Welcome to the world of cap tables. If you're an entrepreneur, you've probably heard this term thrown around in startup circles. But what exactly is a cap table? Simply put, a cap table, or capitalization table, is a spreadsheet or table that shows the equity ownership of a company. It lists all the company's securities, such as stocks, options, and warrants, and who owns them. For an Indian startup, a cap table is a crucial document that can influence your fundraising, employee compensation, and even your company's future. So, let's dive in and learn how to create a cap table for your Indian startup.
Before we start creating a cap table, let's understand its basic elements. A cap table typically includes details about shareholders, types of equity, and share prices. Let's break these down.
Shareholders are the owners of your company. They could be anyone from the founders, employees, to investors. Each shareholder owns a part of your company, expressed as shares. But why is this important? Because the number of shares a person owns determines their voting power and their share of the company's profits.
For example, if you and your co-founder start a company and you both own 50% of the shares, you both have an equal say in the company's decisions. But what happens when you bring in investors? The number of shares you own will decrease, and so will your voting power. That's why it's crucial to keep track of who owns what in your cap table.
Not all shares are created equal. In a startup, you'll typically come across three types of equity: common shares, preferred shares, and options. Common shares are usually owned by the founders and employees. Preferred shares are generally owned by investors and come with special rights, like getting paid first in case of a liquidation event. Options are a promise to sell shares in the future at a set price and are usually given to employees as part of their compensation package.
Why is this important? Because each type of equity has different rights and privileges. For example, preferred shareholders usually have a say in major company decisions, while common shareholders may not. So, when you're creating your cap table, make sure to clearly distinguish between the different types of equity.
Every share in your company has a price. This price is determined by the value of your company and the number of shares you've issued. For example, if your company is valued at ₹10 crore and you've issued 1 crore shares, each share is worth ₹10. But remember, the share price can change as your company grows and raises more funding.
Why does the share price matter? Because it determines how much money you'll raise in a funding round. If your share price is high, you'll raise more money, but you'll also give away a larger part of your company. So, it's important to strike a balance between a fair share price and retaining control of your company.
Like any specialized field, cap tables have their own jargon. Terms like "dilution", "vesting", and "pre-money valuation" are thrown around often. Let's decode these terms.
Dilution happens when you issue more shares in your company. This reduces the percentage of the company that each existing share represents, effectively "diluting" each shareholder's stake. Vesting is a process where an employee or founder earns their equity over time. This is usually done to incentivize people to stay with the company. Pre-money valuation is the value of your company before you raise a funding round.
Why do these terms matter? Because they directly impact your cap table. For example, if you don't understand dilution, you might end up giving away more of your company than you intended. So, make sure to familiarize yourself with these terms before you start creating your cap table.
Now that we understand the basics, let's start creating our cap table. We'll begin with the founders' equity and then factor in the initial investors.
As a founder, you start with 100% ownership of your company. But how do you divide this equity among the co-founders? There's no one-size-fits-all answer to this question. It depends on factors like who came up with the idea, who's putting in more work, and who's bringing in more resources. Once you've decided on the equity split, you can start creating your cap table.
Let's say you and your co-founder decide to split the equity 50-50. Your cap table would look something like this:
Shareholder Type of Equity Number of Shares Percentage Ownership You Common Shares 500,000 50% Co-founder Common Shares 500,000 50%
Once you've allocated equity to the founders, it's time to factor in the initial investors. These could be angel investors or friends and family who believe in your vision and are willing to put their money on the line.
Let's say an angel investor decides to invest ₹50 lakh in your company. You and the investor agree that your company is worth ₹1 crore before the investment (this is your pre-money valuation). So, the investor will own 50% of your company after the investment (this is called post-money ownership).
How does this affect your cap table? Let's take a look:
Shareholder Type of Equity Number of Shares Percentage Ownership You Common Shares 500,000 25% Co-founder Common Shares 500,000 25% Angel Investor Preferred Shares 1,000,000 50%
As you can see, the founders' ownership has been diluted to 25% each, and the investor now owns 50% of the company. This is a simplified example, but it gives you an idea of how a cap table works.
