What is a cap table?

What is a cap table?

A cap table is a list of every owner of a company's shares and of everything that could turn into shares, such as options and convertible notes. For each holder it shows the number of shares, the class of shares, the amount paid and the ownership percentage. Founders, investors and employees with options all appear on it.

It is usually kept in a spreadsheet or in specialised software. In India, the company's official share records are also kept in statutory registers under company law, and the cap table must match them. A cap table is the working tool for planning rounds. The registers are the legal record.

What does a cap table contain?

A basic cap table has rows for each holder and columns for the numbers. A fuller one adds the instruments that are not yet shares. These matter because they will dilute everyone when they convert.

The shares come in classes. Ordinary (equity) shares are usually held by founders and employees. Preference shares, which in India are often compulsorily convertible preference shares (CCPS), are usually held by investors and carry extra rights, such as getting money back first in a sale.

• Founders and their shares.
• Investors by round, with the class of shares and the price paid.
• The employee stock option pool: granted, vested and still available.
• Convertible notes, iSAFE notes and warrants that will convert later.
• Advisors and any other shareholders.

Fully diluted vs basic ownership

Basic ownership counts only shares that exist today. Fully diluted ownership counts all shares plus everything that could become shares, including every option granted, the unallocated option pool, and notes and preference shares as converted. Investors and valuers usually talk about the fully diluted number, since it shows the real picture after everything converts.

For example, a founder with 500,000 shares in a company with 1,000,000 shares issued holds 50 percent on a basic basis. If there are 200,000 options in the pool and 100,000 shares will come from a note, the fully diluted total is 1,300,000 and the founder holds about 38.5 percent. The gap is why founders must use fully diluted numbers when comparing offers.

How does a cap table change in a round?

Each funding round adds a new row for the new investors and changes everyone's percentage. The model is straightforward: the pre-money valuation, divided by the shares outstanding, gives the price per share. The investment, divided by that price, gives the number of new shares. Add those to the total and recalculate each holder's percentage.

A good habit is to build a version of the cap table before the round, called pro forma, showing what it will look like after. It lets founders see how the option pool, the valuation and any notes affect their stake before they sign a term sheet. Investors will build one too, so the founder's version should match.

What mistakes do founders make?

A common problem is a messy cap table. Equity promised verbally to early helpers, advisor shares with no paperwork, or options granted without board approval can all appear in due diligence and delay a deal. Investors prefer a clean table where every share is documented.

Other mistakes include ignoring convertible notes until they convert, forgetting the effect of a new employee pool, splitting founder equity equally without a vesting schedule, and using only basic numbers. Each can surprise founders at the next round. Keeping the table updated after every grant and every issue, and matching it to the legal registers, avoids most of them.

What does a cap table look like over time?

A cap table at incorporation is simple: two or three founders holding all the shares. After a pre-seed round with angels, it has a few more rows. After a seed round, there is a lead investor and likely an option pool. By Series A, it can have dozens of rows, including several classes of preference shares, each with different rights and prices.

Each class of preference share may have its own liquidation preference and conversion price. In a sale, the payout is not simply percentage times price. A payout table, sometimes called a waterfall, shows who gets what at different sale prices. Founders benefit from building a waterfall to see how much they would receive if the company sold for a lower price than the last round.

How should a founder keep a cap table clean?

Update it after every event: a share issue, an option grant, a transfer, a note signed or a note converted. Keep copies of the signed documents behind each row, and match the table to the company's registers and filings with the Registrar of Companies. Board approvals should exist for every issue.

Do not promise equity informally. A promise made in a chat or by email can become a claim later. If someone is to receive shares or options, record it in a document with a vesting schedule. Founders should also keep a short history of each round with the date, price and investor, so that later investors can follow the story without questions.

Before a funding round, review the table with a lawyer or company secretary to catch gaps. A gap found by the founder is a task. The same gap found by an investor during due diligence is a risk, and may reduce the price or delay closing.

Cap tables are also used for planning, not only record keeping. Before hiring a senior executive, a founder can test how much equity can be offered without breaking the option pool. Before a sale, a founder can run the waterfall to see what each holder receives. Because the table links ownership to money, investors often treat the quality of a founder's cap table as a hint about how carefully the company is run. A tidy table with clear footnotes, dates and supporting documents signals care, while a table full of rounded guesses signals that problems may be hiding.

Who sees the cap table and why does it matter?

Investors ask for it early in due diligence. It shows how much control the founders still hold, whether early investors have enough stake to make follow-on decisions, and whether the company has room in its employee pool. Potential acquirers and lenders ask for it too.

Employees with options may see a version of it, or at least their own stake. Sharing clear information builds trust, but companies usually keep the full table confidential. This guide is general information, not legal or financial advice. A lawyer or company secretary should review any change to a company's share structure.

Read next

• Dilution: why founders own less after every round
• Pre-money vs post-money valuation
• The term sheet, clause by clause
• How startup valuation works
• What is Series A funding? A guide for Indian startups