A cap table is a tool that clearly shows a company's ownership structure, that is, who owns which stakes in the company and to what extent. A cap table often includes details of the shareholders' stakes and number of shares, as well as information about options and other potential dilutive effects. Cap tables are particularly common among startups and growth companies, where the ownership structure can change quickly through acquisitions, share issues and various funding rounds.
What does a cap table contain?
A cap table usually contains information on:
- How ownership is distributed, with a list of shareholders such as founders, business angels and investors.
- How many shares there are and how they are distributed among the shareholders.
When is a cap table needed?
A cap table is an important document when potential investors examine factors such as the company's ownership structure and how future funding rounds or dilution could affect their investment. Cap tables are particularly important for startups and growth companies, where the ownership structure can change often.
Although cap tables are mainly used when a company is raising capital, they are a good tool for creating transparency and building trust among the company's stakeholders, since they give a clear picture of the company's current ownership structure.
Read more: How trading in unlisted shares works
Frequently asked questions
Why is a cap table important for startups?
A cap table is important for startups because the ownership structure often changes quickly and many times as the company grows. An accurate, well-kept cap table from the start makes it easier to handle future investment rounds and ownership changes, and gives a clear picture of who owns what.
How does a cap table affect investors?
Well-kept cap tables give a professional impression and signal that the company has its capital structure in order. Investors value companies with clear and well-structured cap tables, since they give an accurate picture of ownership stakes and potential dilutive effects.
How often should a cap table be updated?
A cap table should be updated with every new financial transaction, such as a new share issue, a sale of shares or when an owner is bought out by the other owners.
What is meant by a broken cap table?
A broken cap table refers to a situation where a company's ownership structure has become complex, problematic or unattractive to potential investors. It usually means that ownership is divided in a way that can cause problems in future investment rounds or in a sale of the company. It can make it difficult to attract new investors or create conflicts between existing owners.
Here are some common causes of a broken cap table:
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Too much dilution:
If the company has carried out many funding rounds, existing shareholders, especially the founders, may have been heavily diluted. This can reduce their incentive to keep working for the company's success, which investors see as a risk.
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Too many small shareholders:
If a company has issued shares to many small shareholders (for example early investors, advisers or employees), this can create a fragmented ownership structure that is hard to manage and complicates decision-making.
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Many types of shares and options:
A cap table with many different share classes (A, B and C shares, preference shares etc.) and options can become hard to follow. This can make future funding rounds complicated and create conflicts if different share classes carry different rights.
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Disproportionate ownership:
If early investors or smaller shareholders hold a disproportionately large stake compared with their contribution to the company, this can create difficulties in future investments or sales. It is important that the people who work actively in a company in leading positions own a large stake in it, so that they have an incentive to do a good job.
A broken cap table can make the company look high-risk and deter potential investors. In such cases the company may need to make adjustments, such as buying out certain shareholders, simplifying the share structure or buying back options, to make its cap table more attractive and investable.
