Complete Guide to Cap Table Management for Busy Founders

Up-and-coming founders need a comprehensive understanding of who owns what at each phase of the startup’s growth – whether it is for due diligence for raising capital or while expanding their business. This is when the capitalization table, often known as the cap table, becomes crucial.

Founders rarely have time to devote to understanding the business’s financial and legal aspects. They would rather focus on building their business.

To help those busy founders, this guide will explain how cap tables work and how to manage them effectively.

A cap table (or capitalization table) is a graphical representation used by startups to show ownership interests in the company. It includes the startup’s assets (such as stock, options, warrants, employee stock purchase program etc.), how much investors paid for them, and each investor’s percentage of ownership.

Most founders start with a spreadsheet with a few essential components in the early days of the business and later switch to a cap table management software.

A cap table includes information about the company’s debt & equity ownership, the liquidation rankings of each investor, and the lenders who have invested in the company. Since most startups do not have traditional loan lenders, the list generally includes information about the shareholders and their ownership stakes.

While equity can take on many forms, including common stock, preferred stock, and convertible notes, each one affects current and prospective future investors.

As startups mature, vital information about future rights to buy additional shares, employee stock purchase program, next rounds of financing, IPO, option vesting dates, voting percentages, and other equity management details are added to the cap table. (It is difficult to keep all this data updated in a secure manner with just spreadsheets.)

To make decisions that will impact their company’s capitalization, founders need cap table management software which allows them to navigate faster, while managing business operations.

While hiring new candidates, a cap table lets you evaluate:

1. whether the employee stock purchase program is available
2. how much grant to offer
3. the percentage of ownership the startup can share

The simplest form of cap tables lists the shareholders and their respective shares. Cab tables are used by venture capitalists, entrepreneurs, and investment analysts to scrutinize important events such as ownership dilution and the issue of new securities.

Startups mostly have two categories of shares that can be tracked easily using a cap table.

Common shares, also known as ordinary shares, are stocks that are traded on a public exchange and represent partial ownership. Each share of equity comes with voting rights.

Common shares do not guarantee dividend payments, but their value can increase with the company’s growth. Common shareholders are not given preference for payout in the liquidation process.

Preference shares are entitled to payment from firm assets before ordinary shareholders in the event of bankruptcy. In addition, preference shareholders enjoy dividends but do not have voting rights.

There are several factors that shape the cap table. Some of them are:

Options are financial derivatives that give buyers the option (not the obligation) to buy or sell an underlying asset at a predetermined price and date. Generally, these are issued to consultants/advisors, investors, and employees.

An option contract must include receiver details, the strike price (fixed price), the number of shares, grant date, cost, vesting details, and exercise date. If and when the option is exercised, it always impacts the startup’s overall cap table. Employees get this option in the form of an employee stock purchase program for their services to the company.

Warrants are derivatives that grant the right, but not the obligation, to buy or sell a security —most often equity— at a specific price before expiry. The exercise price, also known as the strike price, is the price at which the underlying security may be purchased or sold. Much like options, they would have an impact on the cap table whenever exercised.

Convertible security, as the name suggests, can be converted into another security, most likely a bond or a preferred stock. For all reporting requirements and financial statements, convertible securities are recognized as equity; but until they are converted into equity, they are not regarded as a component of a company’s share capital.

As a result, they won’t appear on the cap table until the conversion has occurred. But when you raise money through several funding rounds, it’s crucial to manage and monitor convertible securities. Typically, the decision to convert it is made by the holder of the convertible security; however, in some exceptions, the startup decides.

Unregistered corporate shares, known as restricted stock, are typically given to executives and directors working at the startup. These shares must abide by specific SEC (Securities Exchange Commission) requirements and are not transferable until traded.

Restricted stockholders are prohibited from selling or transferring them during the vesting period, in order to prevent premature selling that can adversely affect the company.

These are usually distributed as compensation because they often become fully vested upon fulfilling certain conditions, such as ongoing employment or accomplishing specific goals.

Similar to restricted stock, restricted stock units (RSU) provide a form of employee compensation (not equity/ownership) when specific performance goals are met. Restricted stock and restricted stock units are two alternatives to employee stock purchase programs that companies use to compensate their employees.

