What You Need to Know about Capitalization Tables

A cap table should include a summary of current ownership by type of security and class, as well as details listing individual holders, type of security, date of grant, exercise price (if applicable) and vesting period (if applicable). A venture capital (VC) -backed company will typically issue the following type of securities:

Common Stock: This is a company’s basic form of capital stock and is typically entitled to statutory voting and economic rights on a pro rata basis; subject to rights of holders of senior securities, such as preferred stock. Founders, employees and angel investors generally hold common stock. 

Preferred Stock: This is a form of capital stock which is entitled to certain preferential contractual rights over common stock — which may include the payment of dividends, liquidation preference and certain voting rights — all set out in the company’s charter. VC investors are almost always granted preferred stock. 

Options: These are contractual rights to buy common stock at a specific exercise price during a specified time period. Employees are generally granted options with incremental vesting over a four-year period to create an incentive for continued service. 

Warrants: These are contractual rights a company issues that grant the holder the right to purchase preferred or common stock within a certain timeframe and at a specific price. Investors are generally granted warrants as a lower-priced investment which may be exercised over a long period (e.g. 10 years). Often, warrants are issued in connection with the issuance of other types of securities, such as preferred stock or convertible debt, to sweeten the deal for investors who otherwise might not be willing to invest.

Convertible Debt: This is a loan to the company that converts into preferred or common stock at a specific price, and usually includes a discount compared to the share price. Convertible debt is typically granted to early angel or seed investors or to existing investors in a company as a way to bridge the company between rounds of preferred stock financing. 

The cap table below sets out the category of security holders in rows and in the columns lists the securities they own (or have reserved). As an example, consider a company with only two types of securities, common stock and options. In this case, the common stockholders own 4 million shares of common stock, the option holders hold options to purchase 500,000 shares of common stock and there is an unallocated option pool of 500,000 shares of common stock reserved for issuance under the equity incentive plan. This information is set out in the pre-financing cap table below.

Pre-Financing Cap Table

Now consider a $4 million investment by new investors at a $6 million pre-money valuation (so a $10 million post-money valuation) and an increase in the unallocated option pool to 15% on a post-money basis. Here are the steps to prepare a new cap table: 

1. The new investors will be entitled to 40% of the shares after the financing ($4 million / $10 million).
2. The 4.5 million shares held by the founders or acquirable by the current option holders will constitute 45% of the ownership of the company (e. 100%, less the 40% share of new investors and the 15% share of the option pool).
3. The total number of authorized shares will be 10 million since 4.5 million shares constitute 45% ownership.
4. The number of shares granted to the new investors will be 4 million (40% of the total 10 million authorized shares).
5. The total unallocated option pool is increased to 1.5 million shares to constitute 15% of the fully diluted ownership.
6. The new shares added to the unallocated option pool is 1 million (1.5 million less the existing 500,000 shares in the unallocated option pool pre-financing).
7. The price per share is $1.00, calculated by dividing the pre-money valuation ($6 million) by the fully diluted capitalization pre-financing, including the proposed increase to the unallocated option pool (4 million (founders) + 500,000 (options granted) + 1.5 million (increased unallocated option pool) = 6 million) (alternatively, think about this on a post-money valuation basis, e. $10 million post-money valuation divided by the 10 million share fully diluted capitalization post-financing, resulting in an investment of $4 million for 4 million shares)

This information is set out in the post-financing cap table below.

Post-Financing Cap Table