How to build your cap table

Cap Table - Part 6

In previous posts, we explained the share and security types that startups can have. Now we will show you how to build and understand your capitalisation table (cap table).

The most important part of your share structure when you are starting a company is to keep it simple! When you get investors, they will ask for preference shares, warrants, and convertible notes. Until you need stock incentives to hire senior executives and other new employees, you will not need a share option scheme. If you set up a complicated cap structure, potential investors will be wary. Also, the more complex the share structure, the bigger the administrative burden.

The cap table helps founders keep track of the equity ownership in the startup and understand the changes in the company’s ownership as they add investors and other shareowners. This is what the ownership section of a cap table might look like for an early-stage startup:

At the beginning… It is just the Founder(s)

Have a cap table from Day 1 and update it each time you have any financing event or establish new employee equity/option compensation. It is critical to have your lawyer or finance director make the corresponding filings at Companies House so that the Companies House record matches your cap table.

When you start adding employees, you will need to add a share option scheme. As mentioned previously, the average size of share option pools in the UK is 10%-15% of total equity. When you set up your cap table, you list the granted options by employees and ungranted options.

Adding Employees and Share Options scheme with vesting

Founders must have a deep understanding of their capital structure. As the company grows, founders should use their cap table to plan future financing rounds and options issuances. Prior to raising a round of equity financing, or issuing convertible notes, options, or warrants, founders should model the impact of a potential funding round on their capital structure to understand how each stakeholder’s ownership percentage will shift after completing the fundraise, including the impact of dilution and potential returns on various exit values.

Understanding and determining your startup’s valuation is important when you seek outside funding from angel investors and beyond, and in order to build a more complex cap table. Activate Ventures’ Foundation Programme helps founders determine their valuation.