#60 — Cap tables for startups explained

Note: Download our free cap table template to get started quickly.§

1 Big Thing: A capitalization table (cap table) is the authoritative record of who owns what percentage of your company, detailing all forms of equity – from founder shares and investor stakes to employee options and warrants. It's dynamic and evolves with every funding round, hire, and equity event.§

Why it matters (and why you must get it right):§

• Fundraising Credibility: VCs and angel investors won't even talk to you seriously without a clean, accurate cap table. It's due diligence 101.
• Dilution Demystified: Understand precisely how each new investment or option grant impacts your ownership stake and that of your existing shareholders. No surprises.
• Strategic Decision-Making: Informs decisions on fundraising strategy, employee compensation, and potential exit scenarios. Who gets what when?
• Legal & Compliance Backbone: Essential for legal agreements, tax filings (like 83(b) elections, QSBS tracking), and maintaining good corporate governance.
• Attracting & Retaining Talent: A well-managed option pool, clearly reflected on the cap table, is key to incentivizing your team.
• Exit Clarity: When it's time to sell or IPO, the cap table dictates the distribution of proceeds. Errors here can cost millions.

Go Deeper: Deconstructing Your Cap Table Anatomy§

A robust cap table isn't just a list of names and numbers. It's a detailed ledger.§

Key Information Your Cap Table MUST Contain:

• Security Holders: Full legal names of all individuals (founders, employees, advisors) and entities (investment funds, holding companies) owning equity.
• Security Types:
  • Common Stock: Typically held by founders, early employees. Usually has basic voting rights.
  • Preferred Stock: Issued to investors, often comes with special rights (liquidation preferences, anti-dilution, pro-rata, participation, conversion rights). Detail each series (Seed, Series A, B, etc.) separately.
  • Stock Options (ESOP): Granted to employees/advisors. Include grant date, vesting schedule, exercise price, expiration date.
  • Warrants: Similar to options, but often issued to lenders, partners, or in conjunction with investment rounds.
  • Convertible Instruments:
    • SAFEs (Simple Agreement for Future Equity): Not debt, but a promise of future equity. Track valuation caps and discounts.
    • Convertible Notes: Debt that converts to equity at a future funding round. Track principal, interest rate, maturity date, valuation cap, and discount.
• Number of Shares/Units: The exact quantity of each security type held by each holder.
• Issue Date & Price: When shares/options were granted/issued and at what price.
• Vesting Schedules: For founders and employees, detail the vesting terms (e.g., 4-year vest with a 1-year cliff). Track vested vs. unvested shares.
• Fully Diluted Shares: The total number of shares outstanding if all options, warrants, and convertible instruments were exercised and converted into common stock. This is the number investors really care about.
• Percentage Ownership: Calculated on both a basic (issued shares) and fully diluted basis.
• Option Pool Status: Total shares authorized for the ESOP, shares granted, shares vested, shares exercised, and shares remaining available.
• Transaction History: A log of all equity-related events (issuances, transfers, buybacks, conversions).

Building Your First Cap Table (And Keeping it Clean):

1. Start Early (Day 0): Seriously, create it alongside your incorporation documents.
2. Spreadsheet or Software?
   • Spreadsheets (Excel/Google Sheets): Fine for the very early days with just founders. Prone to errors as complexity grows. Use templates, but be meticulous.
   • Cap Table Management Software (e.g., Carta, Pulley, LTSE Equity): Becomes essential as you issue options or raise capital. Automates calculations, manages compliance, and provides a portal for stakeholders. Worth the investment.
3. Initial Share Authorization: Your certificate of incorporation will state the number of shares authorized. You'll issue a portion of these to founders.
4. Founder Shares: Issue common stock to founders, subject to vesting. File 83(b) elections within 30 days of grant if applicable (US-specific, consult a lawyer/tax advisor).
5. Detail Every Grant: Document every stock option, RSU, or share grant meticulously. Board approval is required.
6. Model Scenarios: Use it to simulate fundraising rounds, option pool increases, and their dilutive effects.
7. Regular Audits & Updates: Treat it as a living document. Update immediately after any equity event. Reconcile with legal documents. Have your lawyer review it periodically, especially before fundraising.

Example Scenario: Simple Cap Table - Pre-Seed§

Shareholder	Security Type	Shares Issued	Vesting Schedule	Purchase Price/Share	Fully Diluted Shares	% Ownership (Fully Diluted)
Founder Alice	Common Stock	4,000,000	4yr, 1yr cliff	$0.0001	4,000,000	40.0%
Founder Bob	Common Stock	4,000,000	4yr, 1yr cliff	$0.0001	4,000,000	40.0%
ESOP (Unissued)	Options	(2,000,000)	N/A	N/A	2,000,000	20.0%
Totals		8,000,000			10,000,000	100.0%

Note: The ESOP is authorized but no options granted yet. This is the initial "option pool."§

Cap Tables in Action: Navigating Key Startup Stages

1. Founding & Incorporation:

• Key Action: Allocate founder shares (common stock). Establish vesting schedules (e.g., 4 years with a 1-year cliff).
• Critical Nuance: File 83(b) elections (US founders) within 30 days of receiving restricted stock to potentially save big on taxes. Miss this deadline, and you can't fix it.
• Playbook Tip: Agree on founder equity splits and vesting upfront. Get it in writing. What happens if a founder leaves early?

2. Creating an Employee Stock Option Pool (ESOP):

• Key Action: Authorize a pool of shares (typically 10-20% of fully diluted shares pre-money for early-stage) for future employees, advisors, and consultants. This requires board approval.
• Critical Nuance: The ESOP creates dilution for existing shareholders (founders). The size of the pool is often negotiated with investors.
• Playbook Tip: Understand the difference between authorized, granted, and vested options. Communicate option value clearly to employees.

