What is a capitalization (“cap”) table?

Takeaway: A capitalization table is a record of all of the ownership interests in a company. It’s how we keep track of who owns what. The founders are typically the first entries on the cap table.

As a startup grows and raises capital, it becomes important to keep track of who owns what portion of the company. This is where a capitalization table, or "cap table" for short, comes into play. A cap table is a spreadsheet or chart that outlines the ownership structure of a company, including the names of the shareholders, the number of shares they own, and the percentage of the company they hold.

The cap table is used to keep track of different types of equity ownership, such as common stock, preferred stock, options, warrants, and convertible notes. It also tracks the price and value of each share and can also model any dilution that may occur due to new stock issuances or stock option grants.

Having an accurate cap table is important for a number of reasons. First, it helps founders and investors keep track of who owns what percentage of the company, which can be critical during fundraising and acquisition discussions. Second, it can help prevent disputes and misunderstandings among shareholders by clearly outlining their ownership stakes. Finally, it provides a framework for calculating the potential value of equity grants or stock options for employees and other stakeholders.

Creating a cap table can be a complex process, particularly for companies with multiple rounds of financing or complex equity structures. It is important to ensure that the cap table is accurate and up-to-date, and that all equity grants and transactions are properly documented. Many startups use specialized cap table software or hire a professional to help manage their cap table and ensure compliance with legal and regulatory requirements.

In summary, a cap table is an important tool for startups to manage their ownership structure and track equity ownership. By keeping an accurate and up-to-date cap table, startups can avoid disputes and misunderstandings among shareholders, calculate the potential value of equity grants, and position themselves for future fundraising and acquisition opportunities.