For founders in early-stage start-ups, there is so much you need to think about. It’s not just executing an idea or vision; you need to learn all the administrative aspects of running the company and potentially raising capital and meeting your Board and investor needs.
One aspect all founders who raise capital need to consider is how to keep track of the equity ownership (securities) of the company. Making sure you handle this well from the beginning is important as it is core to the company… if cash flow is the lifeblood of a business, then its ownership is the backbone or structure that supports it.
Equity ownership is tracked and presented through a capitalisation table, or ‘cap table’ for short. A capitalisation table will typically also include the impact of any potential funding rounds to help with your capital plan/scenario planning. Most early-stage companies will use a spreadsheet to keep this record and model raise scenarios out for their business, but without a finance degree, or knowledge of what is actually required in a cap table, it’s hard to know where to start…
The team at Orchestra get that; we’ve been through this all too. And that’s why we’ve created a Cap Table Template in Google Sheets to help you understand what to include in your cap table, which differs depending on whether you’re about to raise capital, and what kind of funds you’re seeking.
Let’s start with the basics. A cap table is where all the company's securities are listed, including company shares already held by all shareholders (e.g. common shares, preferred shares) and any unissued shares such as options, warrants, convertible/SAFE notes, and so on. It also shows who owns them. The cap table shows each shareholder’s percentage of ownership in the company, the value of their securities, and the dilution over time from events such as funding rounds or the presence of an employee stock options pool (ESOP).
The cap table becomes a blueprint that is key for long-term strategic planning, and without it, it has the potential to decrease the valuation of your company to potential investors, especially if it’s complicated, not presented well and not well-maintained.
If you’d like to find out more about when to set up a cap table, you can read this article.
Starting off with a simple cap table snapshot of “who-owns-what today”, you’ll want to ensure that you list the different types of securities on the x-axis, including issued shares by share class and - if applicable - any unissued shares relating to an ESOP. This will show you your total securities at full dilution and each stakeholder’s final equity ownership stake (%).
On the y-axis, you will include a list of all your stakeholders and input what they each hold. This will display how many shares and the percentage of ownership across each stakeholder. It’s useful to list your stakeholders in groups such as the founders, active investors, passive investors and ESOP participants.
Cap table snapshot
This cap table will be sufficient to track your equity in the early stages of your company, but as you begin to raise capital, you’ll want a more sophisticated version that shows a raise scenario.
When preparing for a capital raise, you’ll want to build the ability to model the impact of a raise scenario into your cap table structure to see the effect on ownership levels. Within a raise scenario, you’ll want to consider the following:
Existing securities - fully diluted shares before the raise.
Pre-money valuation - the valuation of your company before receiving new capital from investors.
Raise amount - the total capital ($) you plan to raise.
Investor share price - how much an investor will pay for each share given the above.
Investor shares issued (new) - the number of shares that would be issued in this round given the above.
ESOP created or topped up - when raising, an ESOP pool may need to be created (if one doesn’t exist) for allocating options to employees. Or an existing pool may need to be topped up.
This will recalculate to show you the final number of securities and percentage changes to existing shareholders' ownership.
Cap table with raise scenario
In addition to issuing shares during a raise (equity) in exchange for capital upfront, start-ups can also use ‘convertible debt’, typically in the form of a Convertible or Simple Agreement for Future Equity (SAFE) note (see more on Convertible and SAFE notes in this article).
Given the rising popularity of these instruments amongst startups in the past two to three years, it’s important that founders have an idea of what the outcome looks like under different scenarios.
In this cap table scenario, we have included the impact of converting existing Convertible and/or SAFE notes when raising a round, to show what this means for your total company ownership. Within this scenario, you’ll also want to consider the following:
The total investment amount - how much convertible debt you’re seeking.
The interest rate - how much interest (if any) you’ll pay over the course of the loan.
Discount (to next raise valuation) - any discount offered on shares in the priced capital raise round.
Valuation cap - the price limit at which the notes may convert to equity ownership.
Date of raise - when the notes will be converted into shares.
Cap table with raise scenario (with notes)
As the founder of a business, it’s your role to ensure that a share registry is stewarded well. These can have a multiplying effect over time, resulting in compounding errors that need to be corrected later and at a high cost. In addition, maintaining an accurate and compliant share registry is a legal requirement; read more here.
If a company is raising additional capital, then granting access for potential investors to view a ‘clean’ cap table presents a much more professional picture of the business, especially if it’s managed in an online platform, such as Orchestra.
From what we’ve shown in these cap table scenarios, it’s important for founders and leaders in a start-up to work through different scenarios while planning to raise capital to accelerate growth. It helps to better prepare for how much investment is needed, and how dilution scenarios will impact the company.
In this article, we’ve outlined the basics of how to start off your cap table, how to format it, and what you need to include to begin modelling out potential scenarios. To make this as easy as possible for you, your team and your existing/potential investors, you’ll want to manage this in an equity management platform, like Orchestra.
Having this in one platform means that any updated details are made in real-time, and you can easily collaborate with your company admin, advisors and shareholders. We also provide ESOP software to create and manage your options grants and a streamlined share registry to issue shares and keep track of all your shareholders.
Book a demo with one of our expert team to get started.