I mean when I first started out, I might have thought a cap table was a table full of hats. Now that I’m deeper into my career and knowing what I know now, if I found out that a company had a messy cap table or one that wasn’t put together, that would really scare me away. Knowing that I’m on the cap table of the company lets me understand that they’re not going to forget about me when it’s time to cash in.
Your company just gave you some equity and you want to know how it works. To do that, let’s dive in and take a look at what exactly your company is doing when they bring you on board as an owner. My name is DeRonnie, and in this lesson, we’re going to teach you all the basics you need to know about cap tables.
When your company gave you equity, they wrote your name down in an internal document called a cap table. Think of this like a giant spreadsheet with a bunch of complex formulas and equations in it. It’s keeping track of a whole bunch of stuff. And it’s extremely important that the company adds you to their cap table. Because the cap table keeps the record of when you’re going to receive your shares, not to mention, how many shares you’re going to get and how you’re going to get paid if the company sells, goes public, or what have you.
So how does a cap table affect you? How does it work to protect and ensure your ownership? If you’re working for a venture-backed startup, then your company is funding itself and its operations through money from investors. And when a company raises money from investors, they typically give those investors a percentage or shares of the company.
Now, there’s a bunch of different criteria that come along with this transaction. And one of those criteria is that the investors will require their company to reserve a certain percentage of their business specifically for employees like you. That’s called an employee stock option pool or option pool. And when your company gives you shares, that’s where the shares are coming from—that option pool right there.
The reason your company does this—and the reason investors typically require it—is to help them recruit talented people. After all, if an employee has shares in the company, they’re more likely to work hard to make the company successful. They’re also more likely to stay at the company for a longer period of time.
But here’s the thing: Not all equity is created equal. There are different types of equity that people can own. And each of them comes with different sets of rights, preferences, and tax liabilities. For example, investors, employees, and advisors will often be given different types of equity from each other—meaning all their shares have different little details that the company has to keep track of. They might have different timelines for receiving shares, or they might get paid out differently if the company gets bought or goes public. We’re going to talk all about the various types of equity in the next few lessons.
But for now, what you need to know is this: As the company grows, it might have hundreds, even thousands, of employees, investors, advisors, what have you. And all of these people might have different types of equity, with different rights, preferences, timelines, et cetera. You can imagine that’s a lot to keep track of. And that’s why you have a cap table.
At its most basic, a cap table is just a list of all the securities or shares in a company and a record of who owns what. It keeps track of all kinds of different stuff like vesting schedules, fair market values, exercise dates and more.
Now, if you’re a founder, it’s extremely important to keep this cap table organized. And not just for the obvious reasons that you want to know what percentage of the company people own. The other reason is because when your company is funded by investors, there are usually a bunch of specific actions that you can’t take without the approval of certain types of shareholders.
For example, let’s say your business is chugging along and you need to raise another round of funding. You might not actually be able to do that without getting majority approval from both your Series A and B preferred shareholders, and the majority of your seed shareholders.
Pretty confusing, right? If you don’t have any organized way of knowing what types of equity each of your shareholders has, then you’re going to have a pretty hard time getting the approval you need to raise more money.
But that’s not all. There’s also the fact that one person or entity might have invested in your company multiple times, meaning that even though they’re an individual, they actually own several different types of shares in your company. So how do voting rights work for that person? And how do they get paid out if the company sells?
The job of a cap table is to organize all of this. Depending on a company’s stage, this cap table might be managed by the CFO, corporate controller, company’s law firms, or even the founder themselves. We’re about to jump in with Iris and watch her whole journey as she receives equity for the first time. And what’s important to keep in mind is that without the cap table, none of this stuff would even be possible.
So: You know what a cap table is. Now let’s ride along with Iris, as she receives her very first equity grant.