Saturday, July 13, 2024

What is a Fully Diluted Cap Table?

Cap tables are used to help start-ups and investors track their financial investments in a new company. To understand what a fully diluted cap table is it is important to start with a strong understanding of what a cap table is for, how it works, and the different ways it can be utilized to inform the decisions of company founders as well as outside investors. 

What is a Cap Table?

A capitalization table, often shortened and colloquially referred to as a cap table, can be most simply described as an in-depth spreadsheet that provides an analysis of a company’s percentage of ownership and equity. 

Cap tables are a very important tool for founders. By tracking each founders investment and assigned number of company shares a cap table makes clear what each founders percentage of ownership is. 

This can be simple in the beginning, but as outside investors are added the founders ownership interests begin to dilute. With every new round of funding, there will be a change in value of equity and equity dilution.

A comprehensive cap table makes it easy to understand at a glance what percentage of a company is being promised to a friend, founder, venture capitalist or outside investment company in exchange for liquid capital with which to run the company. 

Cap tables are also important documents for courting and educating potential investors. In much the same way as it allows founders to monitor their percentage of ownership cap tables also allow investors to easily assess what different levels of investment would buy them in terms of percentage of ownership.

As these informative spreadsheets are living documents that are updated with each round of funding and change in equity they can also serve as an accounting tool. A clear spreadsheet should have no discrepancies and make it easy to see exactly how many current shares are being held, by whom, and what they were bought for.  

Cap tables can also be used to make pro forma calculations. When a company considers another round of funding our issuing shares to its employees as part of a stock incentive plan it must be able to understand how this dilution will affect the proportional ownership of existing shareholders. 

These changes affect both existing shareholders and founders, because it directly affects the percentage of the company they own. This is where fully diluted cap tables come into play.

What is a Fully Diluted Cap Table

There are no real hard and fast rules as to what is necessary to constitute a fully diluted cap table. Different start-ups and investors will likely use slightly different projections in each of their cap tables to produce a fully diluted table. 

A fully diluted cap table projection allows investors and founders to have an idea of what their share in the company will be after several rounds of dilution. These calculations take into account future planned investment rounds, contingent shares, and even stock options given as part of employee incentive plans.  

The guiding theory behind producing a fully diluted cap table is that it can provide a pro forma projection of equity and ownership percentages after the final funding round and all outstanding debts are taken into consideration. Basically, it’s a way of trying to estimate what final percentages of ownership will look like when the company is fully funded. This is especially important for founders and early investors. 

Over all, cap tables are an important tool for start-up founders and investors alike, and fully diluted projections arm them with another important tool in which they can assess the future value of their investments, and chart the financial future of their companies. 

Maxim Joy
the authorMaxim Joy