CapTable: What is it and should you use it?
- A CapTable shows a company's record of their equity capitalization
- It reflects important elements such as the investors of the company, how much each investor invests, the amount and value of the shares they own, size of the ESOP pool and more
- It is a useful tool to track the shareholders of the company, manage the ESOP pool and also aid in subsequent fundraising rounds through judging the valuation of the company
- Data on the CapTable can be live and is updated whenever there are changes to a company's investments and equity
CapTable: What is it and should you use it?
CapTable – What is it?
A CapTable, short for Capitalization Table, is a comprehensive record of a company’s equity capitalization – that is, who owns what, and how much, within the company.
Companies typically will have a fully diluted CapTable as part of their records keeping. A “fully diluted” CapTable is one which includes shares which have been issued (outstanding shares), but also shares that could accrue after the conversion of notes, bonds and warrants. Such CapTables typically also include the company’s employee stock option plan (ESOP) pool, if ESOP is being used.
When companies are doing fundraising scenarios and financing discussions, pro forma CapTables are used in lieu of the regular fully diluted CapTable.
Pro forma CapTables lay out the pre- and post-investment equity ownership outcomes. These CapTables also account for the conversion of any outstanding notes (Convertible Note or SAFE) in the upcoming fundraising round.
Figure 1: Example of a fully diluted CapTable
Figure 2: Example of a pro-forma CapTable, with a simulation for Series B fundraising
What does a CapTable tell you?
When a CapTable is fully diluted, it would reflect several elements, including, but not limited to the following:
- Who are the investors (stakeholders)?
- How much did each investor invest?
- What are the respective investors’ share class(es) held – or, which fundraising rounds did the investor take part in?
- How many shares (per share class) does the investor hold
- What is the price per share (per round) for each investor?
- What is the investor’s percentage shareholding within the company?
- The investor’s prospective or realised returns on their investment
- What is the size (and proportion) of the company’s ESOP pool?
If the company has any outstanding convertible notes or instruments, a CapTable could also track:
- How many types (or rounds) of convertible instruments does the company have?
- How many investors fall under each type instrument?
- Amount of money contributed per instrument holder
- Key terms of the instrument, including discount and interest rate, valuation cap and valuation type
Apart from breaking down the stakeholders by share class, amount invested and their percentage shareholdings, the CapTable also makes it easy to calculate each investor’s price per share. However, note that there is no specific format for a company’s CapTable, but it should usually show at least a few of the aforementioned elements.
Some CapTables may be more complicated than the one shown above. Certain investors may hold multiple share classes. In addition, CapTables are updated after each fundraising round to preserve the accuracy of the company’s equity shareholding records.
Here is an example of our CapTable taken from our Svested website:
Figure 3: Svested CapTable overview
Figure 4: Svested CapTable price round details
Why is a CapTable essential for your company?
The most fundamental reason is that it allows you to track the shareholders of the company, especially for startups.
Firstly, it allows the ownership breakdown of the company to be monitored. Just by looking at the values reflected on the CapTable, you can find out who is in charge of the company, as well as whether the founders have already lost control of their company – an example of such a scenario would be where the founders have a combined share that is less than ⅓ of the company’s total shareholdings.
From here, you can also tell the relative power dynamic within the company, and even who will need to be involved in key decision-making activities. The company’s board of directors can vote to remove certain individuals, such as the CEO, if they deem that such a course of action is beneficial.
Secondly, having a CapTable will be important for running fundraising scenarios – specifically, in making dilution predictions for different fundraise outcomes. This will enable them to forecast the relative extent of leverage or power that the stakeholders will have, post-fundraise.
Following that, both existing investors and the founder(s) can engage in negotiations on the fundraising details. For instance, investors may deem it necessary to top up their investment, in order to receive more shares and reduce their dilution from the next round of fundraising. If the ESOP pool is being expanded, existing investors may request that some ESOP be allocated to themselves or the founders first – and they can toggle the CapTable to reflect possible change in values after further dilution.
Key factors affecting a CapTable
A CapTable must, as far as possible, be promptly updated when there is a change in ANY of information contained on it. Changes to the company’s fully diluted CapTable occur typically after any fundraising round, including rounds where debt (such as SAFE or Convertible Notes) converts to equity. However, it is also possible for the CapTable to change outside of a fundraising round.
Specific instances relating to fundraising which would CapTable data changes include:
- When a new investor puts in money
- When existing employees top up their investment in the company (for instance, to maintain their percentage shareholdings during a fundraising-induced dilution)
- When a SAFE or Convertible Note holder is converted to become an equity holder
- When an anti-dilution clause is triggered
- When the company is made to change the ESOP pool size, based on incoming investors’ wishes
- Pro-forma CapTables can change during financing discussions, based on the scenarios raised or requested
Specific instances outside of fundraising or debt conversion events which would require updates to CapTable data include, but are not limited to:
- Employee departure on Bad Leaver terms, whereby the employee’s vested and unvested ESOPs may be cancelled and returned to the company ESOP pool (which increases)
- Vice versa, if a new employee joins the company and is granted options, the option pool will decrease
- When an employee exercises their vested stock options
- Share transfers from an employee to third-party, such as another investor
- ESOP buybacks by relevant personnel (such as the founders)
Given the complexity of CapTable management, it is now an increasingly common practice to use digital CapTables, instead of manually creating CapTables using Microsoft Excel.
Do wait up for our next article in this series on the problems with CapTable management practices currently to find out more about this.
How is a fully diluted CapTable different from an ACRA Biz File?
Unlike the company’s fully diluted CapTable, its ACRA Biz File will NOT contain information on the ESOP pool size nor factor for the effect of the anti-dilution clause should it kick in. This is because the ACRA file only tracks the company’s actual shares in circulation. In contrast ESOP shares are not actual shares unless they have been vested and exercised by the employees. If employees have exercised their ESOP, then their name will be included in the company’s CapTable, and their shares will no longer form part of the ESOP pool.
In summary, a CapTable is a valuable and handy tool for employees and founders alike to manage and view their equity holdings. This allows for easy gauging of the company’s financial health and can be used as an anchor point for future rounds of fundraising. Its main function is to reflect the ESOP pool of the company, which is what makes it distinct from an ACRA bizfile. However, not all CapTable software is created equally, and some will give you a better bang for your buck than others.
For more ESOP or corp sec advisory, check out our other articles!