Cap tables are a core part of growing any serious business. They can be especially important for startups.
As a startup entrepreneur, your cap table will influence everything from securing investments to the terms of those investments, your ability to recruit the best talent, and the eventual outcome of your venture. Not to mention how big you can go, and how fast you can grow your company.
While there are plenty of other urgent issues in front of you as a founder, this is an important factor that can quickly cost you a lot more than you ever anticipated, if you neglect it.
It is vital to understand the basics of a cap table, how it relates to investors, your equity, and control, as well as the mistakes to avoid, and what it will cost you if you don’t prioritize getting this right.
The Ultimate Guide To Pitch Decks
Here is the content that we will cover in this post. Let’s get started.
- 1. What Is A Cap Table?
- 2.What Is Included In A Cap Table?
- 3. Who Should Manage Your Cap Table?
- 4. The Pain Of A Poorly Crafted Cap Table
- 5. Time & Energy Drain
- 6. More Intensive Due Diligence
- 7.Quickly Turning Off Potential Investors
- 8. Not Maintaining A Healthy Enough Option Pool
- 9. Unanticipated Impacts Of Dilution
- 10. Not Having A Clear View Of The Value Shareholders Bring Versus Their Cost
- 11. Weak Outcomes In An Exit
- 12.Expensive Costs To Fix It
- 13. Startup Cap Tables & Fundraising
- 14. It’s Instrumental In Negotiating Terms
- 15. Organizing & Presenting Your Cap Table When Fundraising
- 16. It Matters To Investors
- 17. Summary
What Is A Cap Table?
A capitalization table, also referred to as the ‘cap table,’ is a document that shows the stakeholders in a company.
This is typically shown in a spreadsheet format. Listing all of the owners and equity holders, the shares issued, and more.
It shows how the company has been capitalized, how the equity has been managed, what’s left, and what’s possible going forward.
It is a vital internal document. One that will be used in a variety of important financial and other decisions. As well as, being one of the most important documents that prospective investors and acquirers will want to view when it comes to fundraising or an exit.
Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
What Is Included In A Cap Table?
A cap table is most focused on displaying the ownership division of a company.
- Shares issued
- Who holds stock, and how much
- Option pools held in reserve
- Convertible notes or other potential claims to equity and shares
This can, of course, get pretty complicated. It is one thing to register a new company, start a small business with a friend, and split your interests fairly evenly as partners. It is completely different when you are aspiring to launch a true fast-growth startup that you dream of taking to be worth billions of dollars, or more.
In this second case, you will have many more elements involved in your cap table. As well as many complicated terms and calculations defining the value and impact of these agreements over time. Shares may be vested over a period of years, there can be RSUs (Restricted Stock Units), and complex provisions for paying out investors in a liquidity event.
For these reasons, many argue that a traditional Excel format is not going to be sufficient or efficient. Especially if you try to DIY it from scratch.
Who Should Manage Your Cap Table?
Unless you have a strong accounting background and a good understanding of all of the terms of investments, then it is wise to get help with creating and managing your cap table.
This can be outsourced. Accounting and law firms specializing in startups can help. As can leveraging existing cap table templates. There is also cap table software, and equity management software to consider.
Within your organization, your CFO will be heading up the responsibility for this task. Make sure you hire the best you can.
See How I Can Help You With Your Fundraising Efforts
See How I Can Help You With Your Fundraising Efforts
The Pain Of A Poorly Crafted Cap Table
Sloppy, careless, or incorrect cap tables can be a major pain. They can hurt your business and its potential in far more ways than you imagine, and to a much greater extent than you probably realize right now.
Here are some of the common ways that a poorly crafted cap table can quickly become your startup’s Achilles heel.
Time & Energy Drain
Trying to create and fix and update your cap table manually can take up a lot more hours and energy than you think.
While it is one of your most important documents, the ROI on your time is probably going to be low. It is not going to be efficient for most founders and new entrepreneurs to tackle this solo. Unless you have a great math and startup background.
That not only means lots of lost hours, that could have been spent on growing your business and making progress in other vital areas but draining you of your energy in the process. This is especially true when you have to go back and repeatedly fix it and update it yourself.
Learn the basics, delegate this out to someone extremely competent in this area, and go do what is going to grow your venture the most today.
More Intensive Due Diligence
A poorly crafted cap table is going to make going through due diligence far more intensive, painful, and slow. That’s even if your cap table can take you that far in a potential transaction.
The less you answer upfront, and the less confidence you give investors, the more they are going to have to dig into everything themselves. The longer the due diligence process, not only the longer before you can put money in the bank, but far higher the risk that it won’t complete.
