It is common for fast growing startups to offer their employees with options through an employee share option plan (ESOP). ESOPs can be complex to understand, especially for employees who have not received options in a company before.
Understanding what a cap table is and how shares or options work in an ESOP can go a long way in understanding how you are being compensated. This article sets out the definition of a cap table and its role in startups.
What is a Cap Table?
A cap table (also referred to as a capitalisation table or capital table) sets out the ownership of all the company’s shareholders. Shareholders include founders, employees who hold options in the company and any investors. In addition to listing the names of shareholders, a cap table will also list out the portion of ownership and any distributed securities. In short, a cap table lists who owns what securities in a startup.
You can download LegalVision’s free cap table template to manage all your equity.
To understand how much of a company a person owns, they will need to have the fully diluted share count (compared to the basic share count). The fully diluted share count is the complete sum of not only all existing shares but also the value of any other securities such as options, warrants and unissued options that may eventually be converted into shares (exercised). It is common for investors to see their ownership of the company expressed regarding fully diluted shares. This calculation assists them with conservatively determining the true value of their shares.
There are a number of benefits of having a cap table that is frequently updated and can model forecasts. A cap table can assist with new hiring and option pool decisions, modelling new rounds of capital and accurately tracking ownership. An effective cap table must be able to keep track of every single transaction between your shareholders and the company.
Excel Spreadsheets and Cap Tables
There’s no one way to create a cap table. However, an Excel spreadsheet is often a good starting point but as a company grows, a basic spreadsheet may not be enough. It can become very complicated very quickly, as you offer more options to new employees or take onboard more investors. Using a conventional format and common terms makes it easy for others to understand.
Essentially, effective cap table management comes down to accurately recording all transactions that affect the valuation of a company such as option issuances, sales transfers, conversions of debt to equity and any exercises of options. Whether you use a cap table template or start one from scratch, this will depend on what you wish to achieve from it. For example, some templates may allow you to model out a new capital raising round, but not offer any tools to analyse exit scenarios.
Whichever way you build your cap table, the information must be presented in a manner that can easily be understood, especially to your investors. Most importantly, cap tables must be current at all times and easily accessible to those who require access to it. Beyond a simple recording of who owns what, more complex cap tables will also model out various hypothetical situations such as scenarios of M&A activity or public offerings. They can also provide granular detail on the holdings of each owner and the type of security.
It is critical that startup founders understand their cap table. If you have any questions about cap tables, capital raising or startup law documentation, get in touch with our team of startup lawyers. Call us on 1300 544 755 or fill out the form on this page.
Don’t forget to download LegalVision’s free cap table template.