) of shares that together create the total ownership of the company.
The cap table below is a neat, relatively simple and fairly organized example, most likely due to the small size of the current company.
Example of an early stage cap table, which includes a “Series A” for the sake of contrast to ordinary. Click here (or on the image) to download the Excel spreadsheet depicted above
Some tips to manage your Cap Table like a pro
1. Keep your cap table organized and clearly grouped
A cap table that requires “cleaning up” will prove to be an obstacle when trying to get a clear view on what the holdings are of the various groups which retain ownership in your company. In the example above the section that says “Investor #1”, “Investor #2” etc. can be grouped in excel and labeled VCs/Angels. Additionally, different corporate and investment entities can often be condensed and labeled clearly without using their proper legal name.
2. Remember to aggregate all the different types of financing into one place
If shareholders have an outstanding convertible loan, warrants to purchase preferred/equity shares etc. – these should be clearly noted in the cap table and possibly even shown as affecting fully diluted shares. You can add a section at the bottom of the excel sheet, or add an extra column to the table to show this detail.
3. Don’t try to reinvent the wheel
I look at a lot of cap tables, and for some reason I see a lot of companies move away from the classic template above (granted it gets more complicated as the company grows) in favor of mind-numbingly complicated formats. In my opinion, the best idea is just keep it to a simple table. Don’t split apart the columns or have a separate ESOP calculation at the bottom of an excel sheet. The cap table should be self-explanatory and easy to read.
4. Know your cap table inside out
As a founder or key employee, the numbers in this table represent your (and your colleagues’) ownership in the company. Furthermore any changes to current holdings and future scenarios based on investment rounds, option allocation and stock splits will determine how much money you come away with upon liquidation. For this reason, you should know how increasing the stock option pool, taking new equity vs debt, and issuing warrants might affect your total ownership in the company.
5. [Advanced Tip] Keep a company financial timeline and summary
This is just a recommendation and not necessarily standard, however I have seen a few companies do this, and it is extremely helpful and definitely expedites the coherent analysis of a cap table. It would simply consist of the various funding rounds with the amount invested by each party, and the exact dates and price per share. It might seem like overkill, but each time you take money from friends and family and then investors there will be different terms and details attached.
6. [Advanced Tip] Keep track of various shareholders and their percentage of voting shares This is a bit more advanced, but legally, when it comes to corporate governance, there are some shares that are entitled to votes regarding new funding rounds and other strategic and financial decisions. It is important for both the company and the investors to know the various holdings of these voting shares as they affect many decisions surrounding investment.
What can happen if you don’t keep an organized spreadsheet?
(Warning: Extreme example!)
When numbers in an Excel spreadsheet represent actual monetary value in the real world, even the slightest misstep can amount to a big blunder. In 2014, for example, Goldman Sachs miscounted the amount of outstanding shares in a spreadsheet they were managing for their client Tibco, who ended up having to sell their company to Vista Equity Partners for $100 million less than they should have ($4.2 billion instead of $4.3 billion):
“Tibco Software Inc.’s board left $100 million on the table after failing to rectify a mistake by Goldman Sachs Group Inc… a spreadsheet mix-up during the deal’s negotiations led Goldman Sachs to provide Vista with incorrect share numbers tied to the $24-a-share offer, Tibco officials said in a filing with the U.S. Securities and Exchange Commission last month.”
~ Bloomberg Business
I don’t know the specifics of what happened as a result to whoever was managing Tibco’s cap table at Goldman Sachs, but I’m guessing it probably wasn’t pretty.
Your cap table is of crucial importance, because it’s where the company’s ownership is defined through the various amounts that each shareholder maintains.
Important decisions are made based on the numbers that appear in the spreadsheet, so every single digit counts.
An organized cap table enables accuracy for future financial and strategic decisions.
There are plenty of extensive cap-table related glossaries online (here’s one example) but here are a few terms that I feel are particularly worth familiarizing yourself with which I’d like to include here:
Ordinary Shares (common stock) represent simple equity ownership in the company. These shares will be entitled to returns on their money in the event of an exit, after preferred shareholders receive their dividends or return on their money. This is a form of ownership usually held by founders, early employees and angel investors.
Ordinary shares provide unlimited upside as the value of the company grows. At the same time if you are invested as a common shareholder you stand to lose the entirety of your investment should the company shut down or liquidate itself with little or no value.
Preferred Shares (also known as a “hybrid investment”) represent equity ownership in a company, but they possess characteristics that grant them a higher priority to ordinary shares in two main ways:
Upon liquidation of the company or in the event of a dividend, the preferred shares will get money back on their investment before ordinary shares do (hence the name “preferred”).
In certain cases, preferred shares might have certain preferential voting rights that entitle the preferred shareholders to a say in future capital or operational events in the company.
ESOP (Employee Stock Option Plan) outlines the shares or ownership of the company given to employees in the form of options. An option is a financial instrument that gives you the right to buy a share of a company at a pre-determined (strike) price. For example if the strike price of the options that you are currently in possession of is $0.01 and the value per ordinary share of “Future Unicorn Startup” skyrockets to $100, then the ESOP plan gives you the right to purchase something worth $100 for $0.01.
ESOP can either be:
1. Allocated, meaning that they have already been assigned/granted to specific employees and make up part of the ownership of the company. It is important to note that companies can have “promised” shares that have not yet officially been allocated to employees but set aside for them. These should be included in the cap table’s ESOP section as well.
2. Unallocated, meaning that companies create a reserve pool of options (essentially future shares) that can/will be granted to employees as part of their compensation/bonus.
Fully Diluted (for example, in reference to shares “on a fully-diluted basis”)
As I mentioned earlier, companies can issue options and warrants that signify the “right” to purchase shares of the company. To understand the effect of these securities we must first understand that at any given time, if you take the amount of shares actually issued/purchased up until that point (excluding all “right to buy” shares, such as options and warrants), this is called the “outstanding” or “issued” basis. This way of looking at the holdings disregards options that have not yet been converted into actual shares and just takes a snapshot of the total holdings as they stand right now.
In the future, if the company does well, it is highly likely that all employees and warrant holders will exercise their right to purchase shares. “Fully-diluted” simply assumes that all options/warrants will have been exercised. Looking at things on a fully-diluted basis is pretty standard because it shows the “played-out” version of every shareholder’s holdings in the company.
Cap Table Tools
Finally, I thought it might be useful to mention a few platforms I’ve come across for cap table management, some of which also provide a variety of tools for managing ESOP records, share issuances, exit analysis, 409A valuations etc. These programs can prove useful to companies, law firms or even VCs.
I have personally used each of these programs – with the exception of eShares & Reportally (so you’ll have to look into those ones yourself, I’m just listing them here for your reference):
More posts by Alon Amar:
What’s your startup’s TAM (Total Addressable Market)? A practical guide to crunching the numbers