What You Need to Know About Capitalization Table?

A capitalization table (or cap table) is a simple document that shows who owns what in a company. It lists all the owners and the types of securities (like stocks or options) they hold. Think of it as a snapshot of the company’s ownership structure.

A cap table helps with:

• Voting decisions: Figuring out who gets a say in big decisions, like approving a new investment.
• Economic rights: Determining who gets paid dividends or other payouts.
• Planning: Helping the company decide how new investments or employee stock options might affect existing owners (e.g., how much the founders’ ownership will shrink if a venture capitalist invests).

What Should a Cap Table Include?

A cap table should clearly show:

• Overall ownership: A summary of who owns what, broken down by type of security (like stocks or options) and class.
• Details for each owner: Including their name, type of security, when it was granted, the price to buy or exercise it (if applicable), and any vesting schedule (e.g., how long they need to stay at the company to fully own their shares).

Common Types of Securities in a Cap Table

Here’s a breakdown of the typical securities you’ll see in a cap table for a company backed by venture capital:

1. Common Stock:
   • The basic type of company stock.
   • Usually held by founders, employees, and early angel investors.
   • Gives owners voting rights and a share of profits (like dividends), but only after those with “preferred” stock get paid.
2. Preferred Stock:
   • A special type of stock with extra benefits, like priority for dividends or payouts if the company is sold.
   • Typically given to venture capital investors.
   • These benefits are outlined in the company’s legal documents (like its charter).
3. Options:
   • A contract that lets someone buy common stock at a set price for a certain period.
   • Often given to employees to motivate them to stay (e.g., they might vest over four years, meaning they earn the right to buy the stock over time).
4. Warrants:
   • Similar to options, these give the holder the right to buy stock (common or preferred) at a set price within a specific time (often up to 10 years).
   • Usually given to investors as an extra perk to make investing more appealing, especially alongside other securities like preferred stock.
5. Convertible Debt:
   • A loan that can later turn into stock (common or preferred) at a set price, often with a discount.
   • Common for early investors or to help a company get funding between bigger investment rounds.

The cap table below sets out the category of security holders in rows and in the columns lists the securities they own (or have reserved). As an example, consider a company with only two types of securities, common stock and options. In this case, the common stockholders own 4 million shares of common stock, the option holders hold options to purchase 500,000 shares of common stock and there is an unallocated option pool of 500,000 shares of common stock reserved for issuance under the equity incentive plan. This information is set out in the pre-financing cap table below.

Pre-Financing Cap Table

Now consider a $4 million investment by new investors at a $6 million pre-money valuation (so a $10 million post-money valuation) and an increase in the unallocated option pool to 15% on a post-money basis. Here are the steps to prepare a new cap table: 

1. The new investors will be entitled to 40% of the shares after the financing ($4 million / $10 million).
2. The 4.5 million shares held by the founders or acquirable by the current option holders will constitute 45% of the ownership of the company (e. 100%, less the 40% share of new investors and the 15% share of the option pool).
3. The total number of authorized shares will be 10 million since 4.5 million shares constitute 45% ownership.
4. The number of shares granted to the new investors will be 4 million (40% of the total 10 million authorized shares).
5. The total unallocated option pool is increased to 1.5 million shares to constitute 15% of the fully diluted ownership.
6. The new shares added to the unallocated option pool is 1 million (1.5 million less the existing 500,000 shares in the unallocated option pool pre-financing).
7. The price per share is $1.00, calculated by dividing the pre-money valuation ($6 million) by the fully diluted capitalization pre-financing, including the proposed increase to the unallocated option pool (4 million (founders) + 500,000 (options granted) + 1.5 million (increased unallocated option pool) = 6 million) (alternatively, think about this on a post-money valuation basis, e. $10 million post-money valuation divided by the 10 million share fully diluted capitalization post-financing, resulting in an investment of $4 million for 4 million shares)

Post-Financing Cap Table