Cap Table Maintenance - Best Practices

This blog post lists 8 essential tips for managing your company's cap table effectively. Learn about maintaining accuracy, communicating with stakeholders, and choosing the right cap table software.

Farheen Shaikh

28 June 2024

Table of Contents

A cap table is a crucial tool that outlines the ownership stakes (equity) in a company. It lists all shareholders, including founders, investors, employees, and others holding equity or options.

Its primary function is to provide clarity and transparency regarding ownership structures, which is vital for planning future fundraising efforts and ensuring compliance with regulatory requirements.

Hence, it is really important to effectively manage your cap table and follow the best practices.

But before that, here's some recommended reading for those seeking a comprehensive understanding of cap tables:

Reading these posts sets you up to manage your cap table well and navigate it easily. 

Now, let’s begin.

Cap table maintenance best practices

1. Keep it simple 

Make sure your cap table is easy to understand by keeping it clear and concise. Avoid using complicated formulas or jargon that might confuse people, like intricate calculations for weighted average anti-dilution adjustments. These details can confuse stakeholders unfamiliar with financial terms.

Include basic essential details such as:

  • share classes (common stock, preferred stock), 
  • anti-dilution provisions, 
  • and conversion terms for preferred stock and convertible notes. 

It is also important to track vesting schedules for stock options and RSUs, but you can maintain it adjacently, not within your primary cap table.

For easier understanding, tailor different views of the cap table for different requirements or audiences. For example, an incoming investor will want to visualize ownership percentages and capital contribution, while an existing shareholder might also want to look at a pro forma cap table view to understand the dilution impact of a new fundraise.

2. Mastering the fundamentals is crucial

Having a firm grasp of key terms empowers you to confidently manage your cap table. Here are some crucial concepts to understand:

a. Fully diluted ownership: It represents the total number of common shares of a company, which includes both currently outstanding common shares and shares that could be obtained from the conversion of outstanding preferred stock, stock options, warrants, SAFEs, convertible notes, etc.

Read more about fully diluted ownership

b. Liquidation preference: Liquidation preference dictates the order in which investors are paid back (often with a multiple, such as 1x or 2x) from the proceeds of a company's liquidation.

c. Option pool: This is a designated pool of shares reserved for issuing stock options, restricted stock units, or SARs to employees and advisors.

3. Sharing information with investors

Investors rely on their portfolio company’s cap table to track their ownership stake and gauge the company's financial health. 

Based on their ownership and dilution history, institutional investors usually decide whether they should participate in your future fundraising rounds as well. Moreover, investors regularly need to share their portfolio shareholding details with their LPs for their fund compliance.

Therefore, it's essential to provide clear and consistent updates to investors in the form of quarterly reports that outline ownership changes and dilution over time. Additionally, offering accessible summaries of the cap table with key metrics highlighted ensures investors can easily grasp the information they need to make strategic investment choices. This proactive approach not only builds trust but also strengthens communication channels between stakeholders and the company's leadership team.

4. Sharing information with employees

Employees with equity ownership, whether through stock options or RSUs, are pivotal stakeholders whose motivation can significantly impact company performance. 

Companies usually do not disclose their complete cap table to employees other than key employees, if necessary. However, companies should confidentially share equity award details with respective employees to foster transparency.

These are some details you should share with your employees:

  • Grant details and terms
  • Vesting schedules
  • Projected ownership on a fully diluted basis (for key employees).

Additionally, offer educational resources that explain the intricacies of equity compensation, emphasizing its benefits and empowering employees to make informed decisions about their financial future with the company. 

By equipping them with these tools and knowledge, you foster a stronger sense of ownership and commitment among employees, thereby bolstering overall team morale and productivity.

5. Periodic reviews 

Reviewing your cap table is crucial to maintaining accuracy and relevance. Schedule periodic reviews when:

a. Gearing up for a fundraise: Ensure your cap table is accurately updated with all the supporting collaterals such as past Shareholder’s Agreements (SHAs), share registers, and transfer documents collated in one place for legal due diligence. 

b. Post-fundraise: Update your cap table records and share registers immediately after a fundraise to track ownership dilution changes and new capital contributions.

Periodic reviews also include updating information on stock option exercises, new grants of stock options or RSUs, and any secondary sales of shares by founders or employees. 

By staying proactive with these reviews, you not only ensure compliance with regulatory requirements but also provide shareholders with an up-to-date and transparent picture of ownership dynamics within the company. 

This practice helps mitigate potential discrepancies and supports informed decision-making.

6. Analyze the Impact of financing rounds

Before each financing round, leverage your cap table to meticulously model the impact on ownership percentages and potential dilution for founders and existing investors. This strategic analysis empowers you to:

  • Engage in informed negotiations with investors, understanding the implications of ownership changes.
  • Gain insights into the comprehensive financial implications of raising capital, ensuring strategic decision-making aligned with long-term growth objectives.

7. Maintaining good records

Maintaining thorough documentation is essential for ensuring the accuracy of your cap table. Keep records of key documents such as:

  • Stock purchase agreements
  • Stock option grant agreements
  • Stock option exercise notices
  • Shareholder certificates

These documents form a robust paper trail that supports transparency and clarity in your company's equity structure and transactions.

8. Choosing the best cap table management software

If you're managing your cap table manually on sheets, the chances of human errors and lack of clarity are high. By using a robust cap table management software, you can ensure that all of your securities are correctly administered and tracked.

Some softwares even offer advisory and compliance services, providing a comprehensive 360-degree experience—EquityList is one such solution. Book a demo today.

That being said, key considerations when selecting the right cap table software for your startup include:

  1. Ease of use: Opt for a platform that is intuitive and user-friendly, designed to be accessible even for team members without extensive accounting knowledge.
  2. Features and functionality: Choose software that offers essential features like scenario modeling and seamless integration with other tools.
  3. Scalability: Ensure the software can grow with your company, accommodating increased complexity and larger datasets as your startup expands.
  4. Security and compliance: Prioritize platforms with robust security measures and compliance with data privacy regulations to safeguard sensitive financial information.
  5. Automated updates: Select software that automates routine updates such as stock option exercises and secondary sales, reducing manual entry errors and saving time.
  6. Real-time reporting: Opt for platforms that enable quick generation of reports on ownership percentages, dilution, and valuation, facilitating agile decision-making.
  7. Enhanced collaboration: Look for solutions that support secure collaboration among founders, investors, and advisors, with role-based access controls to manage permissions effectively.

These considerations ensure you choose a cap table software that meets your current needs while supporting your startup's future growth and operational efficiency. And while EquityList fits these criteria, we encourage you to see for yourself by -

Booking a demo.