What Are Capital Tables?
A capital table, or cap table, is a breakdown of who or what entities own what percentage of a company.
As an example, you have two friends that go into business with you. You decide to split the business equally and now you and your friends each own 33% of the business. That is a fairly common way of setting up the ownership in a cap table.
There are also instances where you are growing your business and a company comes in and wants to invest. They might say, “Hey, I really like your idea. I’ll give you X amount of money to help you grow your business.” Think Shark Tank. They may offer to give you $100,000 for a percentage of your business. Essentially, they they want to be included in organization and gain equity in your company.
Working with cap tables can be tricky, though. All too often, a business owner may not be keeping track of what they have said or what they promised. They might have promised a little bit too much to certain people, or different people have different expectations on what they are going to be receiving.
This is why it is highly recommended that you write it down as a cap table. Keep it as a living document so you know exactly how much everybody owns.
What would be a fair breakdown for an organization?
This is a very complex question. If you ask 10 different business owners, they’ll give you 11 different answers in terms of what the best breakdown should be.
I know it’s a hated response to any question but the truth is… it depends. It depends on your business situation. If you have employee’s or are working solo. If you have an investor in your business, and that’s where an attorney or a business consultant like Business Legal Management can help plan out the needs for your business.
If you are someone that wants to own the majority of this business, then you have to own more than 50% because that is how you maintain that majority.
But as you continue to grow and you offer equity in your business to investors by offering percentages of the business, eventually you are going to start running out of equity to offer. You need to figure out another strategy.
It is vitally important that you have someone to talk to about your overall company strategy and your exit strategy as a business owner. Do you want to sell the business eventually, or do you want to stay with the company forever and grow with it?
What Percentage Of My Business Should I Own?
There is no wrong answer to this question. It can honestly be whatever you, as the business owner, want and what makes sense for the business. Consider the three most well known business owners in the world right now; Mark Zuckerberg, Jeff Bezos, and Elon Musk.
Each of their cap tables, and the percentage that they own are all very different. Both Mark Zuckerberg and Jeff Bezos actually don’t own very much. Yet Elon Musk owns a significant chunk of his businesses.
Each of them structures their business in such a way that they are a major share holder. Musk owns 25% of Tesla but he owns 47% of SpaceX [source]. Zuckerberg owns nearly 17% of Meta [source] and Bezos only owns 11% of Amazon [source], yet they are all majority owners of their businesses.
You don’t necessarily need to own 51% of a company to to own it. It is whoever has the majority of the shares, whatever that percentage is.
Something to keep in mind, though, is that there are pros and cons to handing out equity from your business.
You can have great opportunities by bringing in partners that help grow the business like crazy with capital investments. They give you money so you can buy new equipment, hire more people and training. The flip side of that is you can also end up like Steve Jobs who got kicked out of his own company because everybody else on the board voted him out. Even though Steve Jobs was eventually able to return, the fact remains that you can get kicked out of your own company that you started if you don’t set up your cap table and your bylaws properly.
Where do I keep my Cap Table?
So obviously this is probably I imagine that your cap table is going to be fluid. It’s something that will change over time.
So does that mean that like so what is the best practice for documenting and keeping your cap table? Is it in the hands of your lawyer?
Is it is it a file on your computer? How would you want to do this?
I would try to keep it stored in a secure. like a digitally secure place as well as principal copies.
And I would encourage most business owners to go over the cap table once or twice a year with an attorney or a business consultant to go like, all right.
Here’s the breakdown. Nothing’s changed. But our future plan is we’d like to sell 10% of the business to get a bunch of money and help us grow even faster.
But I think that it would be best served for businesses to have it stored in a secure location, whether digital or otherwise, that is signed by all parties involved and is reviewed once or twice a year, just so everybody’s on the same page and that we know.
But I fell saying like, whoa, we’ve never talked about this. It’s like really your signature is on the bottom of this page here that we went over in January.
And again, it’s a lie. So either you weren’t paying attention. or I think you’re just living.
What are some other important documents my business needs?
Operating Agreement or your Bylaws
This document lays the foundational rules of how the company is run, how do executives make decisions, how you hire executives or fire executives, and if you have or need a board.
This one is crucial as State and Federal regulations change fairly regularly in terms of adding new addendums to the ADA, the American with Disabilities Act. There are new rules when it comes to gender expression or what’s considered a protected class. Things that you have to be aware of when you’re doing hiring and firing.
Be sure to establish this and have all the necessary verbiage and rules set up for your company. Have it in writing that you don’t discriminate, that you don’t harass, and that your company has set expectations for your employees, and if they can’t do the job, they will be fired for not meeting those expectations.
Think of the operating agreement and the bylaws as the rules for the game and the employee handbook is the term like the order in which you take turns as players.