What is a Cap Table?
A cap table (“cap” is short for “capitalization”) is a list of who owns stock in your company, and how much stock. It also includes people that don’t own stock yet but will have a right to buy and own stock. For example, a cap table can show people who own common or preferred stock, people who have options to buy stock or warrants, or a bridge note that gives someone a right to preferred stock in the future.
Who Will be Looking at Your Cap Table?
Cap tables aren’t just for internal company use. People outside of your business will also be looking at your cap table at certain points in your company’s lifecycle. Potential investors, for example, will look at it when they’re considering investing in your company. They’ll use it to see who owns what of your company, and this means they’ll notice if your co-founder and you broke up, and your angry co-founder left with 50% ownership of the company, or if you haven’t been thoughtful or strategic in how you distribute options.
They’ll also use it to analyze how they would fit in after they invested in you. If they bought 20,000 shares, how much of your company would they own? 10%? 80%? The cap table will make that clear for them.
How Does Your Cap Table Grow With Your Company?
As you gain more investors, your cap table will become more complex. Your stock classes will also start to increase. If, for example, you started with just common stock (so called because it has no special preference during liquidation, aka “common” preference), you may start to sell preferred stock (which is so called because it gets paid out first in a liquidation). Your cap table may grow from common stock to Seed (preferred stock) to include A (also preferred stock) and eventually B (preferred stock) as your company grows. The most recent round usually has the most senior liquidation preference, i.e., gets paid first, with each previous round stacked underneath in terms of seniority and preference in a liquidation event.
As you hire employees, you will grant them either options (an option to buy common stock) or shares of common stock as an incentive to motivate them to work extra hard and increase the value of the shares. As you hire these employees and grant them shares, the cap table will reflect all of these additional people that have an ownership stake in your company. You may also reward people that have been at your company for a while with bonuses of additional option grants.
Why Does the Cap Table Matter?
A lot of people mistakenly believe two things. The first is that the cap table is just another dry Excel document full of numbers that they dread updating. The second is that the founder alone controls the direction of the company.
At the end of the day, the cap table governs. It tells the true story of who owns the company. It doesn’t matter if you started the company, if your blood, sweat, and tears went into the formation or if the mission of the company is your life’s work. You will not control the direction of the company because you care the most and you have the title of “founder.” It’s the cap table that governs the future of the company and who truly controls its direction.
The cap table is the objective source of truth of your company’s ownership, and it will change constantly. So, when you looked at the cap table 6 months ago and you owned 80%, don’t be surprised if after a few hires and investments, today you own 30% instead.
There’s always strategic reasons to share ownership—taking on new investors, incentivizing employees, and more—but you should take these on only if you understand and accept the impact it will have on your ownership and company control. Because regardless of what founder title you have or the executive position you may hold, the cap table tells the truth about who really owns and is steering the company.
Fidelity makes keeping an update-to-date cap table a cinch.
