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 in the round. 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.
Startups should keep ongoing records of their shareholder positions as transactions happen, so when it’s time to raise capital, it’s clear to new investors whom 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 assumes 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.
This gives new investors a look at the “most diluted” scenario they would be participating in. In reality, some or all of those options or dilutive securities would not be exercised during the round, so an investor’s ownership may end up being higher than represented. However, showing it on a fully diluted basis is the most transparent way to show potential ownership.
Cap tables should be recorded using a spreadsheet with shareholder names listed on the rows and ownership details listed on the columns from left to right.
The column headers should specify the following information at the very least:
- Shareholder name (include a line for “New Investors”)
- Type of security
- Number of shares
- Percentage of ownership (fully diluted)
For venture stage rounds, the “price per share” of an offering is calculated using the fully diluted share count:
- Price per share = Pre-money valuation / Fully-diluted shares
Angel investors and venture capitalists are accustomed to seeing the price per share calculated this way, which makes it important to prepare your cap table accordingly.
Click below for an example spreadsheet that can be used to create a fully diluted cap table for a seed or venture stage round.
Understanding and properly using a cap table is vital to stay compliant and protect your interests when starting up and seeking equity funding. For more guidance on the fundraising process, including tips on pitching to angel investors and venture capital firms, download our free e-book, The Complete Guide to Equity Financing.
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