Cap Table Management and Equity Dilution
Introduction to Capitalization Tables
Who Owns Your Company?
Every company, from a tiny startup to a global giant, has owners. But how do you keep track of who owns what, especially when ownership changes over time? The answer is a capitalization table, or "cap table" for short.
A capitalization table (cap table) is the single most important document for tracking who owns what in your startup.
Think of a cap table as a detailed scorecard of your company's ownership. It's a spreadsheet or document that lists all the company's securities, such as stock and options, and who owns them. It calculates each person's or entity's percentage stake in the business.
For a startup, the cap table is a living document. It starts simple, maybe just with the founders, but grows more complex as the company brings on investors, hires employees and offers them stock options, and goes through rounds of funding. Maintaining an accurate cap table is critical. It provides clarity to founders, reassures investors, and is essential for making sound financial decisions.
Breaking Down the Cap Table
While cap tables can become incredibly detailed, they are all built on a few basic components. Understanding these parts is the first step to mastering your company's equity.
| Shareholder | Share Class | Number of Shares | Ownership % |
|---|---|---|---|
| Founder A | Common | 500,000 | 50% |
| Founder B | Common | 400,000 | 40% |
| Angel Investor | Preferred | 100,000 | 10% |
| Total | 1,000,000 | 100% |
This simple example shows the core information every cap table tracks. Let's look at each piece.
Shareholder
noun
A person, company, or institution that owns at least one share of a company's stock, known as equity.
Shareholders: These are the owners. They can be founders, employees, advisors, or investors. The cap table lists each one by name.
Share Classes: Not all shares are created equal. Companies issue different classes of shares that come with different rights. The most common types are:
- Common Stock: Typically held by founders and employees. It grants basic ownership and voting rights.
- Preferred Stock: Usually issued to investors. It often comes with special perks, like getting paid back first if the company is sold.
Ownership Percentages: This column does the simple math: it divides a shareholder's number of shares by the total number of company shares. This percentage is the ultimate measure of how much of the company someone owns.
Keeping the cap table clean and up-to-date avoids confusion and makes fundraising smoother.
Ready to check your understanding?
What is the primary function of a capitalization table (cap table)?
True or False: A company's cap table is a static document that is created once and never changes.
As your company grows, so will the complexity of your cap table. But by understanding these fundamentals, you're well-equipped to manage your startup's equity with confidence.