Mastering this vital tool is essential to making sure you fully understand the equity and ownership in your startup, right from the start. So let’s take a look into them, and make sure you are set up for success!

What is a cap table?

Let’s start at the very beginning – what exactly is a cap (capitalisation) table? Put simply, it is a list that shows who owns a company and how much of it they own. While this sounds incredibly simple, we all know appearances can be deceiving…so in essence, your cap table will track the equity ownership of all stakeholders (including founders, employees, and investors), and keep the details of the various classes of shares and the percentage of ownership held by each party.

Why is a cap table so important?

If there’s only a few of you, it can seem insignificant to know exactly who owns what. But as you grow and add investors, things can start to get complex. It’s a key resource to making really important decisions, like setting up an ESOP to distribute equity amongst employees, and planning for future cap raises. It needs to be the single source of ‘truth’ in the business, so keep it clean, and up to date! This is not always as easy as it sounds with cap tables sometimes sitting in spreadsheets, software and (officially) with the regulators, ASIC.

FAQs

We have some friends in high (handy) places. If you’re a regular reader of our articles, you’ll have heard us mention Cake Equity before, who are absolute experts on cap tables. We’ve borrowed their FAQs list, with some quick answers so take a look:

• Why is a cap table important? it helps entrepreneurs and investors understand the ownership structure of a company, by providing a clear picture of who owns what percentage of the company and how ownership changes over time
• Who should use a cap table? startups and investors, however, anyone who wants to understand the ownership structure of a company can benefit 
• How often should a cap table be updated? whenever there are changes to the ownership structure of a company, includes issuing new shares, raising capital, and buying back shares
• What is dilution in a cap table? process by which the percentage ownership of existing shareholders is reduced when new shares are issued, this can happen when a company raises capital or issues stock options
• What is a liquidation preference? the right of a preferred stockholder to receive their investment back before common stockholders in the event of a liquidation event, such as an acquisition
• Can a cap table be used to value a company? it is not typically used to value a company, valuation is typically done using other methods, such as discounted cash flow analysis or comparable company analysis

How to create a cap table

Ok so you’re now on board with why you need one, so how can you get started on creating it? While it often starts in a spreadsheet you’re likely to outgrow this as you get more investors and employees – this is the time to check out software like our friends at Cake Equity. Read this article for our top tips on what is best for you.

What’s next?

You’ve made the crucial decision to get yourself organised, yes! Now it’s time to get going. Remember, we are always here to help, and have assisted countless startups like yours with helping set up, or cleaning up their cap tables. So get in touch, we’d love to hear from you.