Capitalization Table

Capitalization Table (often called a 'Cap Table') is a master spreadsheet or table that provides a detailed breakdown of a company's equity ownership. Think of it as the ultimate “who owns what” scorecard for a business, particularly for startups and private companies. It meticulously lists all the company’s securities, such as Common Stock, Preferred Stock, Warrants, and Stock Options, and shows who—from founders and employees to Angel Investors and Venture Capital (VC) firms—owns them. The cap table tracks the ownership stake of each Shareholder and, crucially, calculates their percentage of ownership on both an as-is and a fully diluted basis. For any investor, but especially for a value investor scrutinizing a private or early-stage company, the cap table is not just an accounting document; it's a transparent map of the company's financial DNA, revealing power structures, potential future dilution, and the true value of a single share.

A cap table is more than just a list of names and numbers; it's a dynamic document that tells a story about a company's journey. It reflects every funding round, every key hire granted stock options, and every strategic financial decision made.

• For Founders: It's their primary tool for managing ownership, planning for future funding rounds, and understanding how their own stake changes over time.
• For Employees: It determines the potential value of their stock options. A healthy cap table can be a powerful motivator, while a messy one can render their equity nearly worthless.
• For Investors: This is where the rubber meets the road. A value investor uses the cap table to perform critical due diligence. It answers fundamental questions: How much of the company am I actually buying? Who are my fellow investors? How much will my ownership be diluted in the future? A clean, well-organized cap table signals good corporate governance, while a complicated or opaque one can be a major red flag.

At first glance, a cap table might look like an intimidating spreadsheet. However, it's built from a few fundamental components. Understanding these parts allows you to quickly grasp the ownership landscape of a company.

A typical cap table is organized to show a clear picture of ownership. You'll almost always find these key columns:

• Shareholder Name: Lists all individuals and entities that own a piece of the company.
• Securities Issued: The date the shares or options were granted.
• Type of Security: Specifies whether the holding is common stock, a particular series of preferred stock (e.g., Series A, Series B), options, or warrants.
• Number of Shares: The absolute number of shares owned or reserved.
• Percentage Ownership: This is the most critical column, showing each shareholder's stake as a percentage of the total shares outstanding. This is often shown on both a basic and a fully diluted basis.

The “type” of security matters immensely because not all shares are created equal. Different types carry different rights and privileges.

This is the most basic form of equity ownership, typically held by founders and employees. Common stockholders have voting rights but are last in line to get paid in the event of a sale or liquidation.

Usually issued to investors during funding rounds. Preferred stockholders have senior rights over common stockholders. A key feature to look for is the Liquidation Preference, which guarantees them a certain return (e.g., 1x or 2x their initial investment) before common stockholders see a dime.

These are not actual shares… yet. They are the right to purchase shares at a predetermined price in the future.

• Stock Options: Typically granted to employees as part of their compensation.
• Warrants: Often given to investors or lenders as a “sweetener” to a deal.

Both options and warrants represent potential future dilution, which is why they are essential to a cap table analysis.

For a value investor, the cap table is a tool for assessing risk and finding true value. It's not about the hype of a funding round; it's about the underlying ownership structure and what it implies for long-term returns.

A careful review of the cap table can reveal potential problems before you invest:

• An Overly Complex Structure: Multiple, convoluted classes of preferred stock with aggressive terms can create conflicts of interest and disadvantage common shareholders.
• Excessive Founder Dilution: If the founders have been diluted to a very small percentage, their motivation to grow the company might wane. You want founders to have significant skin in the game.
• A Large “Dead Equity” Pool: Significant ownership by former employees or founders who are no longer contributing can be a drag on the company's momentum and incentive structure.
• A Messy or Outdated Table: This suggests poor management and a lack of attention to detail, which can be symptomatic of larger operational issues.

Dilution is the single most important concept the cap table helps you understand. When new shares are issued—whether in a funding round or through the exercise of options—the ownership percentage of existing shareholders decreases. To get a true picture of your potential ownership, you must look at the fully diluted share count. This is calculated by adding the total number of common and preferred shares to all the shares that could be issued from options, warrants, and other convertible securities. Example: A company has 1,000,000 shares outstanding owned by founders and investors. It also has a stock option pool with 200,000 options.

• Basic Share Count: 1,000,000
• Fully Diluted Share Count: 1,000,000 + 200,000 = 1,200,000

If you own 100,000 shares, your ownership isn't 10% (100,000 / 1,000,000), it's actually 8.33% (100,000 / 1,200,000). This difference is critical when assessing a company's Valuation and your potential return, especially as the company grows and heads towards a sale or an Initial Public Offering (IPO). A thorough cap table analysis ensures you pay a price based on reality, not on a simplified share count.