Startup Cap Table Management: What to Know as You Grow
Can we be real? Let’s not waste time listing everything startups could be doing to more effectively manage their cap tables. That’s a long list. But what about the things you should be doing; the things you need to be doing. When it comes to cap table management in startup companies, it’s unrealistic to expect perfection. Instead, let’s focus on what it takes to cover your bases. What does your cap table need to address at each stage of growth?
The realistic demands of cap table management will increase as your business grows and matures—that much is a no-brainer. It doesn’t hurt to cover a few of the best practices and nice-to-haves in cap table management. What we’re really looking for is the baseline of management startups should afford their cap tables as they grow—in both size and the complexity of their equity structures.
Defining Cap Tables
Before we dive into managing cap tables for startups, let’s define what they are. Cap tables provide a granular breakdown of everyone who owns a stake in your startup as well as the nature of the stake they own. It quantifies capital investments, lays out the allocation of shares and ownership percentages, and accounts for multiple types of security. We’ve said it before: cap tables dictate who holds the money power in a startup just as org charts dictate the people power.
Cap Table Management While Bootstrapping
Managing cap tables presents much less of a challenge to founders in their “garage days”; offering up their blood, sweat, and tears in sacrifice to the startup gods. While a clear-cut division of ownership takes some of the pressure off of maintaining a well-kept cap table, it also provides startups with the opportunity to set themselves up for success before taking on early investors.
At this stage, startups should be taking the time to develop a cap table structure that supports growth; plugging in the formulas to eventually model valuations and equity dilution during seed-stage negotiations. When bootstrapping a startup, this is the bare minimum founders should have in place to avoid being caught off-guard by an angel investor. Beyond that, founders can use dummy data to double-check their formulas and develop the muscle memory necessary to plug in hypotheticals on the fly during negotiations.
Taking things one step further at this stage means preparing your cap table for series funding, breaking out columns into groups reflecting new shareholders and investment capital raised in each round. Going the extra mile shows seed and angel investors that your startup is setting itself up for success in the road ahead.
It’s worth noting that structuring your cap table, early on, to handle the most complex configurations—long before your equity structure necessitates it—can take some of the pressure off of ongoing management in the future.
Managing Cap Tables in Seed and Angel Funding
Let’s assume your startup enters into negotiations at this stage with a neatly-formatted cap table, outfitted with equations for pre- and post-money valuation as well as equity dilution. This is just enough to cover your bases at this stage of the game. However, laying out the roadmap for series funding can sweeten the deal for early investors interested in learning how their shares might be diluted based on your capital goals for each round.
If startups haven’t prepared their cap tables for series funding yet, now’s the time to start. This involves adding columns to list the dollar amount invested, quantity of shares, percentage of ownership, and other applicable metrics (on the x-axis) to accommodate new investors (listed on the y-axis). Cells are often grouped such that series A, B, and C are listed in adjacent blocks. This addresses the minimum amount of effort startups can exert on their cap table to ensure that their bases are covered as they head into series funding.
What does above and beyond look like in this context? Investors are likely searching for an estimate of what they stand to gain; either at the time of their anticipated exit or in a variety of hypothetical liquidity events. Anticipating this, founders can prepare waterfalls and what-if scenarios to model dilution in advance of investor negotiations.
Managing Cap Tables for Startups in Series Funding
Your startup should prepare its cap table as it enters into series funding by breaking out separate sets of columns to account for investments made at each round. Some founders may choose to disclose the amount of capital they’re hoping raise per round. This gives investors a clearer picture of the degree to which their equity may be diluted should the startup meet its goals. Covering your bases at this stage involves being prepared to input shares, investment amounts, and ownership percentages into a cap table at a moment’s notice throughout investor negotiations. The speed and familiarity with which founders are able to input and interpret data in a cap table can impact the “smoothness” of these discussions.
That said, investors may ask to see waterfalls or scenario models for a better understanding of how their shares may be diluted at the time of their exit or in a variety of liquidation events. If founders haven’t incorporated these models into their cap tables before the start of series funding, they should be viewed as must-have components of ongoing management.
Ongoing Cap Table Management in a Startup
Once your startup has “started up”, establishing a baseline for cap table management, in theory, becomes much more cut-and-dried. In practice, however, managing your cap table can get chaotic fast. We’ve already established that founders need to prepare waterfalls and scenario models, covering their bases so as to not be caught unprepared by a crisis or liquidity event.
Adding to the baseline of ongoing management is the obligation (between management personnel and company shareholders) to maintain an accurate, up-to-date record of expiry dates and exercise windows. This is where things tend to get sloppy. In most cases, tracking key dates for investor securities is fairly manageable. However, many businesses offer stock options as an incentive to attract executive talent. Some startup companies also choose to implement an employee stock purchase plan (ESPP). More often than not, tracking important dates and windows in these cases is a hectic ordeal.
Obviously, keeping an accurate ledger of shares as they are issued or expire (with employee recruitment, termination, etc.) is par for the course. Ongoing cap table management, in this case, involves making regular updates to account for additions, deletions, or adjustments to employee shares. Setting aside time—on a recurring basis—for cap table maintenance can help prevent these updates from falling by the wayside.
If you’ve already established a baseline for handling waterfall analysis and scenario modeling in your cap table, your bases are more or less covered. However, it often benefits companies to allocate time each month for adding new models and bolstering existing ones in a proactive effort to maintain a cap table capable of handling whatever the future has in store. Time set aside for cap table management should include some effort to maintain a format and structure which keeps things simple, organized, and easy to read. There’s no ongoing base to cover here. However, neglecting the high-level organization and formatting of a cap table for too long can make managing its contents more challenging.
Ultimately, there’s no “one right way” for startups to manage cap tables. Knowing which bases to cover and when to cover them can be an effective game plan for the busy business owner. This approach is enough to ensure founders are well-prepared to discuss equity division and dilution as they enter into investor negotiations.
Of course, it’s easier for startups to manage cap tables effectively when they use effective tools. Diligent Equity is taking the pressure off founders with features for storing and managing securities and equity documents; powerful waterfall and what-if scenario modeling; and a portal to keep employees, board members, and investors in the loop. Diligent Equity’s secure cap table management platform is free for startups with 50 equity holders or less. Create your free account today to learn how Diligent Equity helps founders prepare for what comes next.