Business Structure and Capitalization Table

What is a Cap Table 

A capitalization table, often called a “cap table,” outlines a company’s ownership structure and the allocation of ownership shares among its founders, investors, and other stakeholders. 

The cap table typically includes information such as the number and class of shares outstanding, the ownership percentage held by each shareholder, and any outstanding equity-based awards or options. It is an essential component of a startup’s business plan, providing a clear picture of its ownership structure, valuation, and potential for future fundraising and exits. 

A well-constructed cap table is crucial for ensuring transparency and fairness among stakeholders and can also serve as a valuable tool for tracking equity and ownership changes over time.

Why Investors Care About Your Cap Table 

A cap table is often used during the fundraising process as it helps investors understand the company’s current ownership structure, the amount of equity they are getting for their investment, and their potential returns on investment based on specific “what-if” outcomes. Investors also like to see how much they are paying per share compared to previous investors.  

Investors will quickly focus on what percentage of the company they will own for a given dollar amount invested. Similarly, they will ask themselves, “How much will we get if the business sells for $x?” 

For added protection, investors will often (usually) insist on getting preferred shares, liquidation preferences, or both.  

Cap Table Template

The list below can be used as a cap table template for your business plan ownership structure.  Following this cap table template will ensure you have all the information investors or lenders need. Including all this information in a business plan that you circulate to potential investors who have yet to be qualified is not recommended. However, it would be best if you had this ready for serious investors, and even then, you should request a non-disclosure agreement before seeing the level of detail listed below. 

1. Shareholder names. Contact information can be redacted for a business plan but will be part of the official record of shareholders. 
2. Type of shares held: Specify whether each shareholder owns common shares, preferred shares, SAFEs, or other types of securities.
3. The number of shares held: Include the total number of shares held by each shareholder, broken down by share class.
4. Percentage of ownership: Calculate the percentage of ownership for each shareholder based on the number of shares they hold.
5. The purchase price per share should include the price per share each shareholder paid to acquire their shares.
6. Total investment amount: Calculate the total investment amount for each shareholder based on the number of shares they hold and the purchase price per share.
7. Conversion rights: For convertible securities such as SAFEs include information on the conversion rights and the potential impact on the share structure.

All businesses need to keep accurate records of their cap table to help manage shareholder relationships and make informed decisions about future fundraising or transactions.

Sample Cap Table for a Business Plan 

The cap table example below represents a small business owned by the founder, co-founder, and two outside investors. As you’ll see, the founders have common shares, and the investors have preferred shares.  

A shareholder agreement would specify the rights of each type of shareholder. 

Current and Past Funding 

Investors will want to know the history of any fundraising or borrowing beyond what is reflected in the Cap Table. Provide a summary of any loans, including the date, amount borrowed, current balance, interest rate, and expected payback period. If the company issued and has repurchased any shares, this information should be in your business plan or an appendix.  

Employee Stock Options 

Investors may want to see employee stock options (ESOs) listed on a cap table for a few reasons:

1. Dilution: ESOs can have a significant impact on the ownership structure of a company. When employees exercise their stock options, they receive new shares of the company’s stock, which can dilute the ownership of existing shareholders. Investors want to be aware of the potential dilution caused by ESOs, as it can affect the value of their investment.
2. Incentives: ESOs are often used as a way to incentivize and retain key employees. By offering stock options, employees have a financial stake in the success of the company and are motivated to work towards its growth. Investors want to see that a company is using ESOs strategically to align the interests of employees and shareholders.
3. Valuation: ESOs can affect the valuation of a company. If a company has a large number of outstanding stock options, it can impact the company’s earnings per share (EPS) and other financial metrics. Investors want to be aware of the potential impact of ESOs on the company’s valuation.

By including ESOs on a cap table, investors can get a more complete picture of the ownership structure of a company and make informed investment decisions based on that information.

If you’re including stock options in your cap table, just list a single line for the total shares authorized for the employee stock option plan as if they are all “owned” already by future employees. 

Ownership Structure for an LLC, LLP or Partnership 

A cap table is typically used to show the ownership structure of a corporation or startup company. It lists all the owners of the company, the number of shares or units they own, and the percentage of ownership.

LLCs (limited liability companies) and LLPs (limited liability partnerships) are different types of business structures than corporations, and they do not issue shares of stock like corporations do. Instead, LLCs and LLPs typically have members or partners who own a percentage of the company’s profits and losses, and their ownership is usually documented in an operating agreement.

While a cap table is not typically used to show ownership in an LLC or LLP, these entities may use other methods to track ownership, such as a membership ledger or partnership agreement. These documents would list the members or partners and their percentage ownership in the company. The information an investor would need is generally the same. 

Types of Equity Common in Small Business 

Common Shares 

Common shares are a type of stock that represents ownership in a company. Common shareholders typically have the right to vote on important company decisions, such as the election of board members and approval of significant transactions.

Dividends can be paid to common shareholders if the company decides to distribute profits to its shareholders. However, the company is not required to pay dividends, and the amount of the dividend is not guaranteed.

