This cap table tutorial video has been produced to give you all the info you need to build your own – it's a part of our tutorial series that aims to make law simpler, faster, easier and fun, which you can find over on Farillio's YouTube channel!
Building cap tables isn’t often something most business owners think about when they’re getting started, but it is something you'll need to get a handle on sooner or later.
Our expert today is Paul Hunt. Paul is our go-to for all things financial when it comes to building businesses and running startups. In fact, there’s very little that Paul hasn’t been asked when it comes to business finance.
Today we’ll be walking you through how to build a capitalisation (cap) table. We'll be talking through the different stages in the life of a new business and how to best display those events and changes on a cap table of your own.
It’s a simple step-by-step process, and you can play along, wherever you are – just pause and hit play as and when you’re ready.
What's a cap table?
Simply put, a cap table is a ledger of record that captures (either on a piece of paper or an Excel spreadsheet) how much of the business you're setting up you own and how much your co-founders and other investors own.
In our example, we have a founder (let's call them Janet) who has invested £20,000 of their own money into a new business and two friends or family members have invested a further £30,000 each – so £80,000 total. The cap table sets out this relative investment and shows that you own 25% of your business, compared to the 37.5% owned by your other two investors. The simplest way to visualise would be like a pizza or a pie chart.
These ownership stakes are commonly referred to as shares, and the share certificates act as a receipt for money you invest in the new business.
And that’s important to note... because, assuming the business is a success, in 2–3 years it will look very different to how it does today and your cap table may involve a lot more people than the original two investors.
So, the cap table acts as an important journal of record, which tracks different investors and shareowners at different times in the lifecycle of a business.
Understanding this picture now, while it’s relatively simple, helps make sure you won’t get lost later as things get more diluted and more complicated.
What other legal documents do you need?
The cap table that we’ll work on today is only one part of the picture, i.e. it exists as part of a wider scenario within a business. As such, there will be some legal arrangements you will need to consider.
Now that your friends or family have invested in your business and you’ve agreed to work together, you’ll need to define, up front, the nature of your new working relationship. Such as, how will you work together? And how are you going to define how this business goes forward?
Like a pre-nuptial agreement before a marriage, you’ll need legal agreements in place to administer this business relationship and cater for every foreseeable outcome.
So what agreements are we talking about?
Firstly, co-founder agreements are a really important starting point that set out what happens should co-founders fall out of love with the business (or one another).
By setting out the rules of engagement, these agreements govern how you and your co-founders will work together, what happens if there’s a change of circumstances and how to deal with that. For example, the procedure for buying out other co-founders and returning their initial investment.
Another important document when thinking about ownership and decision making powers are your articles of association. These act as your rule book for your company – and they contain almost everything you need to know about the rights and powers you have to make decisions for your company.
And as your business gets bigger and begins to attract more investment, things will get more sophisticated. You’ll need to familiarize yourself with shareholder agreements and term sheets but we’ll discuss those in another series.
Getting started with building your cap table
Returning to our earlier example, you, 'Janet', invest £20,000 into a business and your two brothers, let's call them 'Bill' & 'Tom', invest £30,000 each.
How this might look on a cap table in an Excel document is shown in the above video. If these are 1-penny shares (a typical denomination of shares in a startup), £30,000 gets you 3 million shares.
So, Bill & Tom’s share certificates would spell out that they own 3 million shares each, out of a total of 8 million shares within the business. Or to put it another way, Bill & Tom own 37.5% of the business each, compared to Janet’s 25%.
As your business grows and takes on further investment, your cap table will get more complicated, so it’s a good idea to label each round of funding with a particular letter.
In the case of our family of investors – Janet, Bill & Tom – they have the same, ordinary shares with the same voting rights and rights to dividends and will all be treated equally. These have been labelled as 'A' shares.
Want to access this guide?
Already have a Farillio account? SIGN IN
Get unlimited access to 100s of legal resources by signing up to Farillio today.
- Manage your legal documents online
- Well written legal templates by our partners
- Guides to help you understand law
- Legal help available every step of the way