Did you write your own cap table? If you’re like most founders, you probably had your lawyers put one together, or maybe you’re using Carta to track your company’s shareholders. However you got it – and if you don’t have one, we strongly recommend putting one together – your cap table holds a lot of valuable information. But more important is what you can do with that information. Here are five things your cap table should tell you (and what to do if it doesn’t).
Do I Know Who My Shareholders Are?
This might seem like a question with an obvious answer, but as a company grows, it might become difficult to remember exactly who owns shares of stock in the company. Usually, the original shareholders are the founders. But what if a founder left the company? Did he or she take their shares with them when they left? If so, they should still be listed on the cap table, and they will also have certain rights afforded to shareholders under state law.
How Much is Left in the Company’s Equity Incentive Plan?
If your company issues equity compensation to employees, advisors, or contractors – and most startups do – you should have a running tally of the amount left in your equity incentive plan. It’s important to know what this amount is at all times because it is usually limited to a certain percentage of total equity in the company.
What is Everyone’s Fully Diluted Stake in the Company?
When talking about issuing equity, many founders use percentages, but this can be misleading. Depending on the size of the equity incentive plan and how much remains in the plan, a shareholder’s equity stake can appear to be reduced significantly. For that reason, it’s important to have separate columns on your cap table for equity stake based on current outstanding shares and also on a fully diluted basis.
Does Your Company Need to Get a Valuation?
This one is a judgment call for the founders, but usually a good indication of whether you need to get a valuation is whether or not the company has recipients of restricted stock – which are not founders – on its cap table. The company can issue shares of restricted stock to employees, advisors, and contractors, but there are benefits to switching to stock options as the primary form of equity compensation as soon as possible. Remember, there are significant risks associated with issuing stock options without a properly obtained valuation that complies with Rule 409A. If you find your cap table filling quickly because the company is growing, it may be time to get a professional valuation.
How Do the Founders Look After a Round of Investment?
A company’s cap table will certainly change after receiving a round of investment. There will be many preferred shareholders collectively diluting all of the other shareholders, and often this is something founders will look at after the round of funding closes. Your attorney will prepare it early on in the negotiations for the round, and it is worth reviewing and understanding the impact a round has on the other shareholders. It can be challenging to slow down and take your time with the cap table when investment money is coming to the company, but you’ll be glad you did.
Error-Proof Your Cap Table
Cap tables are one of the most useful tools founders can use to get a snapshot of the stakeholders in their company. Reduce the chance for errors in yours by following these steps:
- Review the cap table whenever there is a corporate action which impacts company shares (hint: this is often!)
- Even if you don’t think a company’s shares have been impacted, check your cap table at least once every month
- Keep one with the company and check it against your attorney’s version whenever possible to make sure they align with each other
- Use excel for at least one version of the cap table – it’s simple, effective, and allows you to calculate dilution easily
Want to know more? Click here to listen to our episode of the Peak Pod on cap tables and valuation with our friends from Carta or download the ep on your favorite podcast app.
Bob Baker is a founding partner of Peak Corporate Counsel. He has worked with numerous founders on a variety of issues specific to startups. When he’s not advising innovators, he can be found at networking events, playing rugby, or hiking with his kids. Contact Bob.
This article is for informational purposes only, and may not be considered legal advice.