What is a Cap table?

Managing the ownership of a business is a crucial but an often-overlooked element of the duties of a business owner.

If you’re looking to attract investment into your business, then a Cap table is a vital document that any potential investor will want to see before they decide to invest.

In this article we explore what a Cap table is, its key components, and why a business will need one.

What is a Cap table?

A Cap table, short for Capitalisation table, is a key document that outlines a company’s equity ownership structure. 

It identifies all the shareholders, the number of shares they own, and the types of securities issued to each equity holder or, in other words, who has put money into the business as equity, how much, and what shares they own.

Beyond listing ownership details, a Cap table provides critical insights into a company's share capital. 

Whilst there’s no legal obligation to have one, it is an essential tool for managing equity, tracking ownership dilution, and preparing for future fundraising efforts.

What is a Cap table used for?

The primary purpose of a Cap table is to show company founders, investors, and executives how ownership is distributed and to monitor changes in that distribution over time. 

This is particularly crucial for start-ups and fast-growing companies where ownership percentages can shift significantly due to events like fundraising rounds, the creation of an employee option pool, or secondary transactions. 

Additionally, cap tables play a significant role during due diligence processes, as they allow potential investors to assess ownership details and make informed decisions about investing in the company.

Maintaining an accurate and up-to-date Cap table is vital for ensuring transparency, managing equity, and supporting the company’s long-term strategic goals.

What does a Cap table include?

A Cap table is structured into specific categories that provide a clear overview of ownership information, transaction history, and other financial data. 

Typically, a Cap table includes the following key components:

Ownership information

Typically, a Cap table is organised into multiple sections, detailing aspects of the business such as who owns the various types of equity in the company, the total number of shares each shareholder owns, and what percentage of the business that each share represents.

Equity types

There are a few different types of equity that can appear on a company’s Cap table with each having different terms:

• Ordinary or Common shares: a basic form of ownership share which can often be issued to early employees and founders
• Preference shares: this type of share is offered to investors during a funding round and includes voting rights, distribution priority, and liquidation preferences
• Share options: these give the owner of the option (typically an employee) the opportunity to purchase shares at a set price after a particular vesting period
• Warrants: gives an investor the right to buy shares at a set price over a particular period of time, usually a longer period than for share options
• Convertible instruments: these are investments which will transform into an equity stake at a later date or if certain conditions are met.

Share classes

This refers simply to how different types of shares may differ due to any special rights or restrictions that may come with them.

This part of the Cap table will list the different share classes used by the business, and what each share class entitles the owner of those shares to such as voting rights, liquidation rights, and dividend priority.

For example, an owner of non-voting shares is not entitled to vote as part of the business’s management but is usually entitled to a share of profits on distribution where as an owner of Preference shares is usually entitled to receive a dividend before other classes of shares.

Typically, most small businesses may find it easier to just issue ordinary or common shares which offer equal rights and responsibilities to all shareholders.

Valuations

This part of the Cap table, if you decide to include it, explains to shareholders how much their shares are worth.

There are a number of different ways you can attempt to value a business depending on where the business is in its life cycle such as Pre-money valuation (the company’s value before a new series funding round), Post-money valuation (the company’s value after a funding round), or even Price-per-share.

Many smaller businesses may not include a valuation section as it can be difficult to value a small business.

Learn more about how to value a business.

Transaction history

A key element of any Cap table is a record of all the various equity-related events in the history of the business.

This provides any potential investor a detailed record of ownership and equity changes over time.

Equity-related events can include:

• Funding rounds: such as Pre-seed, Seed, or Series A, B, or C. Read more about Equity funding rounds with our guide
• Share or option grants:  these occur when shares are allocated to employees, advisors, or other service providers to the business
• Exercises: this is when options, warrants, or other instruments are triggered, and the purchase of shares takes place
• Secondary transactions: these occur when existing shares are bought and sold between investors.

If you have a Cap table, it is important that it is updated whenever there are changes to the shares of your business.

Exit scenarios

An Exit scenario model may be included, which will outline to investors what their potential payout would be should the company be acquired or undertake an Initial Public Offering (IPO).

Learn more about IPOs with our handy guide.

Dilution analysis

Equity dilution occurs when a company issues new shares, resulting in a reduction in the ownership percentage of existing shareholders. 

