Setting Up a Cap Table for Pre-Series A Startups

Setting Up a Cap Table for Pre-Series A Startups

As a pre-Series A startup, one of the important things you should do is to set up a cap table. A cap table is a spreadsheet or document that details the ownership of a company, including who owns what percentage of the company and what they paid for their ownership. It’s important to have a cap table to help you keep track of your company’s ownership structure and to avoid misunderstandings or disputes. In this article, we’ll explore the basics of setting up a cap table for your pre-Series A startup.

Understanding the Basics of a Cap Table

A cap table is a central document that outlines the ownership of a company, including the percentages of ownership and what investors paid for their stake in the company. Cap tables also include information about share classes, options, warrants, and convertible debt, all of which can impact the ownership of the company.

When setting up a cap table, it’s important to keep track of all of these variables. This includes the number and types of shares your startup has issued, each investor’s ownership percentage, the price they paid per share, and any other terms or conditions that might affect their ownership.

Creating Your Cap Table

The first step to creating a cap table is to gather all relevant information. Start by tracking down all of the documents related to your startup’s equity, including your founding documents, investment agreements, stock option grants, and any convertible debt. Once you have all of these documents in hand, you can create a spreadsheet or use specialized cap table software to compile all of this information.

When creating your cap table, it’s important to make sure that it’s accurate and up-to-date. This means updating it every time you issue new equity, as well as tracking any changes in ownership over time.

Share Classes & Dilution

Different share classes can impact the ownership of your startup and the distribution of value. Common share classes include:

  • Common Stock: Represents ownership in the company and gives shareholders the right to vote and receive dividends.

  • Preferred Stock: Gives certain investors specific rights or privileges over common stockholders, such as a preference in dividend payments or the right to vote on certain matters.

  • Convertible Debt: Allows investors to lend money to the company with the option to convert that debt into equity at a later date.

It’s important to be aware of the impact of share classes and dilution on your cap table. Dilution occurs when your company issues new equity, potentially decreasing the percentage of ownership of earlier investors. To mitigate the impact of dilution, you can consider setting up a pre-money or post-money valuation, or offering anti-dilution clauses to earlier investors.

Conclusion

Setting up a cap table is an important part of managing your pre-Series A startup’s assets. By tracking and compiling information about your company’s ownership structure and share classes, you can better manage the various terms, rights, and percentages of ownership attached to different shares. This can help you avoid confusion, discrepancies, and disputes down the line, and provide a clear picture of your startup’s current and future ownership structure. Utilizing cap table software or enlisting the help of legal experts can be beneficial in ensuring that your cap table is accurate and up-to-date. Overall, with an organized and well-managed cap table, your pre-Series A startup can thrive and grow.