A capitalisation table, commonly known as a cap table, is a document that outlines the ownership structure of a company. It includes the names of investors, how much they invested and how much of the business they own, among other things.
In the early days of a startup, creating a cap table is pretty simple. Normally, the founders will be the only owners. When you start to raise rounds of funding it becomes more complex, especially if you’re raising from different sources — for example, you may have both angel and VC money committed.
In our Startup Life newsletter, we spoke to the team at 10x10 Capital, a firm for Black founders. They’ve worked with hundreds of companies, advising them on how to get investment ready including sorting out their cap tables. Here are their top tips:
Keep your cap table 'clean'
Keep it simple so that there is a clear overview of company ownership. Include the person or the fund that owns shares in the company, the type of shares they own and how many of them. You can use Google Sheets or Excel. There are also products, like Seedlegals in the UK, that can simplify the process.
Your cap table should be accessible to investors from your data room — the online space startups should set up to store confidential company documents that you need to share, securely, with potential investors.
Ringfence equity for different players
If an investor thinks there isn’t enough equity on the table for them, nor for future investors (without early investors being overly diluted), they will not invest. Don’t give away too much in the early days.
Set aside an option pool for employees (about 10%, which will stay constant through subsequent rounds); if you have advisers, they shouldn't own more than 5% collectively; and leave enough for yourself, the founder.
You need to be motivated and excited about the potential upside of your equity — aim for 60-65% ownership between all founders by the time a company reaches Series A.
Monitor founder equity
When you start a business, the founders will normally own all of it, and divide equity equally between themselves. But how founders contribute to a company can change over time — some may leave, someone new may become CEO and other founders may move into advisory roles. At this point, you should not have equal ownership. The equity everyone owns should match the contribution a person is making.
Set vesting periods from the beginning
This is the amount of time someone must work with a company until they own their full amount of allocated shares. If someone stops working with the company before all their equity has "vested", they are not entitled to the full amount. For example, someone may own 1% but has a vesting period of four years. If that person leaves after year one, they will own 0.25%.
Vesting periods are not reflected on a cap table. In our example, the cap table will say this person owns 1%. After they leave, their adjusted allocation, 0.25%, will need to be reflected in the next version of the cap table. Vesting periods should be tracked separately and cross checked with your cap table each time it is updated.
Be clear on the types of shares you’re giving
All investors can see the types of shares owned by other investors: ordinary, common or preferred. Ordinary shares normally come with voting and dividend rights; common shares provide voting rights giving shareholders a say on things like company policies, who gets elected to a board, etc; and preferred shares ensure investors get their money back before other types of shareholders.
A large investor may not be happy with a smaller investor receiving higher priority shares than them. This will negatively impact your negotiations. As with founder shares, you want to make sure that shares reflect the contribution of an investor. Communicate with your investors — explain why smaller investors may have higher priority shares. For example, you may have strategic investors who add value to the business beyond capital with things like customer contracts, hiring support, etc.
Don’t forget about convertible notes
Investors may loan a startup money in its early days. When a startup goes on to raise money, normally a Series A, the debt converts to shares. This is a convertible note. They aren't reflected on cap tables until they are converted into shares.
Founders should create a forecast of what their cap table will look like upon conversion. This provides a more accurate version of ownership in their company which will be needed when negotiating with investors.
Take different types of money
Party rounds — when lots of different people invest — used to have a negative connotation. People thought investors were hedging their bets in a hot market by putting in small cheques in lots of companies and did not actually care about supporting founders. Now, it’s more acceptable to have a lot of angels involved in rounds, or to raise a round only from angels who can write bigger cheques. Angels can also invest as a syndicate. Syndicates allow angels with smaller cheques to group together and invest under one name — this name is detailed on the cap table, not every individual angel’s name.
Don't worry about how many people you take money from, worry about who you want to take it from. You may want money that comes with an investor’s experience and expertise, or just their name. Focus on getting useful money, not on trying to reduce the numbers — but bear in mind that the more investors you have, the more cap table admin you will need to do.
Once you get to Series B onwards, larger investors sometimes buy out previous shareholders, “cleaning up” the cap table and increasing their ownership.
On the subject of... cap tables
🧱 101. What is a cap table? Why do you need one? How do you put it together? This thread has it covered.
⚖️ You need a diverse cap table. The founder of jobs platform Flexa believes it’s “one of the only ways” to flatten the uneven playing field in a startup scene that’s so heavily dominated, at a founder and investor level, by white men.
🦸🏽 Show investors your potential for success. For example, is there enough equity left on the table to attract top talent with a decent option pool?
🐣 From incorporation to Series A. Seed stage fund Cherry Ventures has shared some useful templates to get you through the first few years of running a company.
Are you diluting yourself too much? If you’re in the Nordics, you’re probably giving away too much of the company too soon.