Fundrasing
Cap Table - best practice (and how to avoid irritating your investors)
A cap table is an overview of a company’s total equity structure and can be organized in various ways. Often, it’s a spreadsheet containing key data related to the current ownership in the company and the future ownership based on forthcoming funding rounds. It is one of the primary points of communication for investors, the company, and the founders—so how it is structured and maintained will have significant implications for investor relations, especially during fundraising processes. Here is a list of best practices that will help impress, rather than irritate, your investors and other stakeholders.
Cap table vs share register
One common misunderstanding is that the cap table is the same as the share register. This is incorrect. The cap table is not the same as the share ledger and serves a different purpose. The share ledger is a legal document that reflects the current shareholdings in the company. The cap table, as described above, is an overview of the total equity structure and can be customized to show key data related to the current ownership and future ownership based on upcoming funding rounds.
Best practice
What should you consider to impress rather than annoy investors?
The cap table is an optional document, and as such, it can be designed according to your preferences. There are many ways to format and manage a cap table. However, several methods and inputs are particularly appreciated by shareholders, investors, and potential investors—just as many aspects are disliked if handled poorly. Below is a guide based on 16 years of observing how investors respond to various types of cap tables from companies and founders. Some points may seem obvious, but others might be thought-provoking and inspire improvements in your cap table management going forward.
1. Have a Sufficient Number of Shares with a Low Price per Share
To give yourself flexibility in managing the cap table and the complexity that comes with it as the company grows and undergoes more funding rounds, ensure that you have an adequate number of shares issued. With too few shares, you may have limited flexibility, especially if the price per share becomes very high as a result.
Having many shares with a low nominal value and a relatively low price per share will make it easier to manage changes in ownership, issue new shares that represent the right ownership stake, and maintain the appropriate total value.
2. Don’t Just Copy the Share Register
Think differently from the formal legal document that is the share register. Remove irrelevant information, such as all the names of employees with ESOPs or the shareholders’ addresses, as these details will only clutter the cap table, making it harder to focus on the relevant high-level ownership issues and financial structure.
3. Create an Overview That Is Super Clear
If there have been several funding rounds or transactions, show them clearly. Strive for a transparent cap table that leaves no room for unpleasant surprises later on.
When more data needs to be included, layer the information by having a manageable front or "main" cap table. More detailed information can be stored under different tabs or workbooks in your Excel spreadsheet (or in the online tool of your choice).
4. Always Clearly Show All Types of Securities Issued by the Company
The cap table is not just for shares. Include all types of securities, along with any contractual promises for future shares. Failing to do so may cause investors to miscalculate the non-diluted basis (see point 7 below), which could have financial consequences and lead to conflicts.
5. If You Have Preference Shares
Include clear information about how different preference shares relate to each other and their position in the overall structure (e.g., are they participating, do they give 1x, 2x, etc., are they treated pari passu, can they be converted to common shares, etc.). This is crucial information that is often missing, leading to situations where each query requires a lawyer to review the shareholders' agreement (SHA) and the articles of association to verify details. This causes frustration and potential misunderstandings that could be easily avoided.
6. Clearly Identify Any Forward-Looking Parts of the Cap Table
Forward-looking parts of the cap table are referred to as pro forma. Make it clear when a part of the cap table shows a future funding round that is under negotiation. Clearly distinguish between the factual and future potential scenarios to avoid misunderstandings and ensure that decisions are based on accurate information.
7. Show Both a Non-Diluted and Fully Diluted Basis
The non-diluted (current) cap table will show the equity as it stands today, including voting rights and current majorities, which may be critical for assessing support for certain shareholder resolutions.
The fully diluted picture is also essential, as it provides a clearer view of what a share or unit in the company is actually worth. For example, if there is substantial dilution from penny warrants in the future, this needs to be considered when pricing current offers to buy shares. Investors may overpay if they are not aware of these factors, leading to frustration.
8. If You Have Reserved Matters/Demands for a Qualified Majority
Many investors appreciate having a column that shows which investors hold control and which ownership groups have reserved matter rights. Indicating how the majority and reserved matter rights may shift in future funding rounds will be helpful and potentially impressive to investors.
9. If You Have Reserved Matters/Demands for a Qualified Majority
One thing that can annoy investors is receiving a cap table that is not up-to-date. This is particularly common with ESOPs, where employees come and go. Establish a routine to ensure accuracy and avoid the need for backtracking and correcting errors later.
10. Share the Cap Table in Excel
Good investors, especially when future funding rounds are included, often prefer to test the data and various scenarios. Sharing in Excel, rather than a non-editable PDF, enables them to modify variables (e.g., valuation, price per share, total amount, etc.) and automatically see the impact on the overall ownership structure. A cap table designed in this manner will often impress potential investors.
11. Keep It on a Need-to-Know Basis
The cap table can contain sensitive information, such as future investment plans, valuations, investor identities, and exit strategies. Sharing it too widely without considering confidentiality can upset investors, particularly if you are negotiating a future funding round. If you have signed a term sheet with a non-disclosure clause, do not over-share.
Keep it on a need-to-know basis. If necessary, anonymize information (e.g., use Investor A, Investor B, and Investor C instead of real names). This will also help ensure compliance with data protection regulations like GDPR.
