A capitalization table (cap table) is a record of all the shareholders of a company, along with their pro-rata ownership percentage. The goal of a cap table is to show a snapshot of the ownership structure of a company.
During equity fundraising, cap tables are used to display the hypothetical ownership of the company incorporating new investors. For early-stage startups, cap tables should be pretty straightforward, but as multiple investment rounds are carried out, getting an accurate snapshot of ownership can get complicated unless recorded properly.
Keeping updated records of their shareholder positions as transactions happen is critical. When it’s time to raise more capital, it’s clear to new investors who owns what and at what percentage.
When presenting a cap table during fundraising, the best practice is to display it on a “fully diluted basis,” which means that all options, warrants, convertible securities or instruments that could be used to acquire common stock are exercised, regardless of vesting provisions. Basically, assume the highest share count possible. Showing a cap table on a fully diluted basis is a transparent way to show potential ownership.
Cap tables usually include:
- Shareholder name
- Type of security
- Number of shares
- Percentage of ownership (fully diluted)
When considering equity financing, a cap table can be a very effective way for a business owner to illustrate the role of shareholders in the company.