Cake Equity | The Cap Table: What, why and how
Cap Table

The Cap Table: What, why and how

April 8th, 2022   —   Tessa Hawthorn


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Capitalisation tables (or cap tables for short) can feel like tricky beasts to wrangle.

We’re here to break down these mysterious spreadsheets, making you a cap table wizard by the end of this article. Or at the very least, feel less bamboozled by them.

Put simply, a cap table is the place where a company records all of its equity-based transactions. It includes ownership stakes, types of shares, and option pools. It usually begins as an excel spreadsheet.

Cake’s cloud-based Cap Table Management Tool takes care of all the calculations and keeps track of your equity transactions. You can add shareholders, issue share certificates, execute share transfers, and much more.

A cap table isn't a legal document, but it’s extremely important for making sure the details of your legal documents are correct and up to date. With Cake’s cap table tool, you can enable access to the relevant company partners like accountants and lawyers to stay in complete control.

A cap table is a living breathing document that changes every time you give equity to employees or contractors via an ESOP, sell shares in your company or distribute equity in any way - so it’s incredibly important to make sure it’s up to date at all times.

If your cap table is in order, business decisions are made easier for you. Time to knowledge-up.

Why do you need a Cap Table?

As your startup grows, your cap table (with any luck) will grow too.

Your cap table shows all of the investments made in your business over time, along with the principal shareholders of the company (usually the founders and/or early stage investors, like friends and family). If you set up an ESOP and begin distributing equity to employees and contractors, the cap table will reflect these distributions.

To understand your equity

If you’re not keeping track of who owns what, how can you make clever business decisions? Short answer is, you can’t. It’s one of the many reasons you need an effective cap table.

And it’s something investors might call upon at any time, to understand the equity position of your company.

Investors aside, you should be able to bring up your cap table to help you make hiring and finance decisions. A quick glance at an accurate cap table will help you make intelligent decisions that affect the present and future equity holdings in your company.

It may seem fairly straightforward when there are minimal equity holders. But imagine an angel investor comes along offering you a certain sum of money for 10% of your company. This is going to dilute everyone’s equity by 10%. Without a detailed and well-organised cap table, you won’t be able to quickly determine the result of the dilution nor be able to communicate it to other shareholders.

You want a cap table ready at your fingertips to enable clear, detailed, smart decision-making. This only becomes more important as your business grows and your company’s equity position becomes more complicated.

To discuss initial equity distributions

Before investors or employees gain access to the equity of your company, there’s likely to be some big conversations around initial equity contributions between founders. These conversations can be lengthy, difficult and sometimes emotional. It’s your collective blood, sweat and tears on the line, after all.

Creating a cap table, where you break down your company's equity on the page (or screen, as the case may be) can help facilitate productive conversations from day one.

To manage your ESOP

Offering equity to employees is a brilliant form of incentivisation. But it’s not always straightforward to explain the mechanics, maths and logic behind what is being offered to an employee and why.

Utilising a cap table to facilitate these conversations, helps explain how you have matched an employee’s contribution with an appropriate amount of stock and how that stock vests over time. A cap table can give insight to the employee, at any moment in time, as to how many stocks have been issued to them and at what dates.

Remember: transparency inspires confidence.

To negotiate term sheets

At Cake, we’ve worked with thousands of founders, VCs, and lawyers globally to make capital raising as seamless as possible. Part of that process requires having a clear snapshot of your company’s equity structure, by way of an automated cap table.

As you’re negotiating, you can easily run various scenarios through the cap table tool, to allow you to see what happens to your company’s equity structure at different valuation levels, and evaluate other factors such as if new options are issued before or after financing. This gives you insight into what situations you're happy with and where to draw your line in the sand, before you sign off on a term sheet.

How does a Cap Table work?

A cap table displays every equity holder’s stake in the company, calculated by multiplying the share price by the number of shares owned.

Sounds simple, right? Well, it is… But only if you keep it up to date.

In most cases, the names of the equity holders (sometimes referred to as security holders) will be listed on a Y-axis and the types of equity on the X-axis. Types of equity can include convertible notes, stocks or preference stocks. All of the equity holdings of each individual or company, should be listed separately, in a single row.

There is no set order by which equity holders need to be listed but many will place the founders first, followed by directors and executives then key employees with equity (this could include options under an ESOP) then other investors, such as angel investors or VCs who have invested in the company. Another option is to list investors in descending order by ownership, showing the largest holders at the top. It’s never a bad idea to stroke the ego of your biggest investors!

Every single time you issue new equity, your cap table must be updated. Cake makes this particularly easy if you already use the platform to run your raise and distribute your ESOP. It’s a single source of truth, with all moving parts speaking to one another.

Similarly, if you buy back options when an employee leaves the business, options expire, vested options are exercised or there is any transfer or sale of stocks or shares -these updates need to be reflected in the cap table.

The wrap up..

Being a founder means juggling a thousand tiny and enormous tasks at any given time. Your cap table is one you can’t afford to drop. Cap tables can become quickly complicated, particularly as you scale and undergo new funding rounds and issue equity to employees.

Cake is committed to bringing equity best practices to founders everywhere with the perfect blend of accreditation, automation, and professional advice. Check out a demo of our cap table management tool today and make the juggle that little bit easier tomorrow.

If you liked this article, check out our comprehensive ESOP guide for founders.

This blog is designed and intended to provide general information in summary form on general topics. The contents do not constitute legal, financial or tax advice and should not be relied upon as such. If you would like to chat with a lawyer, please get in touch and we can introduce you to one of our very friendly legal partners.