Creating Your First Cap Table: Step-by-Step Guide

An organized cap table will help the company make smarter decisions on its shares and know how it will affect the company in the short and long term.

A capitalization table, or “cap table,” is a basic financial tool that details the composition of a company’s shareholding. It gives a quick overview of the distribution of equity and shareholdings. Building a comprehensive and accurate cap table is a crucial first step for any entrepreneur. Following the steps outlined in the article, you’ll have a working capital table.

Here is a basic example of a cap table we have compiled with one founder and 10 investors to understand better how it works.

You can see that the founder started with common shares and that investors provided varying cash levels for preference shares. The founder owns 22.2% of the firm after selling 77.8% to investors for $3.5 million.

In our opinion, this might be a brilliant strategy for taking the firm to the next level of success and expansion, or it could be a burden if the company is purchased or goes public.

A cap table resembles a structured table, often created using spreadsheets during a company’s inception. Its design should be simple yet organized, displaying clear ownership details and outstanding share counts.

What does a Cap table look like?

A standard format lists security owners/investors on the Y-axis and securities types on the X-axis. Progressing from left to right, dilution items illustrate a person’s ownership percentage.

Consider this sample: The top row shows the total company shares. Subsequent rows include:

• Authorized Shares: Shares the company can issue.
• Outstanding Shares: Shares held by shareholders.
• Unissued Shares: Shares not yet allocated.
• Stock Option Plan Reserves: Shares for future employee options.

A separate table below contains:

• Shareholder Names
• Shares owned by each
• Stock options owned by each
• Fully Diluted Shares: Outstanding shares, helping assess share value.
• Remaining Options: Unallocated shares. Founders lead, followed by executives, employees with equity, and then investors.

A cap table shows the total market value of a company and its components. It helps in every financial decision made that has an impact on the market capitalization and the company’s value.

In short, a cap table has to be accurate, and customized based on the business needs and has to be regularly maintained for decision making using the most current information.

Step 1: Start from Scratch

Entrepreneurs often use spreadsheets to build their first cap table. The procedure is simple at this point in the development of your company. However, as your firm expands and additional factors come into play, the cap table might become more challenging to manage.

In order to make sure their cap table structure is efficient and correct, many businesses end up consulting a company attorney.

Step 2: Structure Your Cap Table

The standard cap table style should be straightforward and uncomplicated and store crucial data like share ownership and total shares outstanding.

To get started, write down the names of the investors or security owners and the securities they possess. Spreadsheet templates are readily available, facilitating the entry of crucial numerical and other business data.

In the first row, you should provide the company’s total shares.

For example, you have authorized 1,000,000 shares for the company. On April 1st, the date of incorporation, you issue 30% of the shares to yourself,20% to your partner and 10% to your employees and a further 10% to investors in the series A round Investment.The remaining 30% shares will be kept for future issuance as options.

Step 3: Essential Components

As you proceed with building your cap table, it’s crucial to include the following components:

Authorized Shares

The term “authorized shares” represents “the maximum number of shares that the Corporation may issue,” as specified in the Articles of Incorporation. It significantly affects a company’s standing in the market and is usually recorded under “Capital Accounts” on the balance sheet.

A well-managed cap table for startups helps to attract investment and prevent diluting your stake.

Outstanding Shares

Shares that are “outstanding” have been issued, approved, and acquired by shareholders. Earnings per share (EPS) and cash flow per share (CFPS) are key indicators of a company’s market value, and both require knowing the total number of outstanding shares.

Unissued Shares

Unissued shares are those that still need to be distributed to shareholders. The amount of authorized but unissued shares can impact key metrics, including board effectiveness and profitability per share. A higher number of unissued shares gives the board more flexibility but might impact earnings per share.

Shares Reserved for Stock Option Plan

Authorized but unissued shares are set aside for the stock option pool, where they will be made available to prospective employees. Commonly seen in capital-raising offerings of preferred stock, this clause sets aside a percentage of authorized shares to convert preferred stock into common stock.

Ownership stake represents the percentage of ownership of each shareholder in the company. Simply, it tells who owns what amount of the business.

A cap table might include more advanced metrics and information about a company beyond these basics. This data will be crucial as you continue your business expansion strategy.

Step 4: Expansion and Complexity

The complexity of the cap table is a natural result of your company’s growth and the number of transactions it undergoes. You may need to expand your primary cap table by linking to extra pages to handle this complexity. These supplemental materials can be about anything, from:

• Lists of shareholders for each type of stock
• A vesting schedule outlining ownership over time
• A table of investors detailing their contributions
• A table of shareholders to provide a holistic view

Every company’s structure and requirements are unique. The decision to include separate pages hinges on your specific needs and goals.

Entrepreneurs should devote significant time and effort to creating a detailed and accurate cap table. It is the foundation of open equity distribution and ownership. If you follow this guide, you’ll be well on your way to making your first cap table and will have the tools you need to manage your company’s ownership structure efficiently.

The credibility you gain by presenting this cap table to potential investors and stakeholders will pave the way for a prosperous future for your company.

Get your Cap-table Organized with Eqvista

In summary, a cap table holds increasing significance in modern business, ensuring companies maintain accurate equity records. With the transition from Excel to online tools becoming prevalent, Eqvista stands out as the leading cap table software choice.

With Eqvista’s advanced cap table system and intuitive user interface, companies can effortlessly manage their cap table requirements. Give us a call today!, should you wish to try our free training? Click here.