What is Capitalization Table?
The Capitalization Table is tracked by venture capital (VC) firms to provide a summary of the current capitalization (i.e. equity ownership) in a startup or venture-backed business.
Capitalization Table: Startup Waterfall Modeling
From a high level, a VC capitalization table serves as an extension of the VC term sheet by tracking the impact on the ownership structure of a company.
Since this article will assume an understanding of basic VC terminology, we recommend reading that article before going through this one.
To begin, a VC cap table tracks the equity ownership of a company in terms of the number and type of shares (as well as series) along with any special terms such as liquidation preferences or protection clauses.
The VC cap table for a start-up can start off quite simple at first, initially including just the founders and/or the first handful of employees. But as the company’s employee base grows and more outside investors join in, it can quickly become more complicated.
For this reason, a cap table must be used and kept up-to-date to calculate the dilutive impact from each funding round, employee stock options, and issuances of new securities.
Thus, all stakeholders can accurately calculate their share of the proceeds in a potential exit (i.e. liquidation event such as a sale to a strategic or IPO).
While cap table software programs are available, most cap tables are still tracked in an Excel spreadsheet similar to the one shown above.
Updating the Capitalization Table Model
The capitalization table is updated after each investment round, as designated by the term sheet.
A few of the key items that change on the cap table after a new funding round include:
- Valuation and price per share
- New investors and/or classes of securities (e.g. Series B Preferred)
- Employee option grants and warrants (either allocated or unallocated)
- Debt that has converted to equity
VC cap tables can also be updated as investors exit the company and/or employees leave the company, however, most changes on the cap table are dilutive, meaning the equity ownership percentage of each entity will decrease as more investors join the company.
As long as the company’s valuation is increasing (known as an “up round”), dilution is acceptable, as shown in the following example:
- The founder owns 100% of a company worth $5M
- The next round values the company at $20M, but the new investors want to own 40%
- The founder’s stake of 60% is now worth $12M despite the dilution (i.e., from 100% down to 60%)
As a general convention, VC cap tables group similar parties together.
For example, a cap table can show the company’s founders and key employees first, followed by venture investors, and then angel or minority investors such as family and friends. A cap table may also rank all stakeholders by ownership percentage, generally from largest to smallest.
On a standard cap table, the individual or firm name is listed in one column, followed by their shares in the second column, and then their ownership percentage will be recorded in the last column. The date of investment can also be included.
A typical cap table shows all shares on a fully diluted basis, which means all shares are accounted for, even if they have not been granted or earned yet.
Case in point is a new employee that shows 5% ownership in options that have been granted on her hire date, even though she will not receive the options until they vest, at 25% per year. Should the employee leave the company, her unvested options are forfeited and do not go with her.
There can also be unallocated options on a cap table, which will be allocated as key employees are hired in the future.