The Cap Table

For most entrepreneurs putting together a cap table is equivalent to having four teeth extracted at the same time without anaesthetic. “It’s FRIGHTENING and it has FORMULAS that require SYMBOLS and do we REALLY need to have one?”.

Yes. Yes you do. In fact certainly in the UK I can’t believe how many startups start raising AND actually secure funding without having one. It’s absolutely crazy!

What we need to do is reprogram founders’ minds to luuurrrrvvveee the cap table *cue romantic music*, to WANT to UNDERSTAND the figures and be COMFORTABLE in playing around with different scenarios.

The cap table is the only record, yes the ONLY record that sets out ‘who owns what’ in a business. Now you might say, “well Companies House has that record too”, except you heard it here first, it doesn’t. Companies House only holds a record of who PHYSICALLY owns shares in the capital of the company at any given time (or maybe a debenture or two if you’ve taken a loan). It does not show option holders, convertible notes or option pools; this information is only available in the CAP TABLE.

Startups also need a cap table so they can play around with different offers…..”if VC Awesome gives me a term sheet for £x on y valuation, what does this do to the current shareholders and more importantly what does this do to the FOUNDER’s shares?”. How can you work this out WITHOUT a cap table?

Further down the line, a cap table can help founders when it comes to understand voting rights. “How many people equal 75% of the investor shares to carry the vote?” or put differently “who do we need to go to, to get a yes”. Just open the document and hey presto, the information is right there, who knew.

“Ok, I hear ya; just tell me where I get one from?” you ask and therein lies the rub*.

For some reason there isn’t a standard UK off the shelf version (I want 10% if you now go away and build one — I’m fair as well as fabulous). I have come across a number of templates in the US (Capshare and Sharewave) which are ledger based platforms but to be honest I’m a firm believer that you need to build it yourself to understand the mechanics of it. At the end of the day YOU are going to have to stand in a boardroom and ANSWER questions on this at some point. And a sure fire way of NOT securing investment is to say “Ah, I don’t know, I just created this from a free download”. Duh…..

(*answer to the question if you are really stuck: your lawyer, your mentor, fellow startups, Google Sheets, no need to thank me. And in relation to the latter, no, they do not sponsor me but I’m open to negotiations.

The cap table really is your best friend and an ESSENTIAL tool when raising investment. It’s a one-stop shop to understanding your setup and if that is not enough (boy you’re a tough crowd) you will feel like a ROCKSTAR once you’ve done this. Trust me.

Some closing tips based on experience:

  • Never, ever, call your cap table by a generic name particularly if you are using Excel. ‘Cap Table Final’, ‘Cap Table Final Final’, ‘Cap Table Final Final(1)’, ‘Cap Table 2016’ are great example of totally useless generic names. Nobody will have a freekin clue which is the most up to date version. This is an epic FAIL on your part plus your lawyer will HATE you for it.
  • Try not to get too carried away and start making changes all over the place without a) informing your soon-to-be investors b) remembering what you did so you can unravel it c) using formulas. You are a long way off being an expert so take it SLOW.
  • You can’t just take allotted shares off people because you don’t like them. Shares are property, real things, they are ALIVE. They don’t simply DISAPPEAR because you change the number in cell C2!
  • Avoid using Excel if you can help it. It’s a recognised form of sadomasochism (and not in a good way) and ‘rounds-up’ all of the numbers so it’s hardly EVER right. I can recall a very painful evening-into-early-morning in Boston last year with a client of mine working on an Excel cap table through a Skype share screen trying to structure a UK to US shareflip. No minibar in the world could get me through that one. Try Google Sheets it’s easier to manage version control and share with others BUT remember to set editing privileges.

And finally, REMEMBER this is YOUR responsibility Mr/s CEO. Yes, by all means gets someone who knows this shit to help you start off but this is YOUR job so turn the lights down, warm up the room, open that spreadsheet and in the words of that infamous songwriter Charlie Puth, “Let’s Marvin Gaye and Get It On”, or something like that……..maybe I overdid that last bit!