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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. They are a complete record of all securities that a company has issued. These securities will normally be shares and options. Companies that have undergone multiple rounds of investment will typically have more complex cap tables with a range of securities on issue, such as convertible notes, SAFEs different share classes.
In addition to listing the names of shareholders, a cap table will also list the portion of ownership and any distributed securities. In short, it details who owns what securities in a startup.
Key Details to Include in a Cap Table
A cap table will commonly include the following details at a minimum:
- pre-money valuation (the value of your startup before the investment round);
- post-money valuation (the value of your startup after the investment round) after taking into consideration your startup’s ESOP pool;
- total investment amount;
- investment price per share; and
- the securities currently on issue.
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.
A simple-to-use spreadsheet that sets out who owns shares (or rights to shares) in a company.
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Benefits of a Cap Table
There are several benefits of having a cap table that is frequently updated and can model forecasts.
A cap table allows you to:
- maintain a record of all company security holders;
- view shareholder percentage interests in the company on a fully diluted basis; and
- model what happens if there is a future round of investment and calculate the impact of different pre-money valuations and investment amounts.
Excel Spreadsheets and Cap Tables
There is no one way to create a cap table. While an Excel spreadsheet is often a good starting point, a basic spreadsheet may not be sufficient as your company grows. It can quickly become very complicated 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, including:
- 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 will depend on what you wish to achieve from it. For example, some templates may allow you to model a new capital raising round but not offer any tools to analyse exit scenarios.
There are multiple ways of raising capital, broadly divided into two methods: equity and debt.
- Simple debt financing will typically be in the form of a secured or unsecured loan to the company where the lender is repaid interest for the fixed-term loan (debt financing does not appear on the cap table as it does not involve the issue of securities).
- Equity financing typically involves a straight issue of shares or options or issuing securities that are convertible into shares (usually SAFEs or convertible notes).
Each time a company looks to raise capital or raises capital, they will need a cap table on file as this will allow a company to calculate how the raise will impact existing and future shareholders.
You will commonly see an “ESOP pool” in the context of startups and cap tables. The ESOP pool is a theoretical reservation of the company’s shares in the form of options, typically a pool of 10%-20%. The company’s shareholders and directors pre-approve the reserved pool of options for the company’s employees, directors and contractors through the Employee Share Option Plan (ESOP). An ESOP enables companies to attract top talent and keep existing personnel motivated.
Difference Between a Cap Table and Members Register
A members register (or share register or company register) is a record of all transactions relating to a company’s shares. Under the Corporations Act, it is mandatory for a company to have and maintain a members register.
At a minimum, you must include the following details in the members register:
- date on which every allotment of shares takes place;
- number of shares in each allotment;
- shares held by each member;
- class of shares;
- share numbers (if any), or share certificate numbers (if any) of the shares;
- amount paid on the shares;
- whether or not the shares are fully paid; and
- amount unpaid on the shares (if any).
A cap table is a record of all securities on issue by the company. It will also indicate each security holder’s percentage of ownership in the company on a fully diluted basis. While not a legal requirement under the Corporations Act, maintaining a cap table is normally required by investors.
If you require assistance with a capital raise or managing your members register or cap table, our experienced capital raising lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A cap table is a useful document that allows you to calculate percentage ownership in the company both before and after the conversion of any securities, like options.
Keeping a copy of a table is not a legal requirement, although typically, potential investors will wish to view the company’s ownership structure in the context of capital raising. Likewise, it is good practice from a founder’s perspective to be aware of who holds what ownership percentage in the company.
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