Cap tables for startups: a guide to ownership distribution

A capitalization table (more commonly referred to as a cap table) is a formal record of your startup’s securities—such as stocks, warrants, and convertible securities—and who owns them. However, there’s a bit more to it than that.

Navigating the world of startup finance can often feel like trying to assemble IKEA furniture without the instructions—you know it should all fit together somehow, but you’re left scratching your head about how to make it happen.

And that’s often the case when it comes to founders and cap tables.

We’re here to help make cap tables (and other startup topics) more approachable and actionable. This article will walk you through everything you need to know about cap tables and how to get started.

What is a cap table?

A cap table, short for capitalization table, is a detailed spreadsheet or document that outlines a company’s ownership structure, including shares owned by investors, employee equity awards, and options… It lists out all your company’s securities:

• Common stock: Shares typically held by founders and employees, offering ownership with voting rights but lower priority in payouts.

• Preferred stock: Shares issued to investors with privileges like priority dividends and conversion to common stock, often used in a funding round.

• Stock options: Contracts granting employees the right to buy company shares at a set price after a certain period.

• Warrants: Similar to stock options, these are rights issued to investors or partners to buy stock at a predetermined price before a set expiration date.

• Convertible securities: Financial instruments like convertible notes, which start as debt or preferred equity but can be converted into common stock.

• Restricted stock units (RSUs): Company shares awarded to employees, which vest over time and don’t require purchase (unlike stock options)

• Debt securities: Financial instruments representing a loan or bond that may convert into equity under certain conditions, often used in early-stage financing.

Your cap table isn’t just a snapshot of the current stock ownership—it’s an evolving document that changes with every investment round, grant of stock options, and major financial decisions.

In the early days of your startup, the cap table might seem straightforward—it’s likely just the founders holding all the shares. However, as your company grows, things become more intricate and complicated. New investors come on board, employees earn stock options, and the cap table reflects your company’s evolving equity situation.

Why do you need a cap table?

Your capitalization table isn’t just about numbers on a sheet. A well-maintained cap table helps you make informed decisions about future funding rounds and lets you understand the implications of giving out new equity.

While private companies have no responsibility to report their cap tables, it’s still a must-have legal document. Here’s why:

1. Clarity on ownership: As startups grow and evolve, with new investments and employee stock options, the ownership landscape can get quite complex. A cap table keeps track of these changes, ensuring everyone knows their ownership stake in the game.

2. Fundraising necessity: It shows potential investors and venture capital firms exactly where they fit into the ownership picture and how their investment affects existing stakes. It’s a vital tool for negotiations and setting realistic expectations.

3. Decision-making and planning: A cap table provides the data you need to make strategic decisions, whether that’s evaluating the impact of issuing new stock, planning for an exit strategy, or considering a merger or acquisition.

4. Legal and compliance aspects: A cap table is more than a financial tool—it’s also a legal record. It helps ensure securities laws and regulations compliance, especially when issuing stock and options.

5. Employee incentives: For many startups, stock options are a key part of employee compensation packages. A transparent cap table helps employees understand the value of their stock options.

6. Preparation for future events: You’ll need a cap table if you’re planning for an IPO, acquisition, or other liquidity event.

The structure of a basic cap table

Your cap table will need to include a few basics. While not every item below is a requirement, the more information you have, the better—it’s all more data that can help with the decision-making and planning process:

1. Shareholder names: Everyone who owns a piece of your company, including founders, investors, and employees with stock options.

2. Number of shares owned: Total number of shares each shareholder owns.

3. Type of shares: Indicates whether the shares are common or preferred.

4. Percentage of ownership: Percentage of the company each shareholder owns (based on their share count relative to total outstanding shares).

5. Price per share: Price at which shares were bought, helping to understand investor valuation and employee stock option value.

6. Date of share issuance: When shares were issued to each shareholder.

7. Vesting schedule: When these options become exercisable, indicating how equity vests over time.

8. Total outstanding shares: All shares currently owned by shareholders plus those reserved but not yet issued (like in an employee option pool).

9. Option pool: Reserve of shares set aside for future employees.

How to create and maintain your cap table

A basic cap table might look like a straightforward spreadsheet, but it’s a dynamic tool that evolves with every new investment, hire, and financial decision. You’ll need to keep it accurate and up-to-date, which can be easier said than done.

Here are some tips and best practices to make your cap table effective and reliable:

Start early and update regularly

Your capitalization table is your startup’s foundation—the earlier you start it, the more robust (and reliable) it will be. Your cap table should come to life from the moment your startup has its first share issuance (whether to founders, early employees, or initial venture capitalists).

Creation is just the beginning, though. Next, and more importantly, you need to keep it accurate and up-to-date. Every time you make a new investment, grant stock options, or make major financial decisions, your cap table needs to reflect these changes.

An updated cap table isn’t just about keeping a record—it’s about having an up-to-date map of your company’s ownership landscape.

Understand the implications

Remember, your capitalization table is more than just numbers on a spreadsheet. Every action that alters your cap table has ripple effects, and the more you understand these effects, the more you’ll be able to influence them positively for your startup.

For example, issuing new shares dilutes existing ownership percentages. While dilution is a normal part of a growing startup’s journey, you’ll need to consider how it affects your control of the business and ways it might influence future startup funding rounds.

Then there’s the valuation aspect. The value of shares issued today might vastly differ from those in future rounds. This has implications not just for current shareholders but also for future negotiations with investors and employees.

Use a template and software

Once, cap tables were managed on static spreadsheets alone. Today, most businesses use a specialized cap table template and software to make this task more manageable, accurate, and insightful.

Templates and software are designed to handle the complexities of cap table management efficiently, automating calculations and updates. They reduce the risk of human error and can scale to accommodate increased complexities.

Early-stage startups with simpler structures can likely get by with a well-designed Excel or Google Sheets template. These templates often come with predefined formulas and formats to help you get started. However, more mature companies and those anticipating rapid growth should invest in dedicated cap table management software—these can integrate with financial systems, provide real-time updates, and offer investor portals.

Here are a few dedicated cap table software options:

• Carta: Provides a comprehensive platform for managing equity, ownership, and compliance for private companies, investors, and employees.

• Pulley: Focuses on assisting startups with cap table management, modeling future rounds, and offering insights on equity distribution.

• EquityEffect: Designed for both companies and investors, featuring tools for cap table management, scenario modeling, and compliance tracking.

Get help when you need it

Cap tables can get messy and complicated. You have enough on your plate. Don’t be shy when things get overwhelming—ask for help.

Consult with legal or financial professionals to help, especially when dealing with complex transactions or regulatory compliance. They can help push things in the right direction and ensure you don’t miss any blind spots.

Grow your startup with DigitalOcean

Just as a well-structured and managed cap table is essential for your startup’s financial health, choosing the right technological solutions is essential for its operational success.

And that’s where we can help. DigitalOcean offers a suite of cloud solutions to meet the unique needs of your growing startup.

Just like a cap table evolves with your company, DigitalOcean’s cloud solutions are designed to grow with your business. From simple web applications to complex machine learning algorithms, DigitalOcean’s easy-to-use and cost-effective cloud infrastructure guarantees your technical backend is solid and reliable.

Start your journey with DigitalOcean.