Bay Area Business Lawyers | Primum Law

The Cap Table: Managing Equity in Your Startup

If the term “Cap Table” doesn’t immediately ring a bell, perhaps you should take a cue
from the popular TV show “Silicon Valley” and watch the episode with the same name. But
before you do, let me explain why it’s crucial to have your cap table in order.

In simple terms, a cap table, short for capitalization table, is a document that provides a
comprehensive overview of all the securities your company has issued. This includes shares,
SAFEs (Simple Agreement for Future Equity), Convertible Notes, and warrants. By reviewing
the cap table, you can gain insight into the ownership distribution within your company and
gather information about previous investors who have contributed to your startup’s journey.

Startups frequently experience growth and begin to hire employees who are granted
equity as part of their compensation packages. Often, these changes are reflected in an Excel
spreadsheet or in other similar tools, but what these documents don’t show are the underlying
agreements that support the equity distribution. This can lead to situations where founders
promise equity to team members, and update the cap table accordingly but forget to prepare and
sign the necessary agreements to solidify and, most importantly, justify these awards.

Picture this: when founders start discussing their startup with potential venture capitalists,
questions will inevitably arise. Investors will want to know why a specific person received a
significant equity stake and, more critically, where are the supporting documents that validate
this allocation.

This dilemma brings to mind an episode from “Silicon Valley” where Big Head is fired
because the team couldn’t find a unique skill or contribution that justified awarding him equity.
To avoid such awkward situations with your employees and ensure a transparent and accountable
equity distribution process, you need to have stock purchase or subscription agreements with
your founders. These agreements should accurately reflect the distribution of shares and
contracts with all employees and contractors who hold equity in your startup. These contracts
should include information about the services they provide, the amount of equity they’ve been
awarded, and the vesting schedule. Additionally, you should keep detailed records of all
investors and the securities used for their investments.

Maintaining your cap table on a platform such as Carta or is advisable. These
platforms are often free for early-stage companies and can add an extra layer of credibility when
presenting your startup to potential investors. A well-organized cap table not only streamlines
your startup’s operations but also builds trust and confidence among stakeholders.

In the ever-evolving world of startups, having a clean and up-to-date cap table is a crucial
component of your overall success. It ensures that you’re ready to face questions from investors,
reward team members fairly, and avoid the kind of awkward situations that made Big Head’s
departure from “Silicon Valley” memorable for all the wrong reasons. So, make sure your cap
table is as impressive as your business idea.

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