What is a Cap Table?
At its simplest, a cap table is a spreadsheet or ledger that shows the equity ownership capital in a company. It presents a company's percentages of ownership, equity dilution, and value of equity in each round of investment by founders, investors, and other owners.
The Basic Structure of a Cap Table
Every cap table, though unique in detail, shares a common structure. At the top, you will see a list of the company's equity holders. The columns underneath will typically detail the different classes of equity, the number of shares, and the percentage of total equity each holder possesses.
Why is a Cap Table Important?
A cap table is more than just a document; it's a vital tool for financial planning and decision-making. It aids in tracking equity ownership, helps determine value distribution in exit scenarios, and assists in assessing the impact of future financing rounds.
Components of a Cap Table
To fully understand a cap table, let's break down its key components:
Common shareholders often include founders and employees. They typically have voting rights, but they are last in line to receive any remaining assets if the company is liquidated.
Preferred shareholders are usually venture capitalists or angel investors. They have a higher claim on assets and earnings than common shareholders.
These are individuals who hold options to buy stock in the future at a specified price. This group often includes employees with stock options as part of their compensation.
This includes common stock, preferred stock, and options. Each class has different rights and privileges associated with it.
Share Prices and Valuation
This section represents the cost of each share at each financing round and the overall valuation of the company.
Understanding the Dynamics of a Cap Table
How Funding Rounds Impact the Cap Table
Each funding round, whether it be Series A, B, C, or beyond, significantly impacts the cap table. New shares are usually issued, diluting the ownership percentages of existing shareholders.
Dilution and its Impact
Dilution refers to the reduction in the ownership percentage due to the issuance of more shares. While dilution might initially seem negative, if the investment increases the company's value, shareholders may still come out ahead.
Exit Scenarios and the Cap Table
The cap table is a roadmap for understanding how money would be distributed in different exit scenarios, such as a sale or IPO.