We talk to startup founders all the time, and one of their biggest struggles is wrapping their heads around what will happen with their capitalization table (cap table). Probably the most challenging concept to grasp is that new shares of stock get issued/created instead of transferred between founders and investors.
On a seed round of funding, say, a founder will not ‘yield’ or sell a percentage of their shares to investors; instead, the company will issue new shares, which causes the percentage distribution to change.
When new investors come in, shares don’t transfer hands: new shares are created instead.
The same math also applies to startup stock options. If you are a startup employee with a stock option pool, you have a fixed number of shares you own, and that number will not change. What might change is the total amount of stock that the company has issued, which effectively changes your percentage ownership.
When you combine that with convertible debt or multiple rounds of additional funding, it can be hard to grasp what will happen with your shares (and, therefore, your money).
So I’ve been working for the past few weeks on a cap table template that you can use as your company evolves. Please think of this page as the ultimate instruction manual to manage it. I’m not going to make you scroll through the end to download it; you can get it here:
What is a Cap Table?
Officially called a capitalization table, this is a simple spreadsheet that shows the equity distribution of a company. The most common company structures worldwide (such as the C-Corporation in the USA) are based on shares of stock that represent company ownership.
For example, if two founders want to establish a company, they might decide to issue one company share. In that case, they own 50% of the business, represented in that one share of stock for each one of them.
As the company gets more complex, with multiple founders or potential rounds of investor funding, the…
