What is a capitalization table?

What is a capitalization table?

A cap table (short for capitalization table) is a detailed document outlining the company's ownership percentage.In most cap tables, you might find such details as:

• shareholders list showing who owns equity shares,
• employees list with options and
• an investors’ list with warrants and convertible securities.

A cap table is crucial for managing a company's equity and is often used by startups and venture capitalists to track ownership distribution and model future funding rounds.

Cap Table Example

Let's consider a hypothetical startup company, Company AI, LLC. Here's a simplified version of what their cap table might look like after their seed funding round:

Company AI, LLC Cap Table

Key Points of a Cap Table:

1. Shareholder Names: Lists all individuals and entities that own shares.
2. Shares Owned: Number of shares each shareholder owns.
3. Percentage Ownership: The percentage of the company that each shareholder owns.
4. Type of Equity (Security): Specifies the type of shares owned, such as common stock, preferred stock, or stock options.

Explanation:

• Founders: Kristine and Karin, the co-founders, own 33.33% each.
• Early Employees: Alise and Madara have received options as part of their compensation, with 100'000 options and 200'000 options, respectively.
• Investors: The seed investors have bought common shares during the seed funding round, owning 16,67% and 11,11%, respectively.
• Share Pool (same as Option Pool): A reserve of shares (16,67% of the total) set aside for employees, advisors, or additional investors.

How Cap Tables Evolve Over Time

Companies constantly evolve, and their capitalization tables (cap tables) must be continuously updated to reflect these changes. Startups, in particular, undergo several funding rounds to support their capital needs, and each round impacts the cap table.

Key Factors Affecting Cap Table Changes

1. Funding Rounds: Each new funding round introduces additional investors and new classes of shares, altering the ownership percentages of existing shareholders.
2. Stock Options: Issuing stock options is a common strategy to attract and retain talent. When employees exercise these options, new shares are created, further diluting the ownership percentages of existing shareholders.
3. Employee Turnover: Terminating options when an employee leaves can change the cap table, as can letting unexercised options expire.
4. Investor Actions: Investors exercising vested options, convertible notes or SAFEs (Simple Agreement for Future Equity), redeeming shares, transferring ownership, or selling their stakes can also lead to significant changes in the cap table.

Company AI, LLC Cap Table after Series A funding round

Consider a startup, Company AI, LLC, that has just completed its Series A funding round.

Explanation

• The new round introduces additional preferred shares of 300,000 for the new Series A round investor VC 3, reducing the founders Karin and Kristine and early investors’ VC 1 and VC 2 ownership percentages.
• The company also grants stock options to new hire Anna in the amount of 100’000 options.
• Early employee Madara exercised 200,000 options into 200,000 common shares, which is 10% of all the company shares, further diluting founders and early investors.
• Additionally, an early investor, VC 1, decides to sell part of their stake in the amount of 100,000 common shares to another early investor, VC 2. This results in VC 2 now owning 300,000 common shares, leading to further adjustments in the cap table.

Excel vs Cap Table Management Platform: Why Starting Early with Saltox.co Matters

When you are a small startup with only a few founders, using a cap table management platform might seem excessive. Many founders initially opt for managing their cap table using simple tools like Excel. However, when a funding round comes, or stock options are planned, having a cap table management platform like Saltox.co in place from the beginning can save a tremendous amount of time and hassle down the road. Here's a comparison between managing your cap table with Excel and using a dedicated platform.

Excel: The Traditional Approach

Pros:

• Simplicity: Excel is easy to set up and use, especially when the number of stakeholders is small.
• Cost: There are no additional costs associated with using Excel if you already have the software.

Cons:

• Manual Updates: Every change needs to be entered manually, increasing the risk of errors.
• Complexity with Growth: As the company grows, the complexity of managing the cap table increases exponentially.
• Lack of Automation: No automatic updates or reminders for important compliance deadlines.
• Difficult Sharing: Sharing the latest version with all stakeholders can become cumbersome and error-prone.

Cap Table Management Platform: Saltox.co

Pros:

• Automated Updates: Automatically updates the cap table with new funding rounds, stock option grants, and other changes.
• Scalability: Easily scales with your company as you add more stakeholders and complexity increases.
• Transparency: Provides a clear and up-to-date view of ownership for all stakeholders.
• Time-Saving: Reduces the time spent on manual data entry and complex calculations.
• Professional Image: Demonstrates a higher level of professionalism to potential investors and stakeholders.

Cons:

• Initial Setup: Might seem like an overkill for a very small team at the beginning.
• Cost: There may be costs associated with using a cap table management platform, though we offer free plans for early-stage startups.

Shareholder registers (ledgers) vs Cap Table Management Platform

While shareholders register and cap table management platforms are related, they serve different purposes and have distinct functionalities.

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A shareholder register is a formal list of all the shareholders in a company, detailing their names, contact information, and the number of shares they own. It is a basic document that serves as an official record, often required by law. Typically updated manually and might not capture real-time changes effectively.

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Cap table management platforms, like Saltox.co, are dynamic tools designed to manage and automate the complexities of a company's equity structure. They provide a comprehensive view of ownership and facilitate various equity-related activities, but they do not replace the legal requirement of maintaining a shareholder register.

Key Differences

1. Purpose:
   • Shareholder Register: Serves as a formal, legal document required for regulatory compliance.
   • Cap Table Management Platform: Provides a dynamic and detailed view of the company's equity structure, facilitating management and strategic decisions.
2. Functionality:
   • Shareholder Register: Basic tracking of shareholder details and share counts.
   • Cap Table Management Platform: Advanced features including automated updates, compliance tools, stock option management, convertible notes and SAFEs modelling, and real-time analytics.
3. Updates:
   • Shareholder Register: Manually updated and static.
   • Cap Table Management Platform: Automatically updated with changes in real-time.

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While shareholder registers are essential for maintaining the basic legal records of ownership, cap table management platforms offer a more sophisticated and efficient solution for managing the complexities of modern equity structures. Using both tools in tandem can help ensure that all ownership and equity management aspects are well-covered.

Conclusion

A cap table is a dynamic document that must be regularly updated to reflect the ongoing changes within a company. Understanding and managing these changes is crucial for maintaining accurate records of ownership and ensuring transparency with all stakeholders.

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While managing your cap table with Excel might seem sufficient for a small startup, adopting a cap table management platform like Saltox.co early on can save you time, reduce errors, and ensure compliance as your company grows. Starting with Saltox.co sets a strong foundation for smooth and efficient cap table management, benefiting your business in the long run.

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It is important to note that cap table management platforms do not replace the legal requirement of maintaining a shareholder register. Instead, they complement it by providing additional tools and automation to ensure that equity management is efficient, compliant, and transparent.