A capitalisation table (cap table) is a critical document for any startup or company that tracks the ownership structure, including equity ownership, convertible securities, and other investment forms. Properly setting up and maintaining a cap table can help ensure transparency, prevent future disputes, and make fundraising or acquisitions smoother. Below is a guide on effectively establishing a cap table, along with essential do’s and don’ts.
The Do’s of Setting Up a Cap Table
1. Clearly Define Ownership Percentages
Ensure each founder/shareholder’s ownership is accurately documented and up-to-date.
2. Include All Forms of Equity and Securities
As you fundraise from multiple investors/financiers, ensure your cap table comprehensively tracks:
- Common and preferred shares
- Stock options and warrants
- Convertible notes and SAFEs
- Employee stock grants and vesting schedules
3. Update the Cap Table Regularly
Each time a new investor joins, stock options are granted, or equity is transferred, update the cap table immediately. This prevents discrepancies that could lead to confusion in future funding rounds.
4. Ensure Proper Legal Documentation
Every SAFE or equity issuance should be backed by the correct legal agreements, such as SAFE agreements, shareholder agreements, option grants with vesting schedules and side letters. Work with legal counsel to confirm compliance with securities regulations.
5. Model Different Scenarios
Use the cap table to model different fundraising rounds, employee option pool expansions, and exit scenarios. This helps stakeholders understand potential dilution and future ownership changes.
The Don’ts of Setting Up a Cap Table
1. Don’t Overcomplicate the Structure Early On
Avoid issuing multiple share classes with complex conversion rights unless necessary. A simple, clean structure makes fundraising and exits more manageable.
2. Don’t Issue Equity Without Proper Agreements
Never grant shares, options, or convertible instruments without documenting the terms and getting legal approval. Undefined or informal agreements can lead to ownership disputes.
3. Don’t Ignore Fully Diluted Ownership and the impact of Convertible Instruments
Founders often mistakenly calculate ownership based on issued shares, ignoring outstanding options and convertibles. If you issue convertible notes, SAFEs, or warrants, ensure you understand how they will convert into equity before raising more funds. Always consider fully diluted shares to get an accurate picture of ownership and avoid unintended dilution.
4. Don’t Delay Updates or Ignore Changes
A poorly maintained cap table can lead to confusion and mistrust among investors and stakeholders. Set a routine for updating and auditing the cap table at least quarterly.
5. Don’t Promise Equity Without Board Approval
For companies with a formal board of directors, all equity issuances should go through board approval to prevent unauthorized commitments that could cause legal or financial problems.
Conclusion
A well-organized and transparent cap table is essential for effective company management, investor relations, and future fundraising efforts. By following the do’s and avoiding the don’ts outlined above, companies can build a strong financial foundation and avoid costly mistakes. Whether you’re a startup founder or a corporate finance analyst, staying disciplined in cap table management will help you navigate growth with confidence.Need help setting up or managing your cap table? Consider working with legal and financial professionals to ensure compliance and accuracy. If you’re looking for expert guidance, Safira Tech provides end-to-end legal and financial solutions tailored to your needs, ensuring your cap table remains accurate, compliant, and investor-ready.