Congratulations! You've joined a company that offers equity compensation, a fantastic benefit that allows you to share in the company's growth and success. But with stock options, restricted stock units (RSUs), or other equity forms comes a crucial concept: the cap table. The cap table, short for "capitalization table," is essentially a detailed spreadsheet or record that outlines who owns what in a company. It's a foundational document for understanding the ownership structure and how your equity fits into the big picture. While it might seem like a behind-the-scenes document for finance professionals, understanding your company's cap table can be incredibly beneficial for you as an equity holder.
What is a Cap Table?
Imagine a pie representing all the ownership of a company. The cap table breaks down this pie, showing:
Who owns what: The table lists all the shareholders, including founders, investors, employees (like you), and potentially others.
How much each person owns: It shows the number of shares held by each shareholder, as well as their percentage ownership of the company.
Different classes of stock: Companies often have different classes of stock (e.g., common stock, preferred stock), which have different rights and privileges. The cap table specifies who owns which class.
Option pools: It shows how many shares are set aside for future employees via option grants.
Dilution: A critical aspect of the cap table is understanding dilution, which happens when the company issues new shares, thereby decreasing the percentage ownership of existing shareholders. The cap table tracks this.
Valuation: While the cap table doesn't directly display the current market valuation, it's fundamental in determining the price of each share during fundraising rounds.
Why Should You Care About the Cap Table?
As an employee with equity, the cap table directly impacts you. Here's why it matters:
Understanding Your Ownership: The cap table shows your actual stake in the company. The number of options or RSUs you were granted might sound impressive, but understanding what that represents as a percentage of the company's overall ownership is vital.
Tracking Your Potential Value: Your equity only has value if the company is successful. Dilution can reduce the value of your holdings. Knowing how many shares you own relative to the total outstanding shares allows you to project a potential outcome.
Understanding Your Shareholder Rights (if any): If you own shares, you have specific shareholder rights (voting power or receiving dividends). The cap table can indicate if you are a common or preferred shareholder, and what type of voting rights you may have.
Seeing the Big Picture: The cap table lets you see the ownership distribution among founders, investors, and employees. It can provide insight into how the company is structured.
Preparing for Liquidity Events: A liquidity event, such as an acquisition or an IPO (Initial Public Offering), is when you can potentially realize the value of your equity. The cap table helps determine what payout you would receive based on your ownership percentage.
Navigating Option Grants: When exercising stock options, the cap table is the foundation to calculating purchase price, dilution impact and other impacts on the option holder.
Key Concepts and How they Relate to the Cap Table
Outstanding Shares: The total number of shares a company has issued and are owned by investors and employees.
Authorized Shares: The total number of shares a company is legally allowed to issue, as defined in the company's charter. This is usually larger than the outstanding shares.
Fully Diluted Shares: The total number of shares if all outstanding options, warrants, convertible notes, and other equity instruments were converted to common stock. This provides the most comprehensive picture.
Pre-Money Valuation: The valuation of a company before a funding round or a liquidity event.
Post-Money Valuation: The valuation of a company after a funding round.
Examples
Let's use a simplified example to demonstrate a hypothetical cap table:
| Shareholder | Shares Owned | Class | % of Outstanding Shares |
| Founder A | 3,000,000 | Common | 30% |
| Founder B | 2,000,000 | Common | 20% |
| Venture Capital Fund 1 | 2,000,000 | Preferred | 20% |
| Angel Investor | 1,000,000 | Preferred | 10% |
| Employee Option Pool | 1,000,000 | Option Pool | (Available) |
| You (Granted Options) | 100,000 | Options | 1% (of total outstanding if exercised) |
| Total Outstanding | 10,000,000 | 100% |
In this example:
The company has 10,000,000 outstanding shares.
The founders own the majority of common stock.
Venture Capital and Angels own preferred stock.
There is an option pool for future grants.
You own 100,000 options. If exercised, that translates to 1% of the company's total ownership.
Impact of a New Funding Round
Now, let's say the company raises a new round of funding, issuing 2 million new shares to a new investor:
| Shareholder | Shares Owned | Class | % of Outstanding Shares |
| Founder A | 3,000,000 | Common | 25% |
| Founder B | 2,000,000 | Common | 16.7% |
| Venture Capital Fund 1 | 2,000,000 | Preferred | 16.7% |
| Angel Investor | 1,000,000 | Preferred | 8.3% |
| Employee Option Pool | 1,000,000 | Option Pool | (Available) |
| You (Granted Options) | 100,000 | Options | 0.83% (of total outstanding if exercised) |
| New Investor | 2,000,000 | Preferred | 16.7% |
| Total Outstanding | 12,000,000 | 100% |
What changed?
Your percentage ownership has been diluted from 1% to 0.83%, even though the number of options you hold is still the same.
The overall outstanding shares have increased from 10 million to 12 million.
Key Takeaways for You
Ask Questions: Don't hesitate to ask your HR department or finance team for clarification on your company's cap table. Understanding your specific equity grant is essential.
Track Your Equity: Understand the vesting schedule and ensure that you are tracking your ownership.
Understand Dilution: Realize that the company issuing new shares can dilute your ownership, and try to get visibility into fundraising plans and potential implications.
The cap table might seem complex, but it's a foundational document that provides critical insights into your equity stake. By understanding the cap table, you can better appreciate the potential value of your equity and make informed decisions about your future at the company. Ultimately, your equity stake is not just a number but a piece of the company's future success, and taking the time to understand the cap table will serve you well.