Cap table modeling

A cap table, or capitalization table, is effectively a snapshot in time that reveals who owns what in a company, and how big their slice of the cake is.

Think of it as a ledger that companies use to track the shareholder equity piece of their balance sheet. It details all of a company’s securities such as its ordinary shares, preference shares, convertible notes, SAFEs, warrants, and employee options.

Setting up a capitalization table is one of the first things you want to do as a startup, especially if you’re planning to build an investor-backed business and offer employee equity compensation.
^{—Nan Meka, Fellow at AfterWork Ventures}

This is one of the first documents you will need to create when you start your new venture and is essential when it comes to raising finance. Being able to show the ownership stakes and control in a company is especially useful for early stage companies.

This guide tackles

• What is cap table modeling
• Common uses of cap tables for startups
• Why and when to model your capitalization table
• Types of capitalization modeling you can run
• Cap table mistakes to avoid
• Download a cap table excel template
• Using a cap table modeling software

What is cap table modeling

Cap table models are great tools to demonstrate and give investors the ability to forecast the dilution of their stake with new funding rounds, as well as predict their potential payout under different scenarios.

Startups use cap tables to update existing shareholders, employees, and advisors on the state of their ownership, stock options owned, and other important equity-based information. It goes without saying that cap table modeling is very important to startups in the early stages and in whatever stage of funding and growth.

We invited startup experts to provide practical tips and tools on cap table modeling. You can also watch it here.

Common uses of capitalization tables

As Nan Meka puts it,

Founders and investors use cap tables as scorekeeping of significant equity events in their company’s history.

A quick glimpse at an updated cap table gives startup founders and investors a clear picture into how the company’s equity is being distributed and held.

Here are some of the most common ways the information in cap tables are used by startups.

1. To comply with tax and regulatory requirements

Your capitalization table can act as a legal document that summarizes the ownership structure of your business. This means it can be used by tax authorities to determine that the right amount of tax is being paid by each shareholder and that all share-related documents comply with local regulations.

2. To negotiate with potential investors and raise funds

Startups also use cap tables as a way to raise funds for their company and to negotiate with potential investors.

Investors are primarily going to be concerned about the ranking of their equities, if there’s a liquidation event, and what that dilution looks like for their holdings in future rounds.

An up-to-date cap table can help potential investors understand how their holding may be diluted in future fundraising rounds, influencing their decision on whether to invest in your company.

3. To see the impact of funding decisions

Cap tables allow your company to look at different business choices and assess how these will affect its capital structure (or its combination of debt and equity). This is one of the most important factors that will underpin its growth and operational plans, such as the decision to hire more employees or not.

Why and when to model your cap table

Modelling your capitalization table can come in handy when it comes to analyzing the possible future issuance of shares in your company, also known as ‘capitalization events.

When facing such events, modeling your capitalization table can help you:

1. Prepare for funding rounds by quantifying how much equity you can afford to sell and how much your stake will be diluted.
2. Assess and compare different funding offers you receive on a like-for-like basis.
3. Understand the impact of convertible debt securities such as SAFEs and convertible notes on dilution and share price.
4. Manage and monitor employee option pool levels to help you plan allocations accordingly.
5. Plan the sale of your company by visualizing various exit scenarios and the distribution of proceeds in order to maximize shareholder returns.

Types of cap table models you can run

Listed below are a few of the different types of cap table models a company can run depending on the information they want to glean.

(We’ve also whisked up some helpful terminology beneath it to explain some of the jargon in this section).

1. Round modeling

A round modelling cap table helps you keep track of your company’s equity ownership and value and allows investors and management to view the dilution of their holdings throughout each fundraising round.

2. Employee option modeling

Many startups incentivize their employees by offering them the option to buy shares in the company. An employee option cap table model can help startups understand how the creation of employee option plans (known as an ESOP), will affect the dilution of existing and potential shareholders.

3. Conversion modeling

Conversion modelling is helpful when it comes to debt securities such as SAFEs and convertible notes as it shows how your company’s debt-to-equity conversion methods impact your pre-money or post-money valuation, share price, and ownership.

