What is a cap table and other important questions

This is the first part of the Pro Cap Table training course. In this series we go through the basics you need to know, then sheet by sheet so you know how to use a seriously kick-ass cap table.

What is a cap table?

A capitalization table, commonly known as a cap table, is a table or ledger that lists all shareholders in a company. It details what each shareholder owns, including the amount and value of the stock.

In simpler terms, think of it as an Excel file that illustrates the financial worth of each shareholder in the event of a company exit.

Why do you need one?

Every company needs a cap table for several reasons:

• Staff want to know their share of ownership

• Investors need clarity on their purchase

• Founders must track their stake as the startup raises more capital

Is there such thing as a good and bad cap table?

If you are bootstrapping your startup then you don’t really care about your cap table as you likely own 100% of it.

Everything is more complicated if you raise money for your startup.

Cap tables can significantly impact fundraising if things go pear-shaped. A poorly managed cap table can hinder your ability to raise funds, often necessitating a recapitalization (‘recap’), which dilutes your and often current investors’ stakes (which I assure you they absolutely love, lol).

What is a good cap table?

A useful rule is that the founders should own at least 50% after series-a. You can work your way back and forward from there.

A good cap table has the following characteristics:

• The CEO or original founder retains the largest share.
• Founders maintain substantial ownership.
• There’s an Employee Stock Ownership Plan (ESOP) of around 15%.
• Previous investment rounds didn’t result in investors acquiring more than 30% of the company.
• Ideally, investors own less than 50% of the company.
• There are no investors on the cap table that have a bad reputation, or maybe a potential conflict in the future (Some corporates)
• There are no advisors or other investors who were given a silly number of shares that make investors question if the founders are dumb (like giving 10% to someone who made a few intros)

What is a bad cap table?

Investors are greedy but most are not dumb. They want their pound of flesh from your startup but they are concerned about the founders (and to some extent staff) being super-pumped to crush it. They are wisely concerned if you don’t own enough you might give up and then the startup goes poof up in Juul vapor (get the joke?).

Most rounds are between 10-25%. If you have given away 30%+ in a round (40% is bad).

So if you have done an angel round at 40%, that’s a deal killer (and I’ve seen it before). Founders and prospective investors might try a recap with the existing investors under the threat that there will be no more rounds if there is no recap. That works… sometimes. Sometimes investors just want to watch the world burn.

I’ll write a blog on bad cap tables and link it here when done.

Are cap tables complicated?

Understanding cap tables can be challenging. They range from simple structures in small startups to highly complex layouts in larger companies.

Cap tables, in general, are complicated to wrap your head around. Trust me, it took me time to learn too! So don’t stress if this is feeling like too much!

Here is what Facebook’s cap table looked like (and this is just the summary):

Simple cap tables where you have a few founders and staff can be real… simple. We each have a few shares. You divide the amount you have by the total and the % is the % you own. That’s simple, right?

Maybe you do a fundraise (priced round, not a convertible) and the investors buy 20% post. Now investors have 20% and everyone else has 80%. This means everyone before owns 20% less. That’s still simple.

However, the introduction of RSUs, warrants, convertible notes, and multiple funding rounds can significantly complicate things. Real-world scenarios like staff turnover and share conversions add further complexity. Despite this, with a robust template and understanding, managing a cap table becomes more feasible.

Having an epic pro cap table can help.

That was a very basic intro for you to understand the 40k feet. Next, we are going to get into dilution math.

Read next step

14 parts in this guide

You can jump to a section if you prefer:

1. What is a cap table and other important questions
2. Cap table dilution step-by-step example
3. Cap table dilution math
4. Starting the cap table (The drop-down menus we need)
5. Shareholders sheet
6. Deal calculations
7. The cap table sheet
8. The assumptions sheet
9. Individual shareholder returns sheet
10. Returns waterfall calculation
11. The ESOP sheet
12. The Common sheet
13. The convertible notes and warrants sheet
14. The preference shares sheets (From Series A to I)