Startupedia: What Does Cap Table Mean?
What is a capitalization table?
A cap table is a spreadsheet that provides a breakdown of company shareholders and how much everyone owns.
Typically, it lists the company’s shareholders and describes the investment round each one was involved in, such as a seed or Series A round. These shareholders include founders, angel investors, venture capital firms, and employees with equity in the company. Some more complicated scenarios might account for various hypothetical situations-- such as public offerings or new financing-- using different formulas. Regardless, when everyone has their stock, it can be problematic to have to make changes, so it is critical that your company’s cap table be managed correctly from the start (check out this post for a simple cap table sample). This post will tell you what you need to know about equity and a company's cap table as you negotiate your job offer:
What is equity?
Equity is the value of the shares issued by a company. Startup companies can't always afford to offer highly-competitive salaries, and will often compensate for this by offering employees equity, or shares of ownership in the company, in addition to their salaries (or in lieu of, if they're very young and bootstrapping). This is risky business, of course, given that most startups fail, but if your company does beat the odds, the rewards can be plentiful.
Why are cap tables important for startup and scaleup companies?
As businesses develop, cap tables allow investments to be seen over time, and key stakeholders to make important financing and hiring decisions with a clear notion of how these choices will affect shares and equity in the company in the future. For example, if your CEO makes an offer to a new CTO and the candidate counters, asking for equity compensation covering a certain percentage of the company, a well-organized cap table will allow you to quickly determine what degree of equity dilution other shareholders will suffer, and the precise number of shares that this percentage would represent. The cap table offers a clear visualization, and puts this information at your fingertips, allowing you to get back to your recruit quickly with your decision.
Get a grasp on your company’s cap table:
[bctt tweet="The 4 questions all #startup employees should be able to answer about their #equity "]
Whether you're negotiating a job offer or you're an employee in the thick of it, it is important you understand what a cap table is and what your options mean. Use these four questions as a guide during the negotiation process, and to keep tabs on your company's cap table as you scale:
1) How many outstanding shares exist?
In regards to equity in a company, this should be your #1 question. For example, if you’re offered two shares out of two million, you own very little of the company. If you’re offered two shares out of ten, you’ll be singing a different tune. Legally, the company you’re negotiating this job offer with does not have to tell you the answer, but the number of options you’ll receive are meaningless to you if they don’t tell you.[bctt tweet="Never leave a #negotiation conversation about #equity w/out asking how many shares exist"]
2) Who are the investors?
Who the stakeholders are often dictates the company longevity and key business decisions made along the way. Find out who the investors are and research them to understand what type of companies they invest in and how many years these businesses/ investors are around before a major event happens, such as the company getting sold.
3) What is the exercise price?
The exercise price (or strike price) is the price at which you'll be able to exercise your options, buying them from the company. This will change as the company's valuation changes. They're non-negotiable and are based upon the fair market price at the time they were granted. Your exercise price for these options will never change, but the price of options granted in the future may be different.
4) What is the vesting schedule?
The company’s vesting schedule is meant to incentivize you to stick around. If you are offered a certain number of options, it’s likely that these will become available to you incrementally, according to the vesting schedule.[bctt tweet="Total shares + investors + strike price + vesting = the 4 must-knows on your company's #CapTable"]
Remember: Your company's cap table WILL change!
Most importantly, know that your startup equity will change, and you will more than likely be diluted. A billion dollar company has probably reached a level of stability where they can offer you shares with some level of certainty (or anticipation) about their value. For growing startups, there’s no saying how your shares will change from the time you negotiate equity-- only that they will. For most startup employees, this will mean that your equity will be diluted as more stakeholders enter the game and more shares become available. If you’re a rockstar employee who has really crushed it, it is possible that you’ll be offered more shares at a later date. And, despite the uncertainty involved in startup equity, if you hit the jackpot the payoff will be great.
Want to learn more about startup negotiations? Check out our post on negotiating your salary. Or, give a listen to Sam Altman's philosophy on equity from How to Start a Startup.