Until you’ve raised money you probably think that pitching and getting term sheets in the door is the hard part. In truth, it is just the beginning. Due diligence is the real minefield.
Quickly Turning Off Potential Investors
Remember that investors see and hear so much junk, and are bombarded with so many pitches that they are just looking for a reason to justify their preconception that your pitch is just more spam, and isn’t going anywhere. Don’t give them any red flags to cause them to just dump you in the trash folder.
If your cap table is a mess, or too light, then they will be perceived you are not organized, opaque instead of transparent, and will have more questions.
What you want to do is to get good at enabling fast decision-making, and carry them right through to taking action.
Not Maintaining A Healthy Enough Option Pool
One of the often overlooked parts of a cap table that new entrepreneurs overlook to their own detriment is maintaining a pool of stocks for the future. Especially for recruiting talent, as well as compensating new members of the executive team, and advisors that can really propel traction.
If you miss this element, you are going to end up diluting your stock even more later. Then lose more control, and have a weaker exit.
Unanticipated Impacts Of Dilution
While some dilution can absolutely be worth the trade-off for the value you will receive, and how much larger it will take your venture, and in less time.
However, too much dilution can sap your share in your own company. That may just mean leaving you little to nothing when you exit. Or if you catch onto it earlier, discouraging you from really continuing to give this venture your all.
If you end up with just a small slice of your company, you can also lose control of your company, and the ability to make many decisions that are really important to you, and the purpose for creating this startup in the first place.
Not Having A Clear View Of The Value Shareholders Bring Versus Their Cost
Every little issue gets greatly magnified over time. As your startup scales exponentially, so do the good factors and the flaws.
Your cap table is a significant part of this. It is important that you are aware of the value exchange. What you are getting in exchange for the stake you are giving up.
Paying attention to this in your cap table in the early days will set you up for a much better future. Or it can rob you of a lot of potential if you ignore it.
You don’t want a lot of value going out, and not getting an inferior return back. You don’t want a lot of deadweight sucking the life out of your company, when you could have gotten a lot more help in propelling it forward and making big leaps, for giving up the same amount of equity and control.
This can especially be a problem with early cofounders and friends and family investments. As well as any money you are bringing in, just for the dollars, and not the additional value those investors are bringing to the table.
Understanding the break-up of your company’s capital structure becomes all the more critical when you start fundraising. For more information about how rounds of financing work in startups, check out this video I have created.
Weak Outcomes In An Exit
As we’ve already alluded to a couple of times in this report, a poorly managed cap table can really show up with a big impact when it comes time to exit.
Many entrepreneurs really think forward and prioritize ensuring that their investors and team are highly rewarded when they exit a company. They find it extremely rewarding to deliver great returns and financial freedom to those that were willing to bet on them and make it happen.
Even if you are not there yet in your thinking, keep in mind that you could end up with a small slice of the pie if you are not careful. In fact, if you aren’t watching the fine print, clauses, and calculations when getting into investor agreements, you might walk away with nothing. Even if your company is acquired for over a billion dollars.
Expensive Costs To Fix It
If you neglect your cap table in the early days, it is only going to get harder and more complicated to straighten it all out later. Not just in terms of cleaning up and beautifying how you present your deck, but in perhaps even restructuring past deals, and a ton of legal work. This can easily run thousands, if not tens of thousands of dollars to do.
Startup Cap Tables & Fundraising
Cap tables are a big deal in fundraising. They are certainly impacted as the result of bringing in more equity. Your cap table can be a significant factor in attracting capital, and the terms as well.
It’s Instrumental In Negotiating Terms
Your cap table shows what is available, and how wisely you’ve managed it so far. This can certainly help in attracting solid offers from the start and avoiding wasted time.
Organizing & Presenting Your Cap Table When Fundraising
Your cap table should already be updated and in an appealing format before you go out pitching. It may not be in your pitch deck. Yet, it should be sitting there in your virtual data room, ready to be viewed.
It Matters To Investors
Investors want to know how much is available, the threats to their capital and returns, and what may be a drag on that.
The cap table is the heart of your business. While it may not always be exciting to be diving into spreadsheets instead of pitching, selling, and launching products, your cap table can make or break your venture.
Managing it well, and presenting it correctly, can make all the difference in how fast and big you can grow. As well as how easy it will be, and how rewarding the exit will be for you, and everyone else with a stake in it.
Getting this right from the start will propel your venture, and save a lot of pain and challenges on the way.
You may find interesting as well our free library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here.