Capitalization Table for a Startup

Meaning of Capitalization Table

A capitalization table for a startup is a spreadsheet that describes the ownership stakes in a startup. A capitalization table is accurate documentation of all the primary shareholders of a startup, in addition to their pro-rata ownership of all the securities granted by the business (common shares, preferred shares, and options), and the different prices paid by these stakeholders when acquiring these securities. The table uses those details to prove ownership stakes on an entirely diluted basis; thus allowing the startup’s capital structure to be determined at a glance.

Capitalization table for a startup

One format for capitalization tables is to list shareholders in a column on the left side of the table as well as describe every investment round (like Seed rounds, Series A, Series B, etc.) across the top of the table. Founders are usually listed first, and then executives and other key employees with equity stakes, after which investors, angel investors and then venture capital firms, for each round.

Although the capitalization table may look like a simple document, it is an important record in the development and evolution of a startup. Accessibility to adequate capital is essential for the initial growth of a development-stage company. A capitalization table is a significant tool for recording and monitoring ownership stakes as the company progresses its business strategy.

A capitalization table shows a snapshot of the ownership framework of a startup. Cap tables are commonly used by business owners, venture capitalists, and investment bankers to design as well as evaluate events like ownership dilution, releasing employee stock options, or even issueing new securities. After many rounds of financing, and inclusion of options, warrants and debentures, a cap table can become complex.

For example there may be multiple classes of Preferred Stock and outstanding promissory notes with interest rates. Vesting provisions, for stock subject to vesting, may not be uniform. One needs to list stock certificate numbers and the dates of issuance.

Waterfall analysis

As a capitalization table for a startup becomes more complicated, the ownership percentages stated on the cap table may deviate from actual percentages of profits distributed to shareholders upon liquidity events. Some refer to the distinction between “accounting ownership” (real ownership percentage on the cap table) vs. “Economic ownership” (percentage of profits available to equity).

This perspective results in the concept of a “waterfall” or “waterfall analysis.” A waterfall analysis explains the actual payouts to every single shareholder on a company’s cap table depending on a particular sum of proceeds accessible to equity in a given liquidity scenario. Since a startup can not predict if, when, or how it is going to attain a liquidity event, waterfall analysis often addresses a range of liquidity assumptions. Liquidation preference charts expand the analysis, demonstrating the financial result available to investors at all valuations across ranges of results.

References

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3 Responses to Capitalization Table for a Startup

  1. Thanks for this quick, simple analysis. You’ve put it in a nutshell. Wish I’d had even half of this advice when I was just starting out, but some of this is helpful even for older guys like me.

  2. Wow, I never thought of making such report for my current business; until my first investor meeting. I have been focused on our product and not thinking about the importance of cap tables for a startup. Thanks for sharing this information here.

  3. Hi John! I found your blog from my fb timeline and I think this is the right place for new entrepreneurs likes me! I read many posts from your blog and they’re really helpful. Keep’em coming.

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