Cap Table

A cap table is one of the most important documents for any startup, serving as the definitive record of company ownership. Understanding how to read, maintain, and model cap tables is essential for founders, investors, and employees with equity stakes.

Understanding Cap Tables

A capitalization table provides a comprehensive view of company ownership, showing:

• Who owns what percentage of the company
• Types of securities held (common stock, preferred stock, options)
• How ownership changes over time
• The impact of dilution from new investments
• Voting rights and liquidation preferences

Why Cap Tables Matter

For Founders

• Track ownership dilution over funding rounds
• Plan equity grants for employees
• Model impact of future fundraising
• Understand voting control dynamics

For Investors

• Evaluate ownership stakes and returns
• Assess dilution protection mechanisms
• Understand liquidation preferences
• Track portfolio company performance

For Employees

• Understand equity compensation value
• See how ownership changes with company growth
• Plan for potential liquidity events
• Make informed career decisions

Cap Table Components

Types of Securities

Common Stock

• Typically held by founders and employees
• Voting rights on major company decisions
• Last in liquidation preference order
• Subject to vesting schedules

Preferred Stock

• Usually issued to investors
• Enhanced rights and protections
• Liquidation preferences over common stock
• May include anti-dilution provisions

Stock Options

• Right to purchase common stock at exercise price
• Granted to employees and advisors
• Subject to vesting schedules
• Included in fully diluted calculations

Warrants

• Long-term options to purchase equity
• Often granted to lenders or strategic partners
• Typically have longer exercise periods
• May have different exercise terms

Key Metrics

Ownership Percentage

• Basic: Shares owned ÷ Total shares issued
• Fully Diluted: Includes all potential shares from options and convertibles

Liquidation Preference

• Order of payment in exit scenarios
• Amount investors receive before common shareholders
• Can be 1x, 2x, or higher multiples

Anti-Dilution Protection

• Protects investors from down rounds
• Weighted average or full ratchet provisions
• Maintains investor ownership percentages

Cap Table Evolution

Founding Stage

Initial Equity Split

• Founders allocate initial equity
• Consider contribution, commitment, and risk
• Document with restricted stock agreements
• Implement vesting schedules

Common Splits:

• Single founder: 80-100% (reserve 15-20% for employees)
• Two founders: 50/50 to 70/30
• Three founders: Various combinations based on roles

Employee Option Pool

Pre-Investment Pool Creation

• Typically 10-20% of company reserved for employees
• Created before funding to avoid diluting investors
• Used to attract and retain talent
• Expands with company growth

Pool Management

• Grant options based on role and seniority
• Balance current needs with future hiring
• Consider refresh grants for retention
• Plan for pool increases in future rounds

Funding Rounds

Seed Round (Pre-Series A)

• Angels and seed VCs typically invest
• 10-25% equity for $250K-$2M
• Simple structures, often convertible notes or SAFEs
• Focus on product development and early traction

Series A

• First institutional round with preferred stock
• $2M-$15M for 20-40% equity
• Establishes board structure
• Introduces liquidation preferences and anti-dilution

Later Rounds (B, C, D+)

• Larger amounts for scaling operations
• 15-25% equity per round
• More complex terms and structures
• Focus on growth metrics and market expansion

Dilution Modeling

How Dilution Works

When new shares are issued, existing shareholders' percentages decrease even if their absolute number of shares stays the same.

Example:

• Pre-funding: Founder owns 1,000 shares (100%)
• Investment: Issue 500 new shares to investor
• Post-funding: Founder owns 1,000 of 1,500 shares (66.7%)

Factors Affecting Dilution

New Investment Amount

• Larger investments create more dilution
• Pre-money valuation affects percentage sold

Option Pool Increases

• New employee grants dilute existing shareholders
• Pool increases often coincide with funding rounds

Convertible Securities

• Notes and SAFEs convert to equity
• Conversion terms affect dilution impact

Down Rounds

• Investments at lower valuations
• Anti-dilution provisions may protect certain investors

Cap Table Management

Best Practices

Accurate Record Keeping

• Update immediately after any equity event
• Maintain detailed transaction history
• Track vesting schedules and exercise activity
• Document all equity-related agreements

Regular Reconciliation

• Monthly updates for active companies
• Quarterly reviews with legal counsel
• Annual audits for compliance
• Pre-funding round comprehensive reviews

Scenario Planning

• Model future funding rounds
• Analyze dilution impact on all shareholders
• Plan option pool increases
• Evaluate exit scenarios

Common Tools

Spreadsheet Management

• Excel or Google Sheets for simple cap tables
• Template-based approaches for consistency
• Manual calculation of dilution scenarios
• Cost-effective for early-stage companies

Dedicated Software

• Carta, Capshare, or Eqvista for complex structures
• Automated calculations and scenario modeling
• Integration with legal and accounting systems
• Stakeholder portals for transparency

Legal Integration

• Work with corporate lawyers for complex transactions
• Ensure compliance with securities regulations
• Proper documentation of all equity grants
• Regular legal reviews of cap table accuracy

Canadian Considerations

Legal and Tax Implications

Corporate Structure

• Federal vs provincial incorporation affects cap table management
• Different classes of shares for tax optimization
• Unanimous shareholder agreements common in Canada

Tax Treatment

• Capital gains vs ordinary income for different securities
• Lifetime capital gains exemption for qualified small business shares
• Stock option tax deferral opportunities
• Phantom stock plans as alternatives

Securities Regulations

• Provincial securities laws govern equity issuance
• Private placement exemptions for startup fundraising
• Disclosure requirements for certain investor types
• Cross-border investment considerations

Government Programs

SR&ED Credits

• Research and development tax incentives
• Can improve company valuation and cap table attractiveness
• May affect investor decision-making

Provincial Angel Tax Credits

• Some provinces offer tax credits to angel investors
• Can make investments more attractive
• May influence cap table structure

Cap Table Red Flags

Warning Signs

Overly Complex Structures

• Multiple classes of preferred stock with different terms
• Complicated liquidation preferences
• Excessive anti-dilution provisions
• Unclear voting rights

Founder Issues

• Significant founder departures without proper equity treatment
• Unvested founder shares at risk
• Disputes over equity allocation
• Inadequate founder vesting protection

Employee Equity Problems

• Insufficient option pool for hiring needs
• Underwater options from down rounds
• Poor communication about equity value
• Inadequate refresh grant programs

Common Mistakes

Documentation Errors

• Inconsistent records across systems
• Missing or incomplete equity agreements
• Outdated shareholder information
• Incorrect vesting calculations

Planning Failures

• Insufficient modeling of future dilution
• Inadequate option pool reserves
• Poor timing of equity grants
• Lack of liquidity planning

Exit Scenarios and Cap Tables

Acquisition Analysis

Purchase Price Allocation

• How acquisition proceeds flow through cap table
• Impact of liquidation preferences
• Participation rights and their effects
• Tax implications for different shareholders

Due Diligence

• Acquirers thoroughly review cap table accuracy
• Clean records essential for transaction success
• Unresolved equity issues can delay or kill deals
• Proper documentation reduces transaction costs

IPO Considerations

Public Company Readiness

• Cap table cleanup required before going public
• Stock option plan modifications
• Shareholder reduction if over limits
• Conversion of preferred to common stock

A well-maintained cap table is essential for successful fundraising, employee recruitment, and exit planning. Founders should invest time in understanding cap table dynamics and maintaining accurate records throughout their company's growth journey.