Capitalization Table (cap table) Basics

In my experience, I have found that even with founders and entrepreneurs have various levels of understanding of capital structure represented by what's called a capitalization table or "cap table."

Basics:

Cap table is an Excel file that summarizes equity ownership structure in a corporation. The file lists entities, shares they own in the company, and the tranches or classes (e.g., Common, Series Seed, Series A, Series A-1, etc)

Fully diluted ownership represents the ownership of an entity based on all outstanding shares inclusive of issued and unissued options as well as warrants.

Each Preferred tranche has a price per share. Common shares are valued using the 409A valuation.

Post-money valuation: the most current round's price per share x fully diluted shares.

A detailed cap table will tell you amount of capital raised for each tranche, seniority of each tranche, and price per share.

By looking at the cap table, a few questions can be answered:

• Who are the major investors in term so of ownership?
• How much ownership does founder(s) and/or key employees have, and are those ownership levels ok?
• Is the options pool sufficient for top up and top off?
• Is the cap table "too big?"

Convertible notes are not included in the cap table but they should be taken into consideration when constructing a pro-forma cap table.

A note on convertible notes. I think convertible notes are useful when the size of the convertible note is small. Convertible notes, if too many (with various different terms) and/or too big (more than $5-7m in my view), creates an "overhang" on the cap table.

The cap table representing a fully-diluted view tells you the total capitalization and "size and nature of the pie." These are key factors that determine return.