How to set up a clean cap table, and not mess it up

Here at Cake, startup founders come to us looking to us to help them solve specific startup problems and the most common thing we hear them say is they need help with "cleaning up their cap table."

Everyone's talking about "clean cap tables" like they're the secret sauce to startup success! (Well, they kind of are.) They know that they need a clean cap table in order to attract investors, raise money, and ultimately to scale growth.

A clean cap table is crucial in crossing over to the next stage of growth. Whether you’re raising your first seed round or gunning for your series A, whether you're hiring your first key employees or engaging with advisors—one of the most important tool in your equity toolkit is a clean cap table.

What does a clean cap table look like

First things first, a capitalization table is a document that tracks changes in ownership, issues new shares, and manages equity events. It's a living and breathing document that evolves as your startup grows.

When we talk about a "clean cap table" in the simplest sense, it means having a cap table that's organized and up-to-date, providing a clear and accurate picture of the company’s equity structure for the purpose of attracting investors or key employees.

This means that, at any given point in your startup’s journey, you want to make sure that your cap table has the following characteristics:

Your single source of truth

A clean cap table is always up-to-date. Every share issued, every option granted, every convertible note converted—it's all there, in real-time.

You don't just clean up when it's time to raise funds. You keep your cap table updated always, daily if you must, or whenever there are recent transactions and equity changes such as issuing stock options to new hires.

Ellen Dinsmoor, COO at Vow, talks about how they use their cap table in their day-to-day operations:

The cap table that we use in Cake is our source of truth. That's a tool that we use on a day-to-day basis as we're adding new employees to Vow.

At any point in time for the fundraising process, you're going to have an investor reach out and say, what's the cap table look like today? And what's the exact amount of shares that have been vested within your ESOP pool?

So Cake becomes a very easy one-stop shop where we can go and because we have the day-to-day processes in place where that's updated, then we can very easily go and download what the cap table looks like.
^{—Ellen Dinsmoor, COO at Vow}

If you have a stock option pool like Vow and you regularly add new hires to it, there will be plenty of transactions going around. Updating your cap table regularly prevents discrepancies and provides a reliable source of truth for investors, legal teams, and other stakeholders.

Accurate and transparent

A clean cap table is accurate and transparent. It reflects your equity story and keeps a record of historical transactions for easier audits and checks and balances.

Founders and investors like taking a peek at your historical log! Founders and investors use cap tables as scorekeeping of significant equity events in their company’s history.
^{—Nan Meka, Partner at AfterWork Ventures}

When you have a growing number of stakeholders, the ability to view changes to the cap table is one of the reasons why keeping your cap table in a spreadsheet is no longer an option.

Good cap table softwares typically comes with a transaction log. Trust us when we say, your historical data will come in handy more times than you think!

No "dead weight"

We're talking about those inactive shareholders who are like that gym membership you never use but keep paying for. A clean cap table doesn't have any of these lurking in the shadows!

In cap tables, dead weight refers to equity holders who no longer actively contribute to the growth or operations of the company but still hold shares or options. These individuals or entities may include former employees, ex-founders, or early investors who have exited or become inactive.

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.
^{— David Kenney, Hall Chadwick}

Dead weight can become problematic for startups because it ties up equity that could be used more productively elsewhere. It also messes up your cap table math, and the last thing you want to happen is to make decisions based on faulty data.

Take note that a cap table in the early stages would look different from one in the later stages. Let's deep dive into these differences.

Clean cap table: early-stage vs. late-stage

In the early stages, the cap table is relatively simple, with fewer stakeholders and a straightforward equity structure. At this stage, founders need to focus on creating a clean foundation that will support future growth.

What does a clean cap table look like in the early stages

(Seed to Series A)

• Simple equity structure. Typically, the cap table includes only common stock for founders and early employees and, if applicable, a single class of preferred stock for seed or angel investors. Convertible instruments, such as SAFEs (Simple Agreement for Future Equity) or convertible notes, may be used but their terms should be simple and easy to convert to equity later.
• Focus on founder retention and alignment. The cap table often reflects founder ownership as a dominant percentage, ensuring founders retain control and decision-making power. Vesting schedules are put in place for founders and key early employees to align long-term incentives and reduce the risk of departure.
• Initial option pool. An initial option pool is usually established to offer stock options to key employees. It should be sized appropriately to prevent excessive dilution but large enough to support early hiring needs. The cap table clearly shows how the option pool fits into the overall equity structure, making it easy to model future dilution.
• Prepared for future investment rounds. At this stage, founders should keep the cap table clean to set the company up for future financing rounds. This means avoiding too many share classes and documenting all equity agreements thoroughly. The emphasis is on maintaining transparency for early-stage investors who need to understand how their investment fits into the bigger picture.

If you’re in the early stages, you are ultimately preparing your cap table to scale. And there’s much about scaling that you can learn from what a cap table looks like in the later stages.

Even if you're in an early stage, it's nice to look a bit into the future and learn a little bit about what works, what doesn't work, and some of the lessons that we can bring."
^{—Jason Atkins, Co-Founder & President at Cake Equity}

We talked about this in-depth in the recent Startup Equity Podcast with Chris Hoffman, Founder of Equity Admin Co, a company that offers equity administration services across mid-scale and enterprise-level startups. Listen here.

