How to Build a Cap Table for Startups

When you are a startup founder, understanding who owns the securities that your company has issued is essential. It is not as easy as it sounds to keep an accurate record of this. 

During our weekly mentor meeting, we had Greg Misaskieicz of Capbase talk about cap tables, how to build them, essential considerations, and the problems that could happen from a poorly built one.

What is a Cap Table?

A capitalization table gives all the information that’s necessary to understand your startup’s ownership. The cap table is created in a spreadsheet and often visualized in a chart.

It lists all your company’s securities such as stock, options, and warrants, the amount investors paid for them, and the percentage of ownership in the company of each investor. 

Cap tables are especially important for startups to keep an accurate record of ownership. 

 “Cap tales are the norms for venture-backed startups. The ownership structure may be different in other corporations. It’s not all one size fits all but, generally speaking, the ownership and the structure and incentives are essential when you’re building a venture-backed startup. “, Misaskieicz noted. 

He goes on to say “If you don’t maintain the incentives in the cap table for the continued development and growth of your company, then your company is potentially uninvestable so that’s an important part of this.”

Cap tables not only record the existing ownership of your company. It also serves as the basis for projecting the future ownership of the company. 

How to think about Building a Cap table and Equity in a Startup

When you’re discussing cap tables in startups, a good place to start is thinking about it as a ledger of all the shares in your company. 

This includes debt that will convert to shares in the future which is typically done when stocks are promised to employees on a vesting schedule. If the employee continues to work for the company, it is part of their compensation structure that gives them the option to purchase shares in the future. In that sense, your cap table is also telling you the incentive structure for current employees. 

Cap tables include the various types of shares found in a startup including:

• Common Shares – Typically type of shares that are given when a company is incorporated; Given to employees, advisors, and founders
• Preferred Shares – Given to investors
• Options – Gives the option to buy shares after they vest a certain amount of years 
• Convertible debt – Debt that can be converted into equity

A well-organized and up-to-date cap table will help you:

• Price future funding rounds
• Easily communicate with shareholders about how much of the company they own
• Forecast possible payouts and dilution
• Calculate how many shares remain in your option pool
• Determine more accurate 409A valuations

Your cap table is more than a spreadsheet filled with numbers. It tells your company’s story. When making future decisions about hiring new employees, securing new financing, or even an exit strategy, your cap table is going to tell investors what your future looks like. 

How to Build a Cap Table

There’s no standard way to build a cap table. Your company’s individual will share what your cap table looks like. Variables that are typically found in cap tables include:

• Valuation – Total cost of business shares
• Total of authorized shares – The amount of shares your startup can sell
• Total number of outstanding shares – The total shares held by all the stakeholders in your startup
• Reserved shares – Total number of shares available to employees; Often called restricted shares

Here is an example below of what a real cap looks like at formation:

Shareholder # of Shares % Ownership

Founder 1 2,666,666 26.6%

Founder 2 2,666,666 26.6%

Founder 3 2,666,666 26.6%

Employees/Advisors 2,000,000 20%

Total 10,000,000 100%

An option pool between 10-20% is typically preferred by investors from the inception. The standard for several shares is 10,000,000. The price per share at formation is intentionally low to enable founders to purchase their shares cheaply ($.00001 x $10,000,000 = $100).

Without a standard format that’s used for cap tables, there is a multitude of ways to build one. There are three options you can take when building a cap table: Build from scratch, use a cap table template, and use cap table software from the start. 

Building a Cap Table from Scratch

When building a cap table from scratch, you’re opening up a spreadsheet program like Excel and filling it out. This option gives you the most control over the details. It’s also the most cost-effective solution in the beginning. 

As a long-term solution, building a cap table from scratch isn’t the best option. You will likely have to move to use a cap table software later on. That means you’ll have to build it from scratch. 

Pros

• Can tailor the information based on the type of information you want and need for your company
• Cap table is built according to your specifications from the beginning

Cons

• Difficult to build, collaborate with others, and maintain
• Gets more complicated as your company grows
• As you raise funds, it’s more challenging to keep the cap table accurate
• Keeping track of every detail manually may increase errors and level of effort

Use a Template to Build a Cap Table

Using a cap table template might make the most sense if you’re starting and don’t want to try to build one from scratch on Excel. You’re not paying for software when using a template either. Keep in mind that using a cap table template will be limiting in the long term. For example, if you are frequently issuing options, and raising several rounds of funding, the template will not work well.

Pros

• Provides a fast way to start since you’re only filling in the information in the pre-filled calls
• Saves time initially
• Can transition to cap table software easier and faster when starting with a simple cap table template

Cons

• Not easy to keep up-to-date
• Not robust enough to meet all your needs
• Cap table templates don’t scale well as your startup grows
• Easy to make errors, particularly if multiple people are updating or you’re missing securities
• Your data isn’t checked in real-time and others may have their versions without being notified of updates

Use Software for Cap Table Management

Cap table software can easily scale and keep updated as you issue options, have new 409A valuations, and offer liquidity. Of course, with software, there comes a cost.