In certain circumstances, the startup may benefit from this because it does not instantly dilute the share number, makes bookkeeping simpler, and may have fewer tax implications until the RSUs are converted to shares.

At first, the startup’s cap table will be simple, with a list of the founders and their shareholding, including the following:

• Total authorized shares: Total number of shares the firm is permitted to issue
• Total issued shares: Total amount of shares issued to company shareholders
• Unissued shares: Shares that have not yet been issued
• Founders’ names: The initial founders’ names
• Ordinary shares held: The common shares owned by each initial founder
• Preferred shares owned: The preferred stock that each initial founder owned

But later on, the cap table becomes a collection of all the financial data for a startup, and may include:

• Seed round and series A, B, and C: This would comprise the sum of the investments made and the shares issued.
• Employee stock purchase program: Any stock, options, or warrants granted to the employees.
• Award stock: Restricted shares and restricted units awarded based on employee performance.

Warrants, convertible notes, and transfers are other financing methods that could impact stock ownership and share-price dilution.

The corporate records for these types of funding may also be kept in the cap table.

Click here to know more about the ideal number of investors on the cap table list.

The cap table outlines the ownership structure of a startup. Any mistakes in the cap table are mistakes in the formal records of company ownership.

As new fundraising or employee equity rounds are announced, the founder will need to constantly check the cap table. To ensure correct decisions, the cap table must be updated as and when changes occur (i.e. in case of sale/issue of additional securities, expansion of option pool, or options are offered to employees).

The cap table also changes when an investor exercises vested options, when options expire, when an investor redeems/transfers/sells shares, or when options are terminated (when an employee quits the company). Cap table management is about keeping track of all the little details and ensuring that all the data is accurate.

Here are some of the best strategies for managing a cap table:

Keeping the cap table simple, well-organized, and updated is essential. Events such as the addition of new shareholders, transfer of shares between shareholders, exercising of stock options, repurchasing shares back from the corporation, and other transactions can impact each shareholder’s total ownership of a firm. Using a cap table management software is much more advantageous than an excel sheet as it allows you to keep track of changes, maintain transparency, and build trust with your current and potential investors.

Convertible notes (or convertible security) are a particular form of debt that can’t be repaid in cash. Instead, it is intended to convert into company shares later, combining the ideas of equity and debt.

In almost all liquidation circumstances, debt holders are compensated prior to equity investors receiving cash. Therefore, before you can completely appreciate your ownership in the company, you need to know the outstanding debt and whether any of it is convertible, as well as the terms of conversion. All debt should be recorded in a dedicated section of the cap table.

When investors choose to invest in a startup, they want to ensure that their investment is not diluted for any purpose other than future rounds of financing. Investors look out for a well-represented employee stock purchase program in the cap table that includes information about the grant date, vesting period, and exercise period.

Pre-money valuation, as the name implies, refers to a company’s equity value before receiving funding from a new round. When planning a new round of funding, the company’s cap table should be updated to reflect this pre-money valuation. This, along with the calculation method, provides a reference for the fair value of the shares and the amount of additional capital it needs. Investors also use pre-money valuation to know their ownership percentage upon investing.

When a startup issues new shares, it dilutes the ownership stake of the existing investors. The addition of new shareholders impacts the cap table; hence information about possible dilution must be provided.

Click here to learn more about cap table management.

It is best to automate cap table management due to the sensitive nature of the data and the requirement for accuracy. Cap table management software can be used to achieve this quickly and efficiently.

You only need to share the following details once and update the cap table in case of any changes. It’s that simple.

These include series financing, warrants,  options, convertible securities, transfers, and other business dealings that could impact the company’s shareholdings.

Details of the shareholders, financing rounds, total number of shares, share price, and number of shares per investor/founder. (The company’s shareholders may be added all at once or gradually).

This includes details such as the grant date, the number of shares/units, vesting date, strike price, and whether these options or warrants were exercised. If the startup has issued convertible bonds or notes, add another column. The information concerning convertible securities, which can impact the company’s shareholdings, must also be included.

Click here to learn how to build a cap table.