4. Exit waterfall modelling

This type of cap model can help different classes of shareholders visualize the distribution of proceeds they would receive upon their exit from the company.

Why cap table modeling is crucial for startup founders

“One of the other things that’s important to get right at the very beginning, is the conversation with your co-founders about founder vesting,” says David Kenney, an angel investor and Partner at Hall Chadwick.

One of the very big errors on a cap table is often the dead weight where a founder has got capital and has gone. If you don't think that can happen to you, it happens to lots of people. Your cap table is also a place where you should be monitoring your capital allocation and who owns and controls your company.
^{— David Kenney, Hall Chadwick}

Cap table modeling is important for startup founders for a number of reasons as stated above, but mainly because they help founders and investors understand the ownership structure of the company as it develops. It allows them to model the impact of various scenarios at important events.

Startup founders (and their employees) usually hold ordinary shares in the company so it's important for them to understand what their exit value could look like after taking into account the dilution effect from different share classes (preference shares, convertible notes, as well as liquidation preferences). Many venture capitalists have specific terms of their term sheets and which impact the payout they receive at a certain valuation.

Depending on what the valuation is at the time, startup founders may receive less of a return compared to other shareholder classes.

In this way, cap table modeling can help founders forecast the dilution of their holding and their potential payout based on the share ownership within the company.A cap table, or capitalization table, is effectively a snapshot in time that reveals who owns what in a company, and how big their slice of the cake is.

Cap table mistakes to avoid, lessons from The Social Network

One topic of conversation that made rounds in many startup circles was that scene in The Social Network, which as we all know is based off the early years of Facebook.

As a startup founder, the goal of any cap modeling exercise is to help you make informed decisions about what type of external funding you want to take in. You want to maximize the amount of capital investment and minimize the amount of dilution of your shares so you can realize a worthwhile payout for yourself and any early-stage investors upon exit.

One mistake to avoid as a startup founder was highlighted by this scene where co-founders Mark Zuckerberg, Eduardo Saverin, and Sean Parker fought over ownership of the company.

Remember this scene?

Here, Eduardo Saverin realized that his percentage of ownership in the company had been severely diluted due to several funding rounds.

Back to the webinar, Meka weighs in,

Ed had done some cap table modelling beforehand, perhaps he could have renegotiated his terms to share the dilution level with the other co-founders or even inserted a non-dilution clause into his share agreement, avoiding such a surprising turn of events.

Jason Atkins adds, "quite often it comes down to who your investors are and who you’re stakeholders are. If you happen to be either smart or lucky you can get really good adjustments or terms from your investors."

The scene also hints at the ever-changing nature of cap tables and how important it is to model various scenarios as new investors come in and what this means for your ownership as a founding shareholder in the company.

Let this lesson be a real cake up call for you!

Download a cap table template

There are many cap table templates in the web and you can download and customise according to your business needs. Feel free to download or make a copy of this cap table spreadsheet as seen in the cap table modeling webinar.

Depending on what stage your company is and whether you have previous experience managing cap tables, an excel template is usually good to start with but gets complex quite quickly.

Use a cap table software

While your cap table modelling can be done in a spreadsheet, there are cap table management softwares that can automate the calculations for you.

As a startup, Cake understands the necessity of cap table modelling and therefore has this functionality baked in the product, using real time equity data. This makes it much faster and easier to keep track of your equity ownership and transactions while minimizing errors and eliminating complexity.

It also allows you to store important documents, portfolio information, and company communications that any stakeholders, like your lawyers and accountants, can easily access. It also lets you download your cap table in a csv format if you need more complex modelling or you need to pass along a sample to an investor or shareholder.

This makes staying in control of your cap table a piece of cake!

Cap table modeling resources‍‍

• Bookmark the cap table modeling on-demand webinar
• Slides from the event here
• Cap table spreadsheet example here
• Check out Cake's cap table modeling tool