3. Early Funding (SAFEs, Convertible Notes, Priced Seed):

• SAFEs/Convertible Notes:
  • Key Action: These instruments don't immediately grant equity but promise future shares. Track principal/investment amount, valuation cap, discount rate, and any interest (for notes).
  • Critical Nuance: They convert into equity (usually preferred stock) at the next qualified financing round (e.g., Series A). Model their conversion carefully to see the "pro forma" cap table. Multiple SAFEs/notes with different terms add complexity.
  • Playbook Tip: Understand how the valuation cap and discount rate interact. The more favorable term for the investor will typically apply.
• Priced Seed Round (Issuing Preferred Stock):
  • Key Action: Investors purchase a new class of shares (e.g., "Seed Preferred Stock") at an agreed-upon price per share, based on a pre-money valuation.
  • Critical Nuance: Preferred stock comes with rights:
    • Liquidation Preference: Investors get their money back first (e.g., 1x non-participating) or a multiple before common shareholders in an exit.
    • Anti-Dilution Provisions: Protects investors if you later sell shares at a lower price (full ratchet vs. broad-based weighted average).
    • Pro-Rata Rights: Right to invest in future rounds to maintain their ownership percentage.
  • Playbook Tip: Negotiate these terms hard. They significantly impact founder outcomes. Model the post-money cap table before signing any term sheet.

4. Series A and Beyond:

• Key Action: More sophisticated investors, larger rounds, higher valuations. New series of preferred stock (Series A, B, C, etc.) are created, each with its own set of rights and preferences, often senior to previous preferred rounds.
• Critical Nuance: The "option pool shuffle" is common: investors may require you to increase the ESOP before their investment (so the pre-money shareholders, including founders, bear that dilution). Pay attention to the "pre-money vs. post-money" option pool increase.
• Playbook Tip: Waterfall analysis becomes critical. This models how proceeds are distributed to each class of shareholder in different exit scenarios. Software is invaluable here.

5. Employee Options & Vesting Deep Dive:

• Key Action: Granting stock options to employees. Standard vesting is 4 years with a 1-year "cliff" (employee gets 0% if they leave before 1 year, then 25% at the 1-year mark, then monthly or quarterly thereafter).
• Critical Nuance:
  • Exercise Price (Strike Price): Set at Fair Market Value (FMV) on the date of grant, typically determined by a 409A valuation (US).
  • Acceleration:
    • Single Trigger: Vesting accelerates upon one event (e.g., acquisition). Less common for full acceleration.
    • Double Trigger: Vesting accelerates if two events occur (e.g., acquisition AND termination without cause). More common.
  • Post-Termination Exercise Period (PTEP): How long an employee has to exercise vested options after leaving. Can be short (e.g., 90 days for ISOs to retain tax status).
• Playbook Tip: Use option grants strategically. They are for alignment and retention, not just compensation. Clearly communicate the value and the risks.

6. Secondary Sales & Tenders:

• Key Action: Existing shareholders (founders, early employees, early investors) sell some of their shares to new or existing investors, or back to the company.
• Critical Nuance: Can impact voting control and doesn't necessarily bring new capital into the company (unless it's a company buyback to replenish the ESOP). Needs careful documentation and board approval. May trigger Right of First Refusal (ROFR) for other shareholders.
• Playbook Tip: Secondaries can provide liquidity but also signal various things to the market. Manage them thoughtfully.

Common Cap Table Pitfalls & How to Dodge Them:

• Spreadsheet Chaos: Using complex, error-prone spreadsheets for too long. Formulas break, versions get mixed up.
  • Dodge: Transition to dedicated cap table software early.
• Forgetting Verbal Promises: "Handshake deals" for equity that aren't documented.
  • Dodge: Every equity grant MUST be board-approved and documented legally.
• Incorrect Vesting Calculations: Miscalculating vested shares, especially with complex schedules or early departures.
  • Dodge: Use software or have an expert double-check.
• Ignoring Dilution Math: Not fully understanding how new investments or option pool increases will shrink your stake.
  • Dodge: Model every scenario. Ask "what if?"
• Misunderstanding Convertible Instrument Conversion: Incorrectly calculating shares issued when SAFEs/notes convert.
  • Dodge: Model conversions carefully, especially with multiple instruments and different caps/discounts.
• 409A Valuation Neglect (US): Not getting timely 409A valuations, leading to options granted below FMV and potential tax penalties for employees.
  • Dodge: Get a 409A valuation at least annually or after material events (like a new funding round).
• Not Tracking Fully Diluted Shares: Focusing only on issued shares gives a false picture of ownership.
  • Dodge: Always calculate and present ownership on a fully diluted basis.

Cap Table Best Practices: The Pro Moves

• Single Source of Truth: Your cap table (preferably in software) should be THE undisputed record.
• Regular Professional Review: Have your lawyer review it before fundraising and periodically.
• Transparency (Appropriate Levels): Founders and the board should have full access. Summarized info for employees about their own grants. Investors get detailed views.
• Scenario Modeling: Before any equity event, model its impact. No surprises.
• Understand Investor Terms: Don't just look at valuation. Liquidation preferences, participation rights, and anti-dilution clauses are critical.
• Proactive ESOP Management: Don't wait until you're desperate to hire. Plan your option pool size and refresh it strategically.
• Documentation is King: Every grant, transfer, or conversion needs a paper trail (board consents, stock purchase agreements, option agreements).

The Bottom Line: Your cap table is more than an accounting exercise; it's a strategic asset and a reflection of your company's journey. Mastering its nuances from day one will save you immense headaches, empower your negotiations, and ensure fairness as you build and scale. Neglect it at your peril. Keep it clean, keep it accurate, and use it wisely.§