Pros

• Out of the three options, it’s the easiest way to keep all your data updated
• Details are in real-time
• Can help you handle manners like taxes, corporate compliance, and 409a valuations

Cons

• It’s not a free option; must pay for software

Important Considerations about Equity in a Cap table

As previously mentioned, 10,000,000 is the standard number of shares that are typically issued at formation. This keeps the price per share low so founders can buy up their shares. 

“You can’t just give yourself the shares for 0 because this could mess up your franchise tax calculation if you had what’s called Zero par value shares just as a footnote. It’s better to pay something than not because it can mess up your corporate taxes for the life of the company if you ever issue any zero par value shares for a Delaware corporation at least”, Miaskiewicz explained. 

Founders divide up their shares and also set aside an employee stock ownership pool. The company also brings on some advisors. These advisors are given shares at par value at the same price as the founders. 

These advisors will later introduce the company to angel investors. After these investors make their first investment, shares can no longer be sold or given share grants to employees at par value. From this point on, the fair market value of your common shares is updated based on a board motion. 

Miaskiewicz explains how what happens “If you have lawyers, they won’t tell you what price to set to avoid liability. But the basic back-of-the-envelope napkin math is that at this early stage you figure out what the price per share would be if you’re safely converted so you had to save for a 10 million valuation cap.”

“Thanks to the Enron scandal on the law that created the 409 evaluation requirement, you’re on the hook as a founder for criminal and financial penalties if you sell shares for below fair market value.” For this reason, companies can’t continue to give shares to employees at the par value or price per share the founders who received them for. 

For advisory shares, these are not awarded in single digital percentages. Advisory shares are typically given for roughly 10 basis points. Best practices for offering equity for advisors include:

• Only reward advisors if they add tangible value to your startup
• Giving more than 1% is uncommon and would raise eyebrows 
• Protect the company for the longer term by creating a vesting schedule

When determining how much equity should be given to an early employee, depends on the level of risk they are taking by joining the company and how important they are to get your company off the ground. Here is some guidance on the percentage of the equity to give employees, depending on the stage of the startup:

Stage Senior Engineer Design Lead Head of Sales 1st  Generalist    

/Marketing /Chief of Staff

Formation 1%-4% 1%-4% 1%-4% .5%-2%

Seed .025%-1% .025%-1% .5%-2% .25%-1%

Series A .0125%-.5% .0125%-.5% .25%-1% .023%-.5%

Generally speaking, an employee who’s part of your founding team should receive at least one percent of the equity. 

A founder’s ownership changes over time. The general norms are that you still retain majority ownership and voting rights from seed to Series A. In the ideal scenario, you’ve given up roughly 40% of the company between the two stages. 

Problems from a Poorly Built Cap Table

A clean cap table depicts a company where everyone is pulling their weight and the founders haven’t sold off too much of the company. A poorly built, dirty cap table can arise several problems including:

• Having part-time founders or ones that aren’t part of the company become dead equity
• No alignment between the management and investors
• Advisors with a big % equity but bring questionable value to the company
• Not enough employee ownership of the company
• Using non-standard convertible notes or debt instruments
• Having a complicated set of convertible notes that have different terms and maturity dates

These types of problems have long-lasting effects on your company’s future. Building a clean cap table matters because it:

• Improves the chances of a deal going through for new investments or acquisition because it allows for a faster due diligence process
• Provides more clarity and better information to decision-making on the company’s future
• Reduces dealings with lawyers

A dirty cap table, causes your rounds to become more complicated. There is also the risk of recapitalization which occurs when VCs try to issue a term sheet that essentially washes out existing investors. These situations often lead to shareholder lawsuits from employees and early investors who believe they aren’t getting a fair share of the deal. 

There are several reasons why many people have messed up cap tables. One of the key reasons is that most founders don’t have a finance background. They might be good at targeting customers or building products, but cap tables require a different skill set. 

It also stems from a lack of understanding of the legal agreements involved with having a startup. The details in the fine print are difficult to grasp without a solid knowledge of what they mean. Founders are busy people with several things going on all the time at once. Building and maintaining a cap table may fall into the cracks. 

How to Fix a messy Cap Table

It can feel overwhelming to clean up a messy cap table at first. In the worst case, you may need to find your source documents and have a detailed audit performed. This will ensure the accuracy of the information. 

Take the five steps below to manage and track the investments in your company:

1. Keep and track details on ownership percentages – Your cap table must have current and detailed ownership percentages to know how future investments will impact current investors. These changes are also known as dilution.
2. Keep records of ISOs and NSOs – Make sure you account for ISOs and NSOs in your cap table. Grant agreements to employees should be sent to employees on a timely basis as well.
3. Maintain up-to-date records – Keeping updated records is an important habit to keeping a clean cap table. Investors perceive a disorganized cap table as a red flag when assessing whether to contribute money to your company.
4. Take care of dead equity – If you have founders or owners that aren’t active with the business, it is time to either buy back or redistribute their equity
5. Purchase a cap table software solution. Capbase makes software that’s specifically designed for startups to help them manage their cap tables. It handles everything from incorporation and issuing shares, to the day-to-day management in one convenient location.