A founder's guide to reading a cap table

As a founder, cap tables can be both your friend and foe. While they are essential for decision-making, planning, and negotiating with investors, their intricacies often overwhelm many. This is unfortunate because a deep understanding of the ins and outs of your startup can be gained by reading and interpreting cap tables effectively.

So, to help founders make sense of their cap tables, we’ll cover: 

• The benefits of cap table literacy
• Common elements of a cap table
• A couple of cap table reading examples

Why cap table literacy matters

Not having thorough knowledge on how to read cap tables is a major liability. Regardless of the stage or size of your startup, founders must possess the ability to properly comprehend and interpret your cap tables as they:

1. Help you better understand your equity ownership structure

Monitoring equity distribution closely is key to making informed decisions and proactively identifying potential conflicts. As startups grow, so too does their organizational complexity, making this trickier. 

Cap tables, when done right, document all relevant changes and can provide a clear picture of your startup’s ownership structure at any point in time, regardless of how your startup evolves. And to take full advantage of cap tables, founders need to be cap table literate in the first place.

2. Support clear internal and external communication

Cap table literacy helps founders enhance their interactions with stakeholders. For one, when dealing with investors, you can communicate your startup's ownership structure and equity distribution confidently and align with investors strategically. This then demonstrates competence and builds trust—crucial for securing funding and partnerships.

Even internally, when managing employees and shareholders, not only can cap table literacy showcase a founder's competence, but it can help them ensure that any equity compensation package is fair and well-planned. 

Anatomy of a cap table

No two cap tables are the same. What they contain and how they’re organized depends on a startup’s unique circumstances. However, some of the most common elements seen across most cap tables include:

1. Shareholder information: Contains your shareholders’ essential information e.g., their names, shares they own, ownership percentages, contact information, and date of acquisition.

2. Shares outstanding: The total of the startup's authorized shares that shareholders hold (e.g., restricted shares held by the startup's officers).

3. Authorized shares: The maximum number of shares the startup has determined to issue to shareholders; usually specified by its charter. 

4. Issued shares: Shares that are either being held or have been sold to employees (e.g., as equity compensation) or investors (e.g., in return for capital).

5. Fully diluted shares: The theoretical number of common shares a startup possesses after factoring in all sources of conversion (e.g., convertible bonds).

6. Common shares: These are securities that form the basic unit of ownership for startups. These often come with voting rights and entitle shareholders to profits via dividends.

7. Preferred shares: Though similar to common shares, preferred shares are more attractive as they’re prioritized over common shares in the event of a liquidation and come with special rights.

8. Convertible instruments: Securities (e.g., preferred shares) that can potentially be converted into common stock; contingent on meeting specified conditions. 

9. Convertible debt: A type of loan that, contingent on fulfilling specified conditions, can be converted into common shares. This allows startups to pay off debt with shares instead of cash.

10. Convertible notes: Like convertible debt, convertible notes can convert into common shares upon meeting certain requirements. However, these are seen as investments rather than debt.

11. Capital contribution: The total amount of cash shareholders have invested in exchange for common shares.

12. Option pools: A portion of shares that have been reserved for issuance to internal stakeholders (i.e., founders, directors, employees).

13. Stock options: Stock options give employees the right to purchase a specified number of shares at a fixed price and are used to retain and attract talent. 

14. Warrants: Utilized as a way to raise capital, warrants are securities that give holders the right to buy a specified number of shares at a predetermined price. 

15. Restricted shares: Often given to employees, these shares come with restrictions on how they can be sold/transferred.

16. Liquidation preference: These specify the priority of how shareholders will be paid if a liquidation event, such as the sale of the startup, occurs. 

17. Anti-dilution protections: Provisions that confer protections for shareholders in the event of dilution, often taking the form of either full-ratchet or weighted average anti-dilution protections.

Reading cap tables

Having gone through the anatomy of a cap table, let's now take a close look at a couple of examples:

Example #1

Above is a straightforward cap table of an early-stage startup. Working from the leftmost column, the startup is comprised of three founders who own a majority of the startup with a total of 8,550,000 common shares, representing 90.36% of total ownership.

We can also note that two investors have been onboarded—a lead, and an early investor who owns 8.88% of the startup. Having attracted external investors can signal to potential investors that the startup has enough promise to generate external interest.

An option pool has also been created from 75,000 shares (0.78% of the startup) that have been exercised, as indicated by the price per share ($0.05). This could demonstrate the founder’s commitment to motivating existing employees and attracting talent. 

Example #2

Unlike the first example, the second illustrates a high-level overview of a startup’s cap table instead of focusing solely on shareholders. 

Generated using LTSE Equity’s software, it starts by listing the startup’s common stock: authorized, issued and outstanding, and fully diluted shares. They form 65.21% of total ownership with $731,052 in capital contributions (i.e., cash invested into the startup). 

The following section depicts how preferred stocks have been distributed during their Series A rounds, totaling $2,013,503 in capital contributions. We can also see that the startup has a stock and warrant plan in place, both totaling the rest of the remaining ownership. Right below, we see the startup’s convertible securities total $805,000 in capital contributions. These can be inferred to be unconverted due to the lack of an ownership percentage.

Create your cap tables with LTSE Equity

Now that you’re familiar with the basics of reading a cap table, keep in mind that your journey does not end here. Developing expertise in cap table literacy takes time, continuous effort, and practical experience. 

As you move forward on your journey, why not also learn about how cap tables can help your startup realize its ultimate goals and objectives?