A typical cap table will have the person or company’s name in one column, their shares in the second column, and their ownership percentage in the final column. It is also possible to include the date of investment.

Every share is represented on a fully diluted basis in a cap table, meaning that every share is taken into consideration even if it has not yet been awarded or earned.

Managing a cap table is a cumbersome process in a growing company with multiple stakeholders with differing equity holdings and vesting periods. It often needs expensive resources, and the process is still prone to errors.

Startup founders don’t have to be concerned about laborious paperwork or manual errors in data management because of cutting-edge cap table management software like trica equity. The entire procedure is automatic, user-friendly, and available with just a few clicks.

Here are some important things for busy founders to consider:

1. As a founder, you must be familiar with what the cap table is, including the type(s) of equity offered.
2. Implement tools to manage the cap table and automate the process. A good system will allow you to track all financial activities and manage equity transfers properly.
3. Stay compliant. Tax and regulatory compliance is a vital aspect of managing the cap table. It is best to outsource this service to a cap table management firm.
4. As and when necessary, update the cap table as it serves as the basis for many crucial business decisions.
5. Founders, investors, and important employees should be on the same page. The cap table will reflect this synergy for funding rounds and business expansion.
6. Bring in experts as necessary. Don’t be afraid to seek advice from accountants and attorneys.

Cap table management ultimately revolves around legal rights to the company’s assets.

Click here to learn the best practices for cap table management.

The term sheet stipulates that the cap table is updated following each investment round with the latest information about:

• Valuation and share price
• New investors and classes of securities (for example, Series B Preferred)
• Warrants and employee stock purchase program (employee option grants (either allocated/unallocated))
• Debt converted to equity

However, most changes on the cap table are dilutive. Hence, when additional investors join the company, the equity ownership percent of each entity will reduce. Cap tables should also be updated as investors exit the company and/or personnel leave the company.

A cap table that is full of mistakes and inconsistencies is a significant warning sign that could hurt your chances of getting investments. Watch out for the following:

1. A shareholder’s stock certificate should be issued the same day they execute their option. One of the simplest solutions to this problem is to use a cap table management software that enables you to issue shares digitally.
2. Many employees and investors have multiple option grants. It’s crucial to keep track of these with accuracy. Otherwise, you and your employees may end up paying tax penalties.
3. Be precise when dealing with stock certificates. Cap tables often use misspelled or abbreviated names for the same person or business. Shortened titles and varying forms of an entity’s name (that do not match their legal name) can cause confusion and lead to the cancellation/renewal of mislabeled stock certificates.
4. Employees can exercise options outside their allotted window if cap tables are not properly managed and buy more shares. An updated cap table prevents the misuse of stock options.
5. Some founders err by offering options either outside of their 409A safe harbor period or without a 409A valuation. This usually has detrimental tax repercussions for both the business and employees receiving these benefits.
6. Take previously issued paper certificates into account while switching to a cap table management software. Otherwise, the same stock can be unintentionally issued twice.

Click here to learn more about cap table management mistakes.

When the company is sold, an updated cap table plays a crucial role. Everything, including the breakdown of the company’s shareholdings, each shareholder’s exit terms, the issuing of shares, and convertible equity, is reviewed.

Accountants and attorneys examine the shareholder agreements, convertible notes, options, and warrants to determine who will receive what in cash payments. If any of these records are missing or incomplete, it could result in additional legal challenges and difficulty for the shareholders. Hence everything should be well structured and all details updated in the cap table. Of course, you may not have the time at hand to do all these, which is why we recommend investing in good cap table management software.

Ultimately, cap tables can prove to be a great tool for scaling your business. This guide contains all the information a busy founder may need in order to efficiently manage the cap table. To successfully document the company’s growth, the cap table should, at a minimum, include the whole equity structure of the company.

A well-managed cap table will save you the unpleasant surprises when entering into a corporate transaction. Consider automating this tedious process from the very beginning by using smart cap table management software so that you can concentrate on running your company.

trica uses cutting-edge technology to make tracking and managing all of your company’s shares simple. Take the first step in building an effective and easy-to-maintain cap table (and stock options management process) at your startup. Contact us today for a free demo!