The Cap Table: A Marketing and Strategy Tool

TL;DR: a cap table shows how the ownership of a startup is distributed among the startup’s founders, employees, and investors. It is a tool that shows how the startup has raised capital, and is used as both a marketing and strategic tool by the startup.

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What is a capitalization table (‘cap table’)? 

A capitalization table, most commonly called a 'cap table', shows who owns what portion of a startup. If you imagine a startup as a pie, the cap table shows you how many slices there are, and who owns which slice. The size of the pie can be represented in two ways: 1) the ‘valuation’ of the company, or how much the startup is worth in monetary (dollar) terms, or; 2) the number of shares that the startup is authorized to issue. 

At the inception of a startup, the pie is typically divided between the co-founders, who have free rein to determine the number of shares that the startup can issue. The number that is typically chosen is 10 million, with each share representing ‘1/10 millionth’ of the pie. At this stage, it is not necessary to determine the valuation. Founder egos aside, the valuation is both difficult to determine and, with no external investors, of low value at this stage. 

As the startup grows, the co-founders generally require money to grow at a rate faster than what they could achieve on their own. This additional money is generally, but not always, provided by external investors: friends and family at first, followed by venture capitalists and, if the startup is really successful, by large institutional investors.  

Investors give money to the startup, and in exchange, they get some slice of the pie. The inflow of investor capital generally changes the size of the pie, both in terms of (1) valuation and in terms of (2) the number of authorized shares. 

The cap table keeps track of all these changes. It’s not just a list of names and numbers. At its essence, the cap table is the story of the startup's growth and who provided funding along the way.

In simplest terms, a cap table shows: 

• The latest valuation (if applicable) 

• The total number of authorized shares

• The names of all holders of the company’s equity 

• The number of shares held by each holder

Why is a cap table important? 

All startup financing contains two agreements between the startup and its investors. The first agreement is captured in legal documents. It is that investors will give the startup money and, in return, they will receive a slice of the pie. The second agreement is implied; it is that the startup will continue to grow the pie so that the investor’s slice becomes more valuable over time.

A lot will happen between the time of the first agreement and the realization of the second agreement: the startup will hire employees and give them some portion of the pie, and will take additional money from new investors to grow the pie. 

The cap table is the tool that informs what impact these decisions will have on everyone's share of the pie.

For example, imagine a company with 15 million shares, 5 million of which are owned by Investor A; Investor A owns 33.3% (5/15) of the company. Now imagine that the company expands the shareholding to, say, 20 million, and issues the new 5 million shares to Investor B. Now, Investor A only owns 25% (5/20) of the company. In technical terms, Investor A’s shareholding has been ‘diluted’ by the addition of Investor B. 

In the real world, dilution does not happen so easily: the addition of new investors is negotiated between the startup, its current investors, the new investor(s), and the board of directors. However, the cap table is used during these negotiations to determine the impact that new financing will have on everyone’s shareholding. 

Helping make these decisions is one function of the cap table. The second is that a cap table is a marketing document. To understand why, consider the world of startup investing. There are many startups seeking financing, their business plans are complex, and investors are rarely able to predict which startups will succeed and which will fail. The reality is that most will fail. In this incredibly difficult environment, any indication that a startup will succeed is infinitely valuable. One indicator of success, albeit imperfect, is the names of the investors that are already invested in the startup. Seeing the name of an investor that has had success in ‘picking winners’ is a powerful signal to a new investor. In this sense, having a ‘strong’ cap table - as evidenced by the reputation of the investors on the cap table - is a shortcut to raising more money in the future.