For example, a founder may initially own 100% of the company, but each time additional shares are issued, or capital is raised, their ownership stake decreases. 

This phenomenon is often referred to as founder dilution. 

Dilution analysis is a useful tool for illustrating how the creation of new shares affects the ownership percentages of current shareholders. 

Dilution analysis typically includes an evaluation of how shareholders are impacted under various scenarios, such as new fundraising rounds or secondary transactions. 

It’s important to note that because Secondary transactions involve the transfer of existing equity and do not result in new shares being issued, they do not cause any additional dilution within the overall Cap table.

What is ‘dead equity’?

One thing an investor will look to identify when examining a company’s Cap table is the amount of ‘dead equity’ they have.

Dead equity refers to shareholders who are no longer contributing any value to a company beyond their initial financial investment or a prior role in the business.

For instance, this could include a co-founder holding 10% of the company's shares but no longer playing an active role in the business, or a relative who provided early-stage funding but is no longer involved.

Excessive dead equity can raise concerns for potential investors, as it may indicate an imbalance in ownership structure. 

To avoid this, it might be a good idea to try and keep such shareholders to a minimum and focus on maintaining a group of shareholders who actively contribute to the company’s ongoing success.

How to write a Cap table

There is no single ‘right’ way to produce a Cap table and they can be as individual as a business itself.

Some companies use accounting software to produce theirs whilst others find a simple Excel spreadsheet more than adequate.

Since the role of a Cap table is to tell the story of your business in terms of its ownership, the best Cap tables are easy to read so simplicity is key.

Cap tables do tend to become more complex as the business grows so it might be a good idea to get professional expertise early to ensure the right information is being captured.

Here are a few steps you can take to create your own Cap table:

The basics

First, decide who in the business will have overall ownership of the Cap table, typically for early-stage businesses this will be one of the founders or the CEO.

Next, you’ll need to record the total amount of shares the business can issue and the amount currently issued to shareholders.

Founder equity

The first entry into your Cap table will be establishing the initial equity split between the various founders of a business.

You’ll need to record the number of shares assigned to each founder which will help with tracking dilution over time.

It’s also a good idea to record any other information pertinent to the ownership of the business, such as vesting schedules if you have them.

A vesting schedule is a plan that determines when a founder (or any other employee) may gain full ownership of shares over a set period of time. 

A vesting schedule incentivises employees to stay with a business over the longer-term.

Shareholder segmentation

Next, you’ll need to clearly segment your different shareholders based on the types of shares they own.

As we mentioned above, different types of shares bring with them different characteristics such as voting rights.

You’ll need to record what types of equity shares your business has issued and what rights they bring.

Investor equity

After you’ve done this, you should list which shareholders own which shares and include their name, role, and contribution.

It’s a good idea to note down the total number of shares purchased and at what price per share they were purchased at.

If the shareholder has a liquidation preference that should also be included here.

This section will offer potential investors a clear record of fundraising as well as assisting with a company valuation (based on the value of each share).

Convertible debt

Ownership stakes can vary in structure.

Convertible notes are a good example of this as they are initially categorised as debt and therefore don’t appear on the Cap table. 

However, they are designed to convert into equity based on the company's performance.

When this conversion occurs, the note must be reflected on the Cap table. 

To prepare for this eventuality, it could be a good idea to maintain a dedicated section of your Cap table to account for debt that could transform into equity in the future. 

This approach ensures transparency and helps avoid unforeseen changes to ownership representation.

Option pool

An option pool is a designated block of shares set aside for employees and other service providers. 

Including an option pool in your Cap table ensures that shares are available to attract and retain employees, consultants, and advisors while providing greater predictability when it comes to future dilution.

To establish an effective Option pool, you’ll need to make sure that it’s the right size, specifically, it should be large enough to grant equity to new employees and provide further shares to reward high-performing staff. 

The Option pool shows the number of shares as a percentage of total shares but doesn’t list how many of those options have been allocated or who holds them.

Do Option holders appear in a Cap table?

The simple answer is no.

The Cap table only features the names of people who actually own shares in the business.

The owner of a Share option only has the opportunity to purchase a share at a point in the future for a particular price – they do not actually own any part of the business until that Share option is vested.

Once the Share option is vested, that person’s name will appear in the Cap table.