Mastering your cap table - building the foundation for growth

Understanding your cap table, or capitalisation table, is a fundamental aspect of managing an early-stage company's equity structure. It's a dynamic tool that outlines the ownership stakes of a company's securities, including stocks, options, warrants, and convertible securities. 

A well-managed cap table is crucial for making informed decisions about fundraising, employee equity incentives, and exit strategies. In this section, we explore the essentials of cap table management, drawing on our insights and best practices in the industry.

The basics of cap table management

A cap table is more than just a list of who owns your company's shares. It's a reflection of your company's financial health and a roadmap for future growth. 

An accurate cap table should match the company's register of members and detail the full legal name of each shareholder, the number of shares they hold, and the percentage of ownership.

Importance of accuracy

Accuracy in cap table management is non-negotiable. Discrepancies can lead to administrative delays, incorrect legal documents, and complications during due diligence processes. 

Ensuring that the cap table is up-to-date and reflects the current ownership structure is vital for maintaining investor confidence and facilitating smooth transactions.

Option pools

Option pools are a critical component of cap tables, especially for early-stage companies looking to attract and retain talent. It's recommended that early-stage companies defer implementing a formal share option pool until raising the first round of institutional financing. 

Investors often require an option pool top-up to ensure the company can fulfil its hiring plans post-investment, which can be dilutive to existing shareholders.

Investor relations

Founders and investors rely on the cap table for a clear understanding of the dilutive impact of financing rounds, ownership percentages, and how these may affect board appointment rights and consent thresholds. Mismanagement of the cap table can result in incorrectly made-up company registers and delays in financing rounds.

Legal due diligence

During fundraising, most venture capital investors will insist on legal due diligence. A well-prepared data room, including an accurate cap table, can significantly streamline this process.
Convertible securities

Keeping good records of convertible securities like loan notes, advance subscription agreements (ASAs), simple agreements for future equity (SAFEs), and warrants is important for tracking and dealing with these securities as needed. 

Convertible loan notes are common in bridge financings and defer the question of valuation until the next equity financing at a certain threshold.

Rounding pitfalls

When using formulas in an Excel cap table, it's important to avoid fractional shares by using ROUNDDOWN formulas for share numbers and ROUNDUP formulas for subscription amounts to ensure full payment.

Best practices for cap table management

• Keep it updated: regularly update your cap table to reflect any changes in ownership, including new rounds of funding, employee stock option exercises, and conversions of convertible notes.
• Use reliable software: consider using cap table management software to maintain accuracy and facilitate scenario modelling for future funding rounds.
• Plan for the future: anticipate how future transactions will affect your cap table and plan accordingly. This includes understanding the implications of option pool expansions, new investment terms, and potential exits.
• Educate your team: ensure that key members of your team, including board members and executives, understand how to read and interpret the cap table.
• Seek professional advice: work with legal and financial advisors who can provide guidance on complex cap table scenarios and ensure compliance with regulations.

In summary

A well-managed cap table is a strategic asset for any early-stage company. It provides clarity on ownership, facilitates fundraising and due diligence, and helps manage investor relations. 

By maintaining an accurate and up-to-date cap table, these companies can avoid common pitfalls and position themselves for successful growth and eventual exit. Founders should prioritize cap table management as a core aspect of their company's financial health and leverage it as a tool for strategic decision-making.