A capitalization table details a startup’s ownership breakdown.
Cap tables are critical documents that help both founders and investors make more informed decisions regarding the company.
As a startup grows, its cap table is likely to become progressively more complex.
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A cap table—short for capitalization table—is a spreadsheet that breaks down who owns what in a startup. The cap table is a key due diligence item because it reveals how every stakeholder is impacted by a fundraise.
Therefore, understanding how to interpret them as an investor is vital.
In this guide, we’ll go over why cap tables are so important and how to read both a pre-financing cap table and a post-financing cap table (known as a “pro-forma” cap table). We’ll also look at how cap tables evolve over time—and why they tend to get progressively more complex.
What is a Capitalization Table?
A cap table lists out all of a company’s securities—such as common shares and preferred shares, options, SAFEs, convertible notes, and warrants. It also shows how much of each security type each investor owns, the value of their respective stakes, and their current ownership percentage.
In other words, a cap table is a comprehensive listing of what an investor would want to know about a company’s ownership.
While there's no set format for a cap table, every cap table should contain the following details:
Shares reserved for stock options
Valuation details of the last priced round (including pre-money valuation, amount of new equity raised, per-share price, and number of shares)
Complete list of shareholders (including type of shares they own, total number of shares, and percentage ownership stake)
Note that SAFEs and convertible debt are often not listed in the “main” section of the cap table. This is because the number of shares they will convert to—and thus their holders’ ownership stakes—usually depends on what happens in the next priced equity round. They might be listed in a separate section in the cap table, with the following details:
During financing discussions, the parties usually prepare a pro-forma capitalization table. This is a version of the cap table that shows the updated company ownership after a financing round closes. It allows the parties to model out exactly how the company’s ownership will change as a result of the financing round.
There is no set format for a pro-forma capitalization table. Here’s an example of what one might look like:
The key differences between pro-forma capitalization tables and “regular” cap tables are:
The pro-forma cap table shows how the cap table would change should the financing round go through.
The pro-forma cap table must account for potential conversions of convertible debt or SAFEs (if the financing round triggers a conversion).
The pro-forma cap table may change multiple times as investors and founders negotiate the details of the round.
Why Are Cap Tables Important?
For investors, the cap table is a key due diligence document, as it:
Shows them how incentivized the startup’s founders are. Investors want to see founders who still hold significant stakes in their company, as that would affect their motivation in driving the company forward. A startup where the founders’ stakes have been almost wiped out by previous financings is likely a red flag.
Can pinpoint future dilution. Seeing lots of convertible debt or SAFEs on the cap table could be a sign that an investor’s holdings could be diluted, potentially significantly, in the future. While not necessarily a red flag, this might prompt further inquiry.
Shows them whether the startup can attract and retain talent. In the startup world, share options are a major incentive for employees. Investors likely want to see an employee option pool that is sizable enough to attract, retain, and motivate the talent needed to power the startup’s growth.
Tells them who the other investors are and how much they own. The names—and ownership stakes—of the other investors on the cap table can inspire confidence (or do the opposite). Investors also want to see how many other investors there are. If there are too many, it could mean that the founders may have to spend a lot of time obtaining alignment from all parties, potentially complicating future negotiations.
Can help them decide how much to invest. By looking at the pro-forma capitalization tables, investors can work backward to estimate how much they should invest. For example, they may have an internal IRR benchmark they want to hit. By using the startup’s current valuation and estimating an “exit value,” they can come up with an appropriate investment amount. Of course, this is never certain, as there are many factors that could change in the future (including future dilution).
Founders also use the cap table to:
Help them run the company more effectively. By having a complete list of all their investors and their ownership stakes, the founders can ensure the right people are kept in the loop. Decisions like whether to issue new shares or share options can also be better analyzed using the cap table.
Manage the employee stock option pool. A cap table is an important reference when determining how much to allocate toward the employee option pool.
Ensure any potential audits or compliance checks can proceed smoothly. A well-maintained cap table can be crucial in any audits and future financing rounds.
How Cap Tables Evolve Over Time
While cap tables often start out simple, they tend to become more complex as more rounds of financing are completed.
There are a few reasons for cap tables’ tendency toward increasing complexity:
Different investors may have different rights and privileges. The same investment vehicle—whether preferred shares, SAFEs, or convertible debt—can have different privileges, such as different liquidation preferences, anti-dilution provisions, valuation caps, or discount rates. All these must be accounted for in the cap table.
Anti-dilution protection for past investors could be triggered. For instance, if there is a down round, previous investors’ anti-dilution provisions may be triggered.
Bridge rounds or follow-on rounds may be conducted with convertible debt. Startups may raise a bridge round or follow-on round using convertible debt—which would add to the cap table’s complexity as the conversion price for those instruments may not be known until the next funding round.
The employee share option pool may have to be increased. As the startup grows, the employee share option pool may have to grow as well. Further, new employees will likely have options granted at different strike prices than previous hires.
Stock options and warrants may be exercised or cancelled. When employees exercise their options and convert them to shares, they will then be added directly to the cap table as shareholders. Employees leaving before their options are vested will also necessitate changes to the cap table.
Shares may be transferred to other entities. For instance, a founder may transfer their shares from their personal ownership to a trust.
Cap Tables on AngelList
AngelList Stack comes with a cap table that automatically updates as founders issue equity and stock options. Investors and employees get a customized dashboard where they can track their ownership stake. To learn more, visit our website.