Equity management
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Designing a Phantom Option Plan for an NBFC
Equity distribution in the initial days of a startup is simpler. Usually, it is based on mutually agreed terms between partners and is straightforward enough to be tracked on an excel sheet. However, soon enough the startup begins to grow and the number of stakeholders with equity stakes increases. Then developing and properly managing a capitalization table becomes essential for evolution.
The capitalization table or cap table is the data that lays out the capitalization for the company. Capitalization is the total value of shares the company has and how those shares are divided. The cap table provides a detailed and intricate breakdown of the shareholdings, the holders, and the projections. It includes the specifics of a company's equity ownership capital including preferred equity shares, warrants, convertible equity, etc. The cap table essentially helps startup founders illustrate ownership stakes in the business and highlights which securities are outstanding.
The Cap Table is somewhat similar to a balance sheet- it reflects the financial position at a specific point in time. Apart from showing the ownership and accompanying economic and voting rights, the Cap Table also provides valuable information such as ownership position, shareholder information, rights to purchase additional future equity, voting percentages, vesting schedules, purchase price, etc.
The Cap Table takes all the information related to capitalization and distils these into a digestible format that can help startup founders take strategic business decisions with greater ease. With good Cap Table management, startup founders can confidently make executive decisions for issuing ESOP grants to new hires, raising additional financing, soliciting stockholder approval, or calculating liquidation waterfalls for liquidity events.
Also read: Everything About Capitalization Structure: What You Need to Know
The cap table looks different for every company at different growth stages. While in the initial days of the startup the cap table is simple, as the organization matures, the Cap Table also evolves and naturally, starts to become more complex.
Along with listing out the equity stakes, cap tables also need to include other elements such as transaction history and legal restrictions such as transfers and transfer restrictions, sales, the exercise of options, and conversion of debt to equity, amongst other things.
The cap table should always correctly reflect the organization's overall capital structure, detailed ownership information for each class, and series of stock outstanding and must always be current and up to date.
The design of the cap table should be such that it provides valuable information that supports business decisions. If the startup is unable to use the cap table to make decisions by the executive team, then it does not serve its core purpose. Cap tables provide a way to gain alignment on matters important to the organization and find use in many organizational aspects. In hiring, for example, without an accurate cap table, companies will be in a quandary over how many shares can be allocated to new hires. This can unnecessarily slow down the recruitment process. Using a cap table helps HR provide routine feedback on equity packages to help improve or maintain competitive compensation for all employees.
A cap table also needs to be detailed. But how much detail is enough? To begin with, it can be easy to ignore the cap table at the beginning of the startup journey. It is easy to rattle off the cap table details or have the same stored in excel sheets. But as the organization grows, this information becomes more complex and exhaustive. Scalability and traceability can be big problems with spreadsheets as information increases. Excel spreadsheets also do not provide a single source of truth and can be prone to human error apart from being time-consuming to maintain.
Formatting a cap table accurately can also be a source of pain and frustration, especially in the absence of the right skills and knowledge. As such, having the right cap table management systems become imperative.
A cap table is also considered a legal document (while, strictly speaking, it is not so) since it spells out the company's equity structure. Mistakes within the cap table, therefore, mean mistakes in the company's ownership documentation. Managing the cap table well right from the inception of the company becomes extremely important since tracking spreadsheets to track ownership interests alongside investor stakes and employee stock options only becomes complex as the company matures.
Must read: 5 Practical Cap Table Management Tips Startups
A well-managed cap table brings in immense clarity. It can help companies attract investments and prevent or effectively manage further dilution of stakes. It helps:
Putting off fixing the cap table management can prove to be a costly mistake. Remember that the cap table will inevitably need to be managed sometime. And then the company will need to find skilled (read expensive) lawyers and professionals to manage this task and conduct the repair job. Startup founders always need to be on top of their Cap Table management to avoid headaches in the future.
Qapita provides a comprehensive cap table management solution that addresses all the common challenges that companies face and provides a single source of truth and a comprehensive history of ownership eliminates most of the woes associated with its management. It also makes sure that the cap table works for the company and becomes a strategic asset.
Connect with us to see how our equity management platform helps you do cap table management with ease.
A cap table lists all equity ownership including founders' common shares, investor preferred shares, option pools, SAFEs, convertibles, warrants, and vesting schedules. It shows fully diluted ownership percentages, share classes, and economic rights for each stakeholder. Founders use this to model dilution and prepare for funding rounds.
Early cap tables track simple founder splits on Excel, but growth adds funding rounds, employee grants, and complex instruments like SAFEs that create version conflicts. Manual spreadsheets fail at scalability, audit trails, and real-time updates needed for investor due diligence. Proper management becomes a strategic necessity beyond basic record-keeping.
Investors demand accurate cap tables during due diligence to verify ownership, dilution history, and liquidation preferences. A well-maintained table speeds up negotiations, builds trust, and prevents surprises that could be misleading. Founders who model scenarios ahead of term sheets negotiate from strength.
Excel works for 2-3 founders pre-seed but fails after first funding, 20+ stakeholders, or when tracking vesting/SAFEs. Version chaos and manual errors create audit risks during raises. Dedicated cap table platforms like Qapita provide single source of truth with automated compliance.
Yes - discrepancies in ownership percentages, unrecorded grants, or missing convertibles signal poor governance to investors. Legal disputes from inaccurate equity records delay exits and erode trust. Founders who ignore cap table hygiene pay expensive lawyers to reconstruct history later.
