When you start a company, you need to make strategic decisions to allow for growth. Part of those strategic decisions may rely on you having and managing a capitalization table, also known as a cap table.
A cap table is an itemization of everyone who holds equity in your company, as well as who might have the right to receive future equity.
One of the best ways to manage your cap table is with automation software. When you use software, you can centralize your view of everyone who holds equity in your company, and you’ll know more about the ownership stakes in your business at any given time, as well as about outstanding securities.
Managing your cap table should be something as a founder that you’re thinking about in the very early stages, yet it’s often overlooked.
The following are key things every founder should know.
Why Does Cap Table Management Matter?
A cap table is a legal document. It goes through the equity structure of your startup. If you have mistakes in your cap table, those mistakes can then translate to your ownership documentation.
You can fix the mistakes, but if you don’t notice them and correct them, it can create problems when you begin to hire employees or when you’re seeking investments.
In simplest terms, a cap table should tell you who owns what.
If you’re an entrepreneur and founder, you’re going to making decisions all the time that are impacted by your capitalization.
If you need new financing, as an example, you need to see scenarios based on different valuations, round sizes and more.
If you’re looking for a new COO, and the candidate wants to know more about options covering a percentage of the company, you want to quickly tell them if you have enough shares in your option pool.
When your cap table is well managed, then you’re going to be in a position to make smart decisions fast.
It can be somewhat like your balance sheet. A balance sheet shows your assets and liabilities. Your cap table shows ownership, economic, and voting rights.
The cap table should include shareholder information, rights to purchase more equity in the future, vesting schedules, purchase price, voting percentages, and ownership position.
Get to Know the General Elements
As a founder, you want to get to know the elements of the cap table and the formats.
You might view it as a spreadsheet, or a chart or table.
It’s probably going to be pretty simple in the early stages of your company, and then as your company matures, your cap table will get increasingly complex.
Initially, your cap table will just have your equity stakes listed, transaction history, and any legal restrictions.
The most important thing to note if you’re just getting started with your cap table is that you always keep it up-to-date and accurate.
Use it To Make Executive Decisions
Your goal, with your cap table, is to give yourself something that helps you solve problems in your business, and in particular, let it be something that you use to make executive decisions.
If your management team doesn’t think your cap table is useful, you need to make changes.
When to Manage Your Cap Table
If you’re a venture-backed startup, ideally, consider managing your cap table at the following points:
- Every funding round: If you’re preparing to raise equity financing, then you need to be aware of what your current capital structure is. You also want to look at a model of the impact of potential funding to see how everyone’s ownership percentage might shift. Once you close on a round update your cap table to show how the ownership interests have changed.
- You should make sure everything is correct and accurate annually. A 409a valuation is a third-party appraisal that indicates the fair market value of an employee stock option. Every valuation is considered valid for 12 months. You’ll refresh it every year unless you have a material event.
- You may need to assess things quarterly, especially as your company is growing and maturing. You want to look at stock option issuances for new hires, and you also want to consider employee retention top-ups.
- If you terminate an employee, this is a time to look at your cap table. Typically, when employees are terminated or leave voluntarily, they have 90 days to exercise their stock option.
As your business scales, as does your cap table, which again underscores the importance of a good automated solution.