What does a clean cap table look like in the later stages

(Series B and up)

In later stages, the cap table becomes more complex as the startup raises larger rounds of funding, hires more employees, and may even prepare for an exit event (e.g., acquisition, IPO).

When asked what an enteprise cap table looks like, Hoffman says, "It's crazy. You have people exercising all the time!"

• Multiple classes of equity. By Series B or later, the cap table often includes several classes of preferred stock with different rights, preferences, and privileges. A clean cap table clearly organizes these classes and documents their terms. There may also be stock options, warrants, and convertible securities, all of which need to be well-managed and updated regularly.
• Equity plan management. Building and scaling an equity plan is crucial for simplifying the administration of employee equity programs. This includes secure issuance of shares, processing payments, and ensuring compliance.
• Complex equity management. Late-stage companies often manage larger option pools for executives and employees, which means carefully tracking vesting schedules and managing option grants to minimize dilution. Convertible notes or SAFEs from earlier rounds may be converted into equity, and the cap table must be updated to reflect these changes accurately.
• Focus on investor relations and compliance. At this stage, institutional investors (e.g., venture capital firms) are more involved, and they demand detailed and transparent information about ownership, voting rights, and liquidation preferences. Regulatory compliance is crucial, especially for companies preparing for an IPO or acquisition. The cap table must be precise, legally compliant, and ready for intense scrutiny.
• Scenario planning for exit events. The cap table should be used to model various exit scenarios, including how proceeds will be distributed among shareholders based on their equity and preferences. It’s important to maintain clarity in how different share classes and instruments (e.g., options, warrants) will convert or be treated in an exit event to avoid disputes and confusion.

Maintaining a clean cap table in the later stages becomes more challenging but also even more important. Ensuring you start with a clean cap table sets you up for success down the line.

Don't mess up your cap table! Here are the risks:

Chances are, you already know the risks (that's why you're here looking for solutions!) But, we'll list them down anyway:

• Investor deterrence. A confusing or inaccurate cap table raises red flags and can make investors think twice about putting their money into your company. Remember, some investors are looking for reasons to say no—don’t give them an easy one.
• Legal complications. Inaccuracies in your cap table can lead to compliance issues and even lawsuits. Inaccuracies can also lead to increased legal fees, further straining your startup’s resources.
• Valuation challenges. When it’s time to put a price tag on your company, a messy cap table can throw a wrench in the works. It can make it difficult to accurately value your company, which can affect everything from fundraising to employee stock options.
• Employee dissatisfaction. Happy employees are productive employees, and nothing sours the mood quite like equity uncertainty. Proper management of equity compensation is crucial to maintaining employee trust and satisfaction.
• Exit complications. Dreaming of that big exit? A messy cap table can turn that dream into a nightmare. When it’s time for an acquisition or IPO, you need your cap table to be clearer than a summer sky. Complications at this stage can delay or even derail your exit, potentially costing you millions.

TLDR; a messy cap table can raise red flags for potential investors, potentially delaying or even derailing your fundraising efforts. Not only that, experienced employees who have reaped the benefits of equity in the past would know something is fishy in your cap table too, and you risk your chance of getting them on board.

So, how to keep your cap table clean

Now that we've covered the risks, let’s talk about how to set up a clean cap table and how to keep it in tip-top shape! Hoffman summed this up well:

[Managing your cap table] is a daily thing. Because if we think about keeping the cap table always up to date, and that's where software like Cake comes into place, right? It's so important to have software because you can't manage this in Excel. And I've seen companies who try series C, managing this in Excel, and it's just–there's no way.
^{—Chris Hoffman, Founder at Equity Admin}

Let's break that down:

1. Reliable cap table software

Ditch the spreadsheets and invest in cap table management software. These cap table management tools are like personal trainers for your cap table—they keep it fit, healthy, and looking good. Good cap table software comes with all features like automated calculations, historical data, and compliance checks that can save you time and headaches.

2. Regular updates

Make managing equity and updating your cap table a habit, like checking your email. Every time there’s an equity event—issuing new shares, granting options, converting notes—your cap table should reflect it. Set reminders if you need to, or make sure someone's on top of it!

3. Detailed record-keeping

When it comes to your cap table, channel your inner librarian. Keep meticulous records of all equity-related transactions. This includes vesting schedules, special rights, and any conditions attached to the equity. The more detail, the better.

4. Clean communication

Keep your stakeholders in the loop. Regular, clear communication about equity positions can prevent misunderstandings and build trust. It’s like relationship advice – communication is key. Take note that some equity changes might be more important to communicate to certain types of stakeholders than others, and you want to be able to control how your cap table is viewed by investors and employees.

5. Professional consultation

When in doubt, call in the pros. Legal and financial experts can help you navigate complex scenarios and ensure you’re staying compliant. Regular audits can prevent serious problems down the line.

* * *

Remember, when it comes to cap tables, cleanliness isn't just next to godliness—it's next to fundability.

Keep it clean, keep it clear, and watch your startup soar!

Ready to take control of your cap table? Sign up for Cake Equity today and experience the peace of mind that comes with effortless equity management.