Bookkeeping is tedious, confusing, and often the last thing on an entrepreneur’s mind. Yet, understanding the basic elements of startup finance is critical. That comprehension starts with learning how to manage your startups’ cap table.
Let’s talk about what a cap table is, how founders typically manage it, and three free online tools you can use to make managing your cap table easier.
What Is a Cap Table?
A capitalization or “cap” table is a spreadsheet showing the equity capitalization for a company. Most commonly used by startups and early-stage businesses, the cap table breaks down the distribution of a company’s shareholders’ equity.
A basic capitalization table lists out each type of equity ownership capital, the individual investors, and the share prices. Your cap table should show all your startup’s equity ownership capital to include common equity shares, preferred equity shares, warrants, and convertible equity.
A more complex table may also include details on potential new funding sources, mergers and acquisitions, public offerings, or other hypothetical transactions.
Launching Your Startup Means Developing Your Cap Table
Your startup’s capitalization table should show the total market value of your company and its components. Your cap table is considered in every financial decision that will have an impact on market capitalization and your company’s market value.
Almost all founders start by creating a cap table in Excel or Google sheets. This early approach is more than adequate because there are few equity owners and you will probably have not yet created vesting schedules, preferred versus non-preferred shares, voting versus non-voting shares, or treasury shares.
It’s critical for your capitalization table to be accurate, customized to the business needs, and regularly updated for decision making. As your startup grows and takes on more investors, it becomes essential to stop using spreadsheets and adopt tools that will allow you to assign, track, and issue shares to investors accurately and easily.
Why You Need a Good Cap Table Management Platform
Transferring equity to shareholders is often difficult to do right. Using a vesting schedule allows you to track investments when you transfer your records into a software platform. Tracking these data allows you to keep up with the investments that you have received and the equity that you have assigned. When using Excel or a Google spreadsheet you will need to manually configure the automated journal entry to reflect the changing equity.
As you assign equity and vesting equity to employees, you can run into the problem of not having enough equity set aside. If your employees fully vest their shares in your company, you and your co-founders will need to reduce your equity in your startup.
This gets even more confusing when you include convertible or SAFE notes into the mix. Most early-stage founders don’t even realize how these convertible notes will impact their equity and their startup’s treasury shares.
If you’re starting to get worried, you should be. You can grow many things in your startup, but you cannot create more than 100 percent equity in your startup. Always focus on dilution, especially the dilution of your first investors’ equity. Your early investors are the ones who took the greatest risk when they invested in you. You don’t want to reward their support with a poor return on their investment.
Three Free Tools for Managing Your Cap Table
There are plenty of tools that provide advanced equity services. Some of them even offer their services for free until you get to a certain size. Here are three free cap table tools I recommend for founders.
Captable.io is one of my favorite solutions. It’s free at the beginning (a huge plus for early-stage founders) and provides paid services as you grow and need more advanced tools.
- Pro: Free in the beginning.
- Con: Lacks certain features that later-stage founders may want to use.
Capshare is free when you first start using it. What sets this software tool apart is its ability to send investors and the ability to share documents and collect e-signatures even for free users.
- Pro: In the free version you can send and receive signed documents.
- Con: Depending on the number of shareholders on your cap table, Capshare can be more costly than other solutions.
Foundersuite allows you to send investor newsletters via their site. Once you pay for their service you can track the open rates.
- Pro: Not having to track shareholders in different lists makes communicating with them easier.
- Con: Data export only comes in the third-most expensive tier.
Featured image is of a founder trying to keep track of a cap table for a startup. Photo by Startaê Team on Unsplash.