Understanding Capitalisation in a Startup
Updated: Aug 29
Have you ever wondered who actually owns a business?
Capitalisation table can be considered as an easy and systematic way to understand — who owns what amount of a business!
The "cap table" is essentially an important reference point for an investor, as it provides them with an information into the ownership structure of the business.
Understanding the various use cases.
A capitalisation table is a basically a chart used by startups to describe the ownership stakes in their business. It tracks the equity ownership of all the company’s shareholders and the value assigned to their equity.
Cap tables are comprehensive and include ownership stakes, types of shares and option pools. The different stakeholders that could be listed on the cap table include founders, employees, investors or other individuals who own a share in the company. The types of shares that different stake holders own like preferred share, common stock, options, warrants, convertible notes, etc., help in understanding the voting rights within the company. The cap table has the name of the shareholder, number of shares held, date of issue, series of funding and as the columns move from left to right additional dilution items are applied to understand an investors true ownership percentage.
As company grows, the cap table can become long and complicated.
Pre Money-Valuation – This is the value of the company before any money is actually invested into the company and is most often calculated through negotiations or previous valuations of similar companies.
Post Money Valuation – This is the effective valuation of a company after an investment is made. The investment amount is often added to the pre money valuation to arrive at a post money valuation.
Price Per Share – It is the price that an investor will pay for every share they wish to buy. It is calculated by dividing the post money valuation by the number of shares issued.
Common Stock – It is the most basic form of ownership in a company. Common stockholders have residual claim in the company and are only paid a part of the profit after payments to preferred shareholders. They are provided with voting rights.
Preferred Stock – They are issued along with certain special rights. Any payments are first made to preferred stockholders, but after debt payments. Preferred stock can be further classified into types –
Convertible Preferred stock – These shares can be converted to common stock under a specific circumstance and thus provide the benefits of both common and preferred stock.
Participating Preferred Stock – This type of stock might give the holder an additional premium from the profits generated by the company and can also be redeemed at a higher multiple than the original cost.
Non–participating Preferred stock – This type of stock does not share any rights to additional profits and do not receive a premium on sale.
Stock Options – A stock option is a contractual right to purchase a specified number of shares for a specified price at a specified future date or dates.
Warrants – Warrants are similar to stock options in that they offer the right to purchase a specified number of shares for a specified price at a specified future date or dates. They are generally issued in business transactions whereas options are offered to employees.
Convertible Notes – These are issued as debt contracts and offer the holder an opportunity to convert to equity at a discount in the next round of funding. Read more on convertible notes, here.
Authorised Shares – Authorised shares are the shares authorised by the company to be issued today or in the future.
Outstanding Shares – These are the number of shares that have actually been issued and does not include options as they are issued only if the option is exercised.
Fully Diluted Shares – This represents the ownership structure, if all convertible notes and options have been exercised. As new rounds of funds are raised, previously invested capital is diluted to make way for new investors.
The cap table shows how decisions and other factors affect the ownership structure of the company. It helps to asses if the company needs another round of funding. You need to know exactly how much you will be giving up and how options and investments will impact the company, this is all possible with the help of a cap table. It’s very important for new investors to be able to understand the ownership structure of a company. A cap table is exactly what an investor has in mind when referring to ownership. It’s very important for a startup to look after the welfare of their employees and the company can do this by offering Employee Stock Options. The cap table can help you match the employees contribution with the appropriate amount of stock. The cap table shows how many options are available and how many have been exercised. The cap table shows exactly how many options are authorised or available to be issued at any given moment. A cap table also helps in running a scenario or "what if" analysis for new financing rounds. It helps you identify the situations that will benefit you as a founder from the ones that will not be in your best interests.
Having a cap table is not a legal requirement but as you can see it provides many benefits and is also a good way of representing the ownership structure of the startup.
It is a guiding path for fundraising, too!