Common shareholders are the last in line to receive funds if the company goes bankrupt or is liquidated. This means that common shareholders are exposed to more risk than other stakeholders, such as lenders or preferred shareholders.  

However, common shareholders have residual ownership in the company, meaning that they are entitled to a share of the company’s assets and earnings after all other obligations have been met.

Overall, common shares are a customary way for investors to participate in the ownership and growth of a company, but they also carry certain risks and uncertainties. As a result, investors are likely to require more.  

Preferred Shares 

Preferred shares, also known as preferred stock, are a type of stock that gives shareholders priority over common shareholders in terms of receiving dividends and distribution of assets in the event of a company’s liquidation or bankruptcy. 

Investors typically require preferred shares, which receive preferential treatment in both good and bad outcomes.  

Preferred shares often are entitled to receive dividends to be paid out before any dividends are paid to common shareholders. The dividend rate may be fixed or variable and can be cumulative or non-cumulative.

Preferred shareholders have priority over common shareholders in terms of receiving their share of the company’s assets if the company is liquidated or goes bankrupt.

In terms of voting rights, some business decisions will require that preferred shareholders, voting as a class of shareholders, must approve certain business decisions, even if they are not the majority shareholders.  

Some preferred shares are convertible, meaning they can be converted into common shares at a predetermined ratio.

Overall, preferred shares are a way for investors to prioritize their claims on the company’s assets and dividend payments. Some entrepreneurs find this to be unfair, but the reality is that to go along with the founder’s journey, investors need to be enticed to invest.  

SAFES 

SAFE stands for Simple Agreement for Future Equity. It is a type of financial instrument used by startups to raise funds from investors in exchange for the right to receive equity in the company at a future date, typically upon the occurrence of a specific event, such as a subsequent equity financing round or an acquisition.

A SAFE is similar to a convertible note but with some key differences. Unlike a convertible note, a SAFE does not accrue interest or have a maturity date. Instead, the investor typically receives company equity upon a specific trigger event, such as a subsequent equity financing round or an acquisition.

There are several types of SAFEs, each with its terms and conditions. Some SAFEs provide a discount on the future equity price, while others include a valuation cap that sets a maximum valuation for the company at the time of future equity issuance. SAFEs can be a helpful tool for startups that want to raise capital without immediately setting a valuation for their company, but they can also be complex and may require careful consideration of the terms and conditions.

Why Do Startups Issue Safes?

Companies might choose to issue SAFEs, which stands for Simple Agreement for Future Equity, for several reasons.

SAFEs provide flexibility for both the company and the investor. They allow the company to raise capital without setting an immediate valuation, which can be helpful in the early stages of a startup when it may be difficult to determine a fair value for the company. Additionally, SAFEs can be customized to meet the specific needs of the company and the investor.

A SAFE is typically easier and faster to negotiate and execute than traditional financing methods, such as issuing equity or debt. This can be attractive for startups that need to raise capital quickly and efficiently.

SAFEs can be a useful tool for startups that want to attract investors who are interested in investing in early-stage companies but who may not be comfortable with traditional equity or debt financing.

Compared to traditional equity or debt financing, SAFEs can have lower transaction costs because they are generally more straightforward and require less legal documentation.

Finally, SAFEs can be structured to incentivize investors to provide additional funding in the future, such as by including a discount or a valuation cap that rewards investors for investing early in the company’s lifecycle.

Overall, SAFEs can be an effective way for startups to raise capital while maintaining flexibility and attracting investors who are interested in investing in early-stage companies.

Importance of Legal Review of Your Cap Table 

Having your cap table reviewed by a legal advisor who is experienced in raising capital is important for several reasons, especially when a business is raising more capital.

A legal advisor can help ensure that the cap table is accurate and up to date. This is important because the cap table represents the company’s ownership structure and serves as a critical tool for managing shareholder relationships. 

Any inaccuracies or discrepancies in the cap table can lead to confusion, disputes, or legal issues. For example, a legal advisor can review the cap table and verify that all the information is correct, including the names of shareholders, the number and type of shares held, the purchase price per share, and any other relevant terms or conditions.

Secondly, a legal advisor can help identify any potential legal or regulatory issues related to the cap table. For example, if the company has issued securities in violation of securities laws or regulations, the cap table may need to be revised to comply with the law. In addition, a legal advisor can review the cap table and assess whether any legal or regulatory issues exist and advise on how to address them.

A legal advisor can help ensure that the cap table is structured in a way that is optimal for raising more capital. This is especially important for companies that are planning to raise additional funding in the future. For example, a legal advisor can review the cap table and advise on the best way to structure future fundraising rounds, including the number and type of shares to be issued, the potential impact on existing shareholders, and any other relevant terms or conditions.

In addition, a legal advisor can provide guidance on other issues related to raising capital, such as negotiating with investors, drafting legal documents, and complying with securities laws and regulations. This can help ensure that the company is well-positioned to raise capital and grow its business.

Overall, having your cap table reviewed by a legal advisor experienced in raising capital can provide valuable insights and guidance to help manage shareholder relationships, identify and address legal or regulatory issues, and structure future fundraising rounds in a way that is optimal for the company.