This is not legal advice - only educational content. If you need legal assistance please feel free to reach out.
Stockholm, 2024-10-09
Author: Kat Strandberg Email: kat@stgcommerciallaw.com
Cap table vs share register
One common misunderstanding is that the cap table is the same as the share register. This is incorrect. The cap table is not the same as the share ledger and serves a different purpose. The share ledger is a legal document that reflects the current shareholdings in the company. The cap table, as described above, is an overview of the total equity structure and can be customized to show key data related to the current ownership and future ownership based on upcoming funding rounds.
Best practice
What should you consider to impress rather than annoy investors?
The cap table is an optional document, and as such, it can be designed according to your preferences. There are many ways to format and manage a cap table. However, several methods and inputs are particularly appreciated by shareholders, investors, and potential investors—just as many aspects are disliked if handled poorly. Below is a guide based on 16 years of observing how investors respond to various types of cap tables from companies and founders. Some points may seem obvious, but others might be thought-provoking and inspire improvements in your cap table management going forward.
1. Have a Sufficient Number of Shares with a Low Price per Share
To give yourself flexibility in managing the cap table and the complexity that comes with it as the company grows and undergoes more funding rounds, ensure that you have an adequate number of shares issued. With too few shares, you may have limited flexibility, especially if the price per share becomes very high as a result.
Having many shares with a low nominal value and a relatively low price per share will make it easier to manage changes in ownership, issue new shares that represent the right ownership stake, and maintain the appropriate total value.
2. Don’t Just Copy the Share Register
Think differently from the formal legal document that is the share register. Remove irrelevant information, such as all the names of employees with ESOPs or the shareholders’ addresses, as these details will only clutter the cap table, making it harder to focus on the relevant high-level ownership issues and financial structure.
3. Create an Overview That Is Super Clear
If there have been several funding rounds or transactions, show them clearly. Strive for a transparent cap table that leaves no room for unpleasant surprises later on.
When more data needs to be included, layer the information by having a manageable front or "main" cap table. More detailed information can be stored under different tabs or workbooks in your Excel spreadsheet (or in the online tool of your choice).
4. Always Clearly Show All Types of Securities Issued by the Company
The cap table is not just for shares. Include all types of securities, along with any contractual promises for future shares. Failing to do so may cause investors to miscalculate the non-diluted basis (see point 7 below), which could have financial consequences and lead to conflicts.
5. If You Have Preference Shares
Include clear information about how different preference shares relate to each other and their position in the overall structure (e.g., are they participating, do they give 1x, 2x, etc., are they treated pari passu, can they be converted to common shares, etc.). This is crucial information that is often missing, leading to situations where each query requires a lawyer to review the shareholders' agreement (SHA) and the articles of association to verify details. This causes frustration and potential misunderstandings that could be easily avoided.
6. Clearly Identify Any Forward-Looking Parts of the Cap Table
Forward-looking parts of the cap table are referred to as pro forma. Make it clear when a part of the cap table shows a future funding round that is under negotiation. Clearly distinguish between the factual and future potential scenarios to avoid misunderstandings and ensure that decisions are based on accurate information.
7. Show Both a Non-Diluted and Fully Diluted Basis
The non-diluted (current) cap table will show the equity as it stands today, including voting rights and current majorities, which may be critical for assessing support for certain shareholder resolutions.
The fully diluted picture is also essential, as it provides a clearer view of what a share or unit in the company is actually worth. For example, if there is substantial dilution from penny warrants in the future, this needs to be considered when pricing current offers to buy shares. Investors may overpay if they are not aware of these factors, leading to frustration.
8. If You Have Reserved Matters/Demands for a Qualified Majority
Many investors appreciate having a column that shows which investors hold control and which ownership groups have reserved matter rights. Indicating how the majority and reserved matter rights may shift in future funding rounds will be helpful and potentially impressive to investors.
9. If You Have Reserved Matters/Demands for a Qualified Majority
One thing that can annoy investors is receiving a cap table that is not up-to-date. This is particularly common with ESOPs, where employees come and go. Establish a routine to ensure accuracy and avoid the need for backtracking and correcting errors later.
10. Share the Cap Table in Excel
Good investors, especially when future funding rounds are included, often prefer to test the data and various scenarios. Sharing in Excel, rather than a non-editable PDF, enables them to modify variables (e.g., valuation, price per share, total amount, etc.) and automatically see the impact on the overall ownership structure. A cap table designed in this manner will often impress potential investors.
11. Keep It on a Need-to-Know Basis
The cap table can contain sensitive information, such as future investment plans, valuations, investor identities, and exit strategies. Sharing it too widely without considering confidentiality can upset investors, particularly if you are negotiating a future funding round. If you have signed a term sheet with a non-disclosure clause, do not over-share.
Keep it on a need-to-know basis. If necessary, anonymize information (e.g., use Investor A, Investor B, and Investor C instead of real names). This will also help ensure compliance with data protection regulations like GDPR.
This is not legal advice - only educational content. If you need legal assistance please feel free to reach out.
Stockholm, 2024-10-09
Author: Kat Strandberg Email: kat@stgcommerciallaw.com