Cap table explained: Why it is important for SaaS founders

Have you ever wondered if your company’s growth journey could be hindered by an ownership pitfall, even before raising your first investment? Keen-eyed observers of the Nordic startup landscape have noticed a disconcerting trend: founders give up substantial ownership way too soon. As a founder, it’s essential to clearly understand your company’s cap table, or capitalization table, and its significance in managing ownership and equity distribution.

In this article, we want to share the importance of cap tables for SaaS companies, why investors value them greatly, common pitfalls to avoid, and best practices for setting up and maintaining a cap table.

What is a cap table?

A cap table is a spreadsheet or table that shows the ownership stakes and equity distribution within a company. Understanding a cap table and its role in tracking ownership and equity distribution is crucial. Cap tables provide a snapshot of the company’s capital structure, including information on shareholders, equity classes, convertible securities, and more.

The importance of cap tables for SaaS companies

The cap table primarily illustrates how decisions affect your company’s equity structure. This overview lets you manage dilution effectively and plan for future financing rounds. By clearly understanding ownership percentages, you can make informed decisions about equity allocation, assess potential dilution impacts, and evaluate the outcomes of various funding options.

Why do investors want to see your cap table?

Investors want to see your cap table to recognize influential shareholders and understand your company’s ownership distribution. By having a clear overview of who the active and capable shareholders are, investors can more easily comprehend the alignment of interests and decision-making dynamics within your company. Additionally, it enables investors to assess available equity for future investments and assess dilution.

What to avoid on your cap table

Mistakes with your cap table can cost you time, money, and opportunities in the future.

To ensure a good cap table, you should avoid excessive complexity. It can lead to confusion and disputes among shareholders and make raising further capital harder. Over-dilution in the initial funding rounds is one of the most common pitfalls. Not only does it hamper the attraction of new talent and employees, but it also complicates raising further capital.

VCs also value having a network of active and competent participants within your company, including founders, team members, advisors, and other stakeholders. Distributing founder equity should prioritize active, contributing founders and the early team, who are the true value generators.

Situations where angel investors hold more equity than founders or where passive, part-time founders are involved, can create misalignment.

Cap table example

In the early stages of a startup, the cap table is in its simplest form. This starting point includes entries for the initial stock issued to each founder. For instance, if there are two co-founders and the company authorizes 5 000 000 shares, they might decide to distribute the initial shares as follows:

• Co-Founder 1: 2 300 000 shares (46%)
• Co-Founder 2: 2 300 000 shares (46%)
• Friends & Family: 400 000 shares (8%)

As the company progresses, attracting investments becomes pivotal for growth. Each time a new investor joins and shares are issued as part of a new investment round, it’s essential to update your cap table. This iterative process continues as the startup secures more funding, welcomes new investors, and grants equity to employees. Each time changes occur, the cap table is adjusted to maintain the total ownership at 100%.

Below is one example on how a cap table might evolve over time.

Maintaining your capitalization table

Setting up and maintaining a cap table might seem intricate, particularly as the number of shareholders increases. However, you should ensure that your cap table always contains the correct and the most updated information. Spreadsheet tools and templates can help with this, visualizing different scenarios and making it easier to understand the potential outcomes of equity distribution. Founders may also consider using cap table management software to streamline the maintenance process and reduce the risk of errors.

Here are some of the main reasons you would need to update your cap table:

• After a funding round
• Following a liquidity event (e.g., an IPO or acquisition)
• When an employee joins the business (e.g., if you offer stock to new employees)
• After an investor or employee exercises options
• If an investor redeems, transfers, or sells shares

Conclusion

In conclusion, understanding and effectively managing a cap table is crucial for founders and SaaS companies. The cap table is a powerful tool for tracking ownership, equity distribution, and company structure. Investors highly value well-structured cap tables as they provide insights into ownership dynamics and alignment of interests.

To avoid issues, you should keep your cap table straightforward, prioritize active team members in equity allocation, and ensure regular updates to reflect changes accurately. Leveraging spreadsheet tools or cap table management software can simplify this process. By mastering cap table management, you as a founder can navigate complexities, build investor confidence, and set a strong foundation for your growth.

Written by: Sigve Sundsbø (Header image)

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