As your startup grows, you'll likely raise more funding rounds. Each funding round will change your cap table as you issue more shares and bring in more investors. It's important to understand the impact of these rounds on your cap table and plan accordingly.
For example, let's say you raise a Series A round of ₹2 crore at a pre-money valuation of ₹4 crore. This means the investors will own 33.33% of your company after the investment. Your cap table will look something like this:
Shareholder Type of Equity Number of Shares Percentage Ownership You Common Shares 500,000 16.67% Co-founder Common Shares 500,000 16.67% Angel Investor Preferred Shares 1,000,000 33.33% Series A Investors Preferred Shares 2,000,000 33.33%
As you can see, each funding round dilutes the existing shareholders' ownership. But remember, even though your percentage ownership decreases, the value of your shares could increase as your company grows.
As a startup, you might not have a lot of cash to pay your employees. That's where employee stock options come in. Stock options give your employees the right to buy shares in your company at a set price in the future. This not only helps you attract and retain talent but also aligns your employees' interests with the company's success.
When you issue stock options, you create an option pool. This pool is usually a percentage of your total shares. For example, you might decide to set aside 10% of your shares for the option pool. This will dilute your existing shareholders, but it's a common practice in startups.
Let's say you decide to issue 200,000 options to your employees. Your cap table would look something like this:
Shareholder Type of Equity Number of Shares Percentage Ownership You Common Shares 500,000 15.63% Co-founder Common Shares 500,000 15.63% Angel Investor Preferred Shares 1,000,000 31.25% Series A Investors Preferred Shares 2,000,000 31.25% Option Pool Options 200,000 6.25%
Remember, options are not shares. They only become shares when the employees exercise their options, i.e., buy the shares at the set price. Until then, they're just a promise to issue shares in the future.
Your cap table is a living document. It will change as your company grows, raises more funding, and issues more shares. It's important to anticipate these changes and plan for them.
For example, let's say you're planning to raise a Series B round of ₹5 crore. How will this affect your cap table? You'll need to issue more shares, which will dilute your existing shareholders. But by how much? And how much ownership will the new investors get? These are the questions you need to answer before you start the funding round.
Similarly, what happens if an employee leaves the company? What happens to their options? Or what if a shareholder wants to sell their shares? All these scenarios will affect your cap table, and you need to have a plan to handle them.
Managing a cap table manually can be a headache. It's a complex document with lots of moving parts. Fortunately, there are software options that can make your life easier. Tools like Capshare, Carta, and Capdesk can help you create, manage, and update your cap table with ease.
These tools not only automate the tedious tasks but also help you visualize your cap table and simulate future scenarios. For example, you can see how a funding round or a new option grant will affect your cap table. This can help you make better decisions and avoid costly mistakes.
India has its own rules and regulations around equity and shareholding. For example, as per the Companies Act, 2013, a private limited company in India can issue equity shares, preference shares, and share warrants to its shareholders. It's important to ensure your cap table is compliant with these laws.
Moreover, if you're issuing stock options to your employees, you need to comply with the SEBI (Share Based Employee Benefits) Regulations, 2014. These regulations lay down the rules for employee stock option plans (ESOPs) and other share-based employee benefits.
Non-compliance can lead to penalties and legal troubles. So, it's a good idea to consult with a lawyer or a legal advisor when you're creating your cap table.
Your cap table needs to be up-to-date and accurate. Any changes in your shareholding, like a new funding round, a share transfer, or an option exercise, should be reflected in your cap table immediately. This is not just good practice, but also crucial for the health of your startup.
An outdated or inaccurate cap table can lead to disputes and misunderstandings among shareholders. It can also create problems during due diligence in a funding round or an acquisition. So, make it a habit to update your cap table regularly and keep it accurate.
Creating a cap table might seem daunting, but it's an essential part of your startup journey. It's a document that tells the story of your company's ownership and growth. So, take the time to understand it, create it, and manage it well. Your future self will thank you.
Explore our startup expert-led programs or join our free community of 5,000+ Indian founders - scale with 18startup!
Get started 🚀 Antah Prerna Education Private Limited,
Office Address: 55, Raju Naidu Road, Tatabad, Coimbatore – 641012
.jpg)
