A cap table is a crucial starting point for investors’ due diligence on a company. Used by private companies of all sizes, a cap table is a list of the securities issued by a company including shares, convertible notes, options, warrants, and others. It typically contains details about holders, purchase date, cost basis, and diluted ownership percentage for each security position.
Why is cap table management important?
As a startup adds more employees and completes each round of funding, its ownership structure becomes more complex and difficult to track manually. A cap table organizes all the relevant details concerning a company’s securities, including the economic ownership and voting control in a company held by each stakeholder.
Many founders use a spreadsheet to manage their cap table in a startup’s early days. Spreadsheets are cost effective, since they don’t require purchasing new software and there are many cap table templates available free to download and use. However, as ownership structures become more complex, manually updating a cap table stored in a spreadsheet grows inefficient and error prone. Whomever is tasked with maintaining the cap table must spend more and more time ensuring data is updated and accurate—time spent away from a startup’s real priorities.
To investors, an inaccurate or out-of-date cap table could signal a startup is disorganized or amateurish and discourage them from investing, so having a constantly updated version with correct information is of the utmost importance. Cap table software helps startups streamline their cap table management and keep all information accurate. Although each cap table is different depending on the company, there are a few characteristics that investors look for in a cap table. It’s essential that founders know the main data points investors would like to see so that they are prepared when seeking additional funding.
What investors look for in a cap table
1. Ownership and Funding Summary
The key word here is “summary.” Investors don’t need to see the name, address, and phone number of every single shareholder your startup has to date. Rather, they want an easily digestible overview of company ownership. Here’s what you’ll need:
Common and fully diluted share count / ownership:
Investors should be able to find the company’s outstanding and fully diluted share counts, as well as the total number of authorized shares. Try to avoid burying this information at the bottom of a long list of shareholders. Instead, add a clearly-labeled breakdown near the top of your cap table or document. Cyndx Owner uses an easy-to-read donut chart to illustrate ownership of outstanding and fully diluted shares side-by-side, as well as the breakdown of common vs. preferred stock. If it doesn’t clutter your presentation, you may want to add a chart which shows the distribution of voting power among holders for each of outstanding and fully-diluted shares.
List of funding rounds and invested capital:
Your cap table summary should also outline all of the company’s funding events to date. This information helps give shape to the narrative of a startup’s development and future plans. List financing rounds and other events in chronological order. Although your master cap table document may include extensive detail about previous funding rounds, you can limit the version for potential investors to key items, such as those listed below. This can help keep investor conversations focused. For each round, includes the following information:
Types of securities issued
Number of investors who participated
Number of fully diluted shares
Amount of capital invested
2. Appropriate Founders Stakes and a Healthy Option Pool
Now that you know how potential investors expect your cap table to look, what kinds of information do they want to see? Most often, two things: evidence of sound decision-making regarding how and to whom equity is distributed, and sufficient incentive for key team members to stay motivated as the company grows.
Appropriate Founders’ Stakes
Investors reviewing a cap table summary will often pay close attention to how equity has been distributed between founders. They typically want to see a distribution that is both appropriate and equitable. “Appropriate” means that founders have a sizable enough share in the business to stay motivated—if they have a meaningful potential to profit, they will be more committed to the company’s success. This also means that their incentives will be more aligned with their investors’.
An “equitable” distribution means that ownership is divided fairly among founders. This doesn’t necessarily mean that every co-founder always owns an equal percentage of the company. There may be reasons why two co-founders decide a 60-40 split is more just than 50-50—one may have put in more capital initially, for example. The equity split should also reflect the proportional value of skills and effort each founder is bringing. Investors want the team who will be responsible for scaling the company to be properly incentivized; they may be concerned to see someone who is no longer contributing significantly to the company’s development with a major stake.
Well-Designed Equity Incentive Plans
Early stage companies frequently offer equity compensation, especially in today’s market, to attract new hires and retain existing employees. Equity compensation packages usually consist of stock options, restricted share awards, or restricted stock units. All of these types can help motivate employees and align their incentives with those of investors in the company.
Stock options give holders the right to buy a certain number of shares of company stock at a specific price during a certain period. Restricted stock awards (RSAs) are shares employees may purchase from a company at a specific price which the company may repurchase from them at cost until the shares have been fully earned (vested). Restricted stock units (RSUs), similar in many respects to RSAs, grant the employee the right to receive shares in the future once they have vested. Startups using equity compensation must reserve shares in an “option pool” to be able to convey shares to employees upon vesting or option exercise, and often the option pool will include shares for equity grants to be made in the future.
With an accurate and updated cap table, potential investors can evaluate current employee equity participation as well as the size of the option pool relative to future needs. They want to see that an appropriate number of shares have been authorized to cover employee equity grants as the company continues to grow.
If there’s one thing that really matters when you send your cap table to potential investors, it’s accuracy. As you add more stakeholders and security types, cap table management becomes more complex. Manual data entry increases the chances of errors that could call into question a company’s credibility with investors. There are also added legal complexities, related to when and how certain events should be notated. If your legal counsel is not already in charge of maintaining your cap table, make sure they review it before sharing with investors.
Some cap table management software, including Cyndx Owner, provides powerful tools for performing scenario analysis. By automating the analysis of exit outcomes and the pro forma impacts of funding rounds, these tools eliminate the need to build complex models in a spreadsheet, sometimes requiring substantial financial expertise to construct properly. Ensuring scenario round and exit waterfall analyses are done correctly is important because these calculations provide founders with critical information about the economic and governance impacts of an investor term sheet. The use of these tools should be informed by the company’s business plan and market analysis to confirm that both a startup’s growth and its financing strategies are aligned to deliver the equity returns that employees and investor holders expect.
When it comes to accuracy, cap table management software avoids many of the hassles and pitfalls of spreadsheets. Not only is it often easier to use and understand, some cap table management software even automates the complex calculations involved in later-stage fundraising, mergers, corporate restructuring, and other situations which affect equity distribution. Potential for manual errors is greatly reduced. So is the likelihood of errors related to regulatory compliance. As rules change, providers of cap table software will update their platforms or alert you in response.
Organize your cap table with cap table management software
Cap table management software can make your startup’s cap table more efficient, accurate, and useful. Cap table software grows with you and holds all details of equity distribution organized along the way. At any stage, having critical data points at your fingertips with the confidence that they are correct is crucial to both founders and potential investors.
Cyndx Owner is a powerful tool for startup founders who want an efficient way to manage their cap table while making it easy for investors to access accurate and up-to-date information. By hosting all information in one centralized location, Cyndx Owner helps founders organize their current ownership distribution while planning for their next stage of growth. To see how Cyndx Owner can improve your cap table management, request a free demo with Cyndx today.