What is a cap table? A guide for startup founders

Why does the cap table matter?

The cap table is how founders, employees and investors know what they own, and it drives every financing, option grant and exit. Investors will check it against your signed documents in diligence, and the proceeds of a sale are split according to it.

It also has a legal role. A Delaware corporation must keep a stock ledger recording who holds its shares (DGCL Sections 219 and 224), and the cap table, kept on a platform, usually serves as that ledger. Rule 701 and 409A compliance also depend on accurate records of what was granted, when and at what price.

What’s on a cap table?

For each holder, a cap table shows the holder’s name exactly as it appears on their stock documents, the type of security, the number of shares, the issue or grant date and the holder’s fully diluted percentage. A full cap table also tracks vesting, exercise prices and certificate or ledger numbers.

The securities you’ll typically see are:

• Common stock, held by founders and early employees. See Preferred Stock vs Common Stock.
• Preferred stock, issued to investors in priced rounds. It usually carries a liquidation preference and protective provisions. See Liquidation Preference.
• Restricted stock (RSAs), which is common stock subject to vesting. See Restricted Stock.
• Stock options, granted from the option pool. See Stock Options.
• Warrants, rights to buy shares, usually issued to lenders or investors. See Stock Warrants.

SAFEs and convertible notes are tracked separately, as explained below.

What does fully diluted mean?

Fully diluted shares are all issued and outstanding shares, plus the entire option pool (both granted and ungranted options), plus warrants. SAFEs and convertible notes are not included, because they convert into shares only in a later priced round. Investors in a priced round quote their ownership on this basis. See Authorized, Outstanding and Fully Diluted Shares.

What does a simple cap table look like?

Here is an example for a company with 10,000,000 authorized shares, two founders and an option pool of 1,000,000 shares, of which 400,000 have been granted.

There are 8,000,000 shares issued and outstanding and 9,000,000 fully diluted. The remaining 1,000,000 authorized shares are unissued and don’t appear in the percentages.

How should SAFEs appear on a cap table?

Keep SAFEs on their own tab, separate from issued equity. Using the same company, if it has raised $1,000,000 on post-money SAFEs, the SAFE tab would look like this:

Don’t add a column showing each SAFE holder’s implied ownership at the cap. A SAFE isn’t stock, and the number of shares it converts into depends on the terms of the priced round. Showing a percentage at the cap overstates the SAFE holders’ position before conversion and confuses everyone reading the table.

When you raise a priced round, counsel and the lead investor will build a pro forma cap table that shows the SAFEs converting, the new investors’ shares and any option pool increase. See SAFE, Valuation Cap, Convertible Notes and Equity Dilution.

Who maintains the cap table?

The company does, usually a founder or the finance lead. Most venture-backed startups keep it on a cap table platform rather than a spreadsheet once they have outside investors or option holders. See What Should We Use to Manage Our Startup Cap Table? Your lawyer should have access, reconcile the cap table against the signed documents at each financing, and help fix anything that doesn’t match.

When does the number of stockholders matter?

Usually not until a company is well into its growth. Under Section 12(g) of the Securities Exchange Act, a company with more than $10 million in total assets has to register with the SEC and start filing public-company reports once a class of its equity is held of record by 2,000 or more people, or by 500 or more people who aren’t accredited investors. That second test is why it’s still called the “500 stockholder rule.” Shares and options received under the company’s equity incentive plan generally don’t count while the person who received them still holds them, so a large option pool on its own rarely triggers it. People who buy shares from employees or former employees in a secondary sale generally do count, and each class of stock is counted separately. If you’re planning a secondary program or your holder count is climbing, track holders of record by class and talk to counsel before you get close.

What are the most common cap table mistakes?

These are the problems we fix most often before a round:

1. Equity promised but never issued. An email or offer letter promised shares or options, but no board approval or grant followed. See Promising Equity vs Issuing Equity.
2. Unsigned RSPAs or no 83(b) proof. A founder’s or early hire’s stock purchase was never signed, or there’s no record the 83(b) election was filed.
3. Grants with no board consent, or the wrong date. An option grant has to be approved by the board on or before the grant date, at a price backed by a current 409A.
4. SAFEs missing from the records. A signed SAFE never made it onto the SAFE tab, so the founders underestimate dilution.
5. Percentages instead of share counts. Someone was promised “1%” with no share number, which changes every time new shares are issued. See Why Use Exact Share Numbers.

Go deeper: For a full walkthrough, see our Founder Guide to SAFEs and Founder Guide to Convertible Notes.

Each of these is easier to fix before investors find it. If equity was promised in writing outside a signed grant, or you are about to raise, have counsel review the cap table against your documents. If you’d like help cleaning up your cap table, contact us.