A capitalization (cap) table is a spreadsheet showing a company's equity ownership breakdown, listing shareholders, number of shares owned, and percentage of ownership. Cap tables provide clarity into who owns what and are critical for startups making investment and financial decisions involving equity.

Why Cap Tables Matter

Cap tables serve several important functions:

• Help Make Investment Decisions
• Identify Potential Issues
• Legal/Regulatory Compliance
• Audit Accuracy

Creating a Cap Table

Cap tables can be created using Excel or Google Sheets, but cap table management software is the modern way to manage a cap table for any venture backed company. Tools like AngelList can help with this.

Why Cap Tables Matter

Cap tables serve several important functions:

Help Make Investment Decisions
By showing existing ownership stakes, cap tables allow startups to determine how much of the company is still available when seeking new funding. They provide the necessary information to evaluate financing options without diluting existing shareholders too much.

Identify Potential Issues
Reviewing the cap table helps identify problems like a shareholder owning too large a stake, which could create issues if they leave. It also ensures founders remain motivated with decent equity.

Compliance
An accurate cap table allows startups to comply with relevant tax and securities laws and regulations when issuing new shares or share options.

Audit Accuracy
Cap tables enable auditors to verify financial reporting accuracy and compliance by detailing the capital structure.

Creating a Cap Table

Cap tables can be created using cap table management software with the following key components:

Investor Information
This includes investor names, number of shares owned, percentage ownership, and security types (common vs. preferred shares) for each.

Founder Information
Details founders' names and number of shares owned. As substantial owners, this impacts decision-making.

Stock Value
The price paid and current value for each share. This enables calculating total company value and individual ownership stakes.

Other Details
Like stock issuance dates, sale restrictions, options/warrants outstanding.

Managing Your Cap Table

Properly managing a cap table requires:

Regular Updates
As investors and shareholders change, cap tables must reflect new issuances, transfers, exercises, terminations, etc.

Modeling Scenarios
Modeling various funding rounds, option grants, etc. provides insights into potential dilution and ownership changes.

Common Cap Table Mistakes

Some common errors include:

Infrequent Updates
Failing to regularly update ownership leads to inaccuracies and disputes.

Misunderstanding Share Terms
Not fully grasping preferred vs. common shares/options can lead to unintended consequences.

Lack of Planning
Companies often raise multiple funding rounds which dilute. Not forecasting this can upset investors, employees, and lead to unintentional consequences.

Spreadsheet Errors
If you're not using cap table management software — and, you really should be! — custom formulas may inadvertently round numbers, producing incorrect totals.

Cap Tables and Venture Capital
Venture investors receive preferred shares with negotiated rights, like liquidation preferences and anti-dilution protections. These rights heavily impact ownership and value, requiring careful tracking. Updates from follow-on rounds also must be reflected properly.

In short?

While seemingly simple initially, cap tables often grow complex as companies raise additional rounds and issue more share-based compensation. Maintaining an accurate view is crucial for smooth operations and keeping investors satisfied. Taking time upfront to structure the cap table thoughtfully sets up companies for success.

Reach out to your Meow representative for help getting set up with cap table management software!