How to build a cap table for your startup
Here are 3 ways to set up a Cap Table for your startup from scratch.
Sometimes customers message us saying they want a ‘clean cap table’, and to do that they want to set up a Special Purpose Vehicle (SPV) or nominee structure to reduce the number of shareholders on their cap table.
In fact, a ‘clean cap table’ isn’t that you have few shareholders, it’s that the founders have the majority of the shares and that you don’t have toxic convertible notes or investments.
Here’s how to achieve a clean cap table that keeps your company looking investment-ready, and avoids investors blocking your ability to run your business.
In the old days before SeedLegals, people wanted fewer shareholders because documents had to be signed in person. You and your investors had to schlepp to a lawyer’s office to sign, and share certificates were issued as signed pieces of paper.
What a faff. If you had more than a dozen or so shareholders, it was a major headache. So companies often preferred a ‘clean’ cap table with fewer shareholders.
Nowadays, services like SeedLegals and e-signing have changed everything. On SeedLegals, your cap table is digital – you can create, sign and send share certificates to one or 100 shareholders in one click. No-one meets at a law firm’s office or signs bits of paper anymore, those days are over.
Beyond 100 investors, you might consider doing a crowdfunding round. The crowd platform will usually set up their own nominee structure – but that’s as much for their strategic purposes as for your convenience.
So, here’s what a ‘clean cap table’ means, and how to achieve that for your company:
It’s fine to have lots of investors on your cap table. A clean cap table actually means a company has:
You could use a Special Purpose Vehicle (SPV) or nominee to bundle shareholders. Instead of appearing as separate investors on your cap table, they appear as just one investor: the nominee company.
It looks nice and tidy on the cap table as just one line entry. But actually we think it’s a bad idea, here’s why:
Does an SPV or nominee company still sound appealing? We hope not – we think they’re a superficial way of cleaning up a cap table and they thwart your aims for straightforward company admin.
There’s nothing wrong with SPVs or nominee companies, they’re a great solution for specific problems. For example, if your goal is ‘As an investor, I’d like to set up a vehicle so I can create and manage a group of co-investors and we go hunting together’, then an SPV or nominee company is a good solution.
But if your goal is ‘As a founder, I want a clean cap table’, an SPV or nominee company adds overhead that in our view is unnecessary, and might actually make it harder to run your company.
So, how about using a syndicate to group investors?
A syndicate is an arrangement where a lead investor brings other investors with them. The lead investor might simply be a well-connected angel investor who loves investing but doesn’t have the funds (or doesn’t want to take the risk) to fund an entire round themselves. So they introduce the investment to some friends, and then they hunt as a pack.
The lead investor sometimes wants a fee for finding and bringing the other investors – that fee could be in the form of cash, or share options, or a ‘carry’. A carry is where the lead investor gets an enhanced pay-out if/when you sell the company – they’re effectively deferring their payment till later.
Sometimes the lead investor isn’t looking for any fee for themselves, they just want to invest in great companies, and bring their friends with them. It’s a mix of business and lifestyle.
Either way, the lead investor might simply introduce their co-investors to you and you add them as direct investors in your round as normal.
Or, the syndicate might set up their own SPV or nominee, giving them more control of who they have in their investment group – this way, they can freely add and remove people themselves. In this model, the syndicate itself typically bears the costs of setting up and running their nominee entity.
If you have an investor who’s asking about setting up a syndicate for this purpose, explain to them that, sure, they can if they want – but you can save them all a lot of time and money by just having them invest directly. With SeedLegals, you can easily set the syndicate lead as the Lead Investor in your round, give them share options as their reward, and maybe a board seat if needed.
On SeedLegals, you can choose terms to make your company admin much easier, for example:
At SeedLegals we have a lot of investors. Some are angels, some are funds. In total, we have around 50 shareholders on our cap table (we use SeedLegals for our cap table, of course) – and that’s totally fine.
We designed our cap table management tool to automatically create clean, easy to read cap tables which automatically update when you issue more shares. There’s a reason SeedLegals is the UK’s number online one cap table tool.
Need a hand with your cap table? Hit the chat button to ask our experts. We’re here to help seven days a week.
Our cap table builder takes care of the arithmetic and calculates equity dilution so you can easily keep tabs on who owns what.Try UK #1 for cap table