In this article we look at what a cap table is, why they are used and what should be included in one. We are also sharing a free template.
A cap table or capitalisation table shows how the ownership of a company is broken down by investor, giving an indication of who controls the company and how much of the capital each investor is entitled to.
Cap tables are used by companies, often start-ups, to:
- keep a track of the ownership of the company’s shares and the impact that actual capital raising has had, and any planned capital raising is likely to have, on the ownership;
- show the impact that granted options will have on the ownership;
- show the amount each investor is likely to receive on the sale of the company.
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Fully diluted ownership
The cap table should, therefore, include:
- all the shareholdings of the current shareholders;
- the number of shares that will be issued to meet all unexercised options;
- the number of shares that will be issued to meet any convertible loans; and
- planned future share issues.
This means that the ultimate shareholdings in the company after all the options have been exercised and all future planned share issues have been processed will be shown. This is often referred to as the fully diluted ownership.
A cap table will, therefore, show both the current company ownership as a percentage of the issued share capital and the future company ownership as a percentage of the fully diluted ownership after all proposed share transactions have taken place.
Example of fully diluted ownership
A company that has 100 issued ordinary shares owned 50:50 by Joan Smith and Alison Howard grants options to buy ordinary shares in two years’ time to six employees (including the existing shareholders) under an employee share scheme as follows:
Joan Smith option to buy 50 shares
Alison Howard option to buy 50 shares
George Howard option to buy 20 shares
Frederick Smith option to buy 20 shares
Florence Keeble option to buy 20 shares
Douglas Keeble option to buy 20 shares
The current ownership is 50% by Joan and 50% by Alison. However, if all the options are taken up in two years’ time the total number of shares will be 280, split as follows:
Joan Smith 100
Alison Howard 100
George Howard 20
Frederick Smith 20
Florence Keeble 20
Douglas Keeble 20
Therefore, the current and fully diluted ownership of the company will be:
|Current ownership||Fully diluted ownership|
This means that Joan and Alison will, after the options have been exercised, together still have a majority ownership in the company. However, as this less than 75% combined they will not then be able to pass special resolutions without support from at least one of the other shareholders.
Layout of cap tables
The actual layout of a cap table is up to the company. It can be done at a summary level by type of investor (eg founders, SEIS and EIS investors, employees, etc) or it can show each person’s shares. Cap tables should break down the holdings of the investors by the type of share (eg ordinary, preference, etc) held as different types of share may have different voting and/or rights to capital.
As a minimum the cap table should include:
- each shareholder’s name;
- the number of shares held by each shareholder in each share class;
- the number of options each person holds for each share class;
- the amount of the convertible loan each person holds and the number of shares that it converts into;
- planned future share issues or option grants, allocated to each person where the purchasers are known;
- each current shareholder’s current ownership percentage;
- each person’s fully diluted ownership percentage; and
- the value of each person’s fully diluted holding, once all options and conversions have been exercised, based on the current share price.
It is important that the cap table is not overly complicated as it needs to be usable and understandable, although it should contain all the necessary information. Download our free cap table template.
Example cap table
For the company in the above example the ordinary shares are split into 1p shares so that the founders now have 5,000 shares each. This also means that the existing options are amended to be for 1p shares and not £1.00 shares giving a total of 18,000 share options. The company then issues 2,000 ordinary shares to three new investors at £10 per share. The cap table will look like:
|Shareholder name||Ordinary shares||% of shares in issue||Options for ordinary shares||Fully diluted number of shares||% of fully diluted number of shares|
|Charles VC Limited||1,000||8.33%||0||1,000||3.33%|
As can be seen the original shareholders still have together more than 50% of the shares between them after the issue and this will also still be the case once the options have been exercised.
For options and convertible loans it is the maximum number of shares purchasable under the options and the maximum number of shares that the loan can be converted into that should be included. The number of shares may not always be set, so an approximation of the number will be needed. For example, a company has share options that give the holder the right to purchase a certain percentage of the company at the time of exercise. The number of shares will, therefore, vary depending on how many shares there are at that time.
In addition, cap tables sometimes include a timeline for each completed as well as planned issue of shares showing how the ownership has changed and will change over time.
It is important that the cap table is updated when any changes to a company’s shares or options are made – for example when:
- new shares are issued;
- shares are transferred between shareholders;
- a capital reorganisation is carried out (eg share split, share redemption, share buyback, etc);
- share options are exercised, lapsed or lost;
- new share options are granted;
- convertible loan notes are issued;
- convertible loan notes are repaid;
- convertible loan notes are converted.
Venture capitalists and similar investors
When a venture capitalist invests in a company, they may want a separate share class, often with preferential rights as to the return of capital and share of the company’s assets on a winding up. These preference shares will often have the same voting rights as ordinary shares, but they do not need to. Any differences in voting rights or rights to capital need to be included in the cap table. Care is needed to ensure that any ‘abnormal’ voting rights are correctly reflected in the cap table as well as any preferential rights to capital on a sale or winding up.
Market value/projected value – waterfall analysis
Cap tables can include a projected financial return based on the current market value or a projected value. This is referred to as a waterfall analysis. To do this the cap table will need to also include the amount paid and payable by each investor. It will also need to include details of any preferences to dividends or return of capital on a sale or winding up applicable to preference shares as well as the redemption conditions and prices for redeemable shares.
Such a table will also need to include any future capital funding that the company feels is necessary before it can be sold.
This then means that the cap table will provide an estimate of the amount payable to each investor when the company is sold or carries out an initial public offering (IPO).
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