What Is a Fully Diluted Cap Table and Why Is It Important?

Introduction

A fully diluted capitalization table (cap table) is a document that summarizes a company’s outstanding securities, including common stock, preferred stock, options, and warrants. The cap table generally includes the number of each type of issued and outstanding equity ownership, breakdowns by security type and class, and the percentage of each type and class held by each investor.

The purpose of this blog post is to explain what a fully diluted cap table is, how it works and why it is important for understanding the equity ownership structure of a company.

Definition of Fully Diluted Cap Table

A fully diluted cap table is a document which lists a company’s ownership structure from the perspective of all securities that have been issued, dilutive securities (securities that can be converted into equity) included. The cap table provides information on how many shares of the company are owned by various shareholders and the percent of ownership stake each shareholder holds. Cap tables are typically maintained by venture capitalists and other investors who need to track equity ownership of the companies they invest in.

Definition of Fully Diluted Cap Table

The term “fully diluted” refers to all shares of a company’s stock when all convertible securities have been converted into equity. A fully diluted cap table takes into account the dilutive effect of these securities, meaning they are included in the total number of shares outstanding. Additionally, a fully diluted cap table also accounts for all options and warrants outstanding as these are also convertible into equity.

Illustration of a Fully Diluted Cap Table

A fully diluted cap table is typically organized into columns with each column representing a different ownership class of the company’s equity. For example, a fully diluted cap table may list “Common Stock”, “Preferred Stock”, “Options” and “Warrants”. Each column typically offers information regarding the number of shares outstanding, the price per share, the total value and the dilution effect that the class holds.

Below is an example of a fully diluted cap table for a hypothetical company:

• Common Stock: 2,000,000 Shares, $1 per Share, $2 million total value
• Preferred Stock: 500,000 Shares, $2 per Share, $1 million total value
• Options: 400,000 Shares, $1.25 per Share, $0.5 million total value
• Warrants: 250,000 Shares, $1.50 per Share, $0.375 million total value

As seen in the example above, a fully diluted cap table provides a more comprehensive overview of a company’s ownership structure since it takes into account all convertible securities, options and warrants.

Understanding the Components of a Fully Diluted Cap Table

A cap table, or capitalization table, is a document that lists out who owns what in a company. A fully diluted cap table includes all the outstanding securities of a company, such as common stock, preferred stock, options, warrants, and convertible debt. It is a significant document for investors and business owners alike, as it tracks who owns what, and is important for evaluating changes to ownership.

Overview of Most Important Components

The most important components of a fully diluted cap table are: the class of security, the holder of the security, the number of securities, the ownership percentage (both pre- and post-money), the exercise and/or conversion price, and the description of the security.

Description of Each Component

• Class of Security: Class of security refers to the type of security, such as common stock or preferred stock. It is important to know what type of security the holder owns, as the rights and privileges attached to each security vary.
• Holder of the Security: Who owns the security can affect the voting rights and dividend payments of the security class, and is an important piece of information for assessing ownership concentration.
• Number of Securities: This tracks the amount of securities held by each holder.
• Ownership Percentage: Ownership percentage shows how much of the company is owned by each holder. This is important for determining the strength of each holder's influence and the duties that are assigned to themaccording to their ownership. This is also important for assessing the total value of the company on a pre- and post-money basis.
• Exercise and/or Conversion Price: This indicates the price per share that the security holder may receive when they exercise their option or convert their debt.
• Description of the Security: Describing the security helps to understand further the specific rights and privileges of the holder.

Different Valuation Methods

A fully-diluted cap table is an important tool in the startup world, as it provides an up-to-date overview of the value of the company. With this knowledge, companies can make more informed decisions when it comes to fundraising and transactions. To understand the full potential of a fully-diluted cap table, it is important to first understand the different methods of valuation that can be used.

Overview of Different Stock Valuations

Typically, stocks are valued through one of five different methods. These methods are asset-based valuation, comparable company analysis, discounted cash flow analysis, venture capital methodology, and the option pool shuffle.

Description of Each Valuation

• Asset-Based Valuation: This method involves calculating the value of the company based on the assets that the company owns. This includes items such as cash, buildings, and equipment.
• Comparable Company Analysis: This approach compares the company being evaluated to similar companies that have already gone public, or been acquired. This method focuses on the market capitalization of the comparable firms in order to come up with a value.
• Discounted Cash Flow Analysis: This method looks at projected future cash flows and discounts those cash flows to their present value. It is a more comprehensive approach, but also more difficult to calculate.
• Venture Capital Methodology: This approach looks at the risks and rewards associated with investing in the company. This method also takes into account the exit strategies that the company may have.
• Option Pool Shuffle: This method looks at the current value of a company’s options and adjusts the pre-money valuation based on the option pool size. It is used to adjust for the increase in the fully-diluted shares of the company.

Benefits of a Fully Diluted Cap Table

A fully diluted cap table represents a company's stock at a 'fully diluted' state, meaning all options and other future equity that could become available are included in the table. Such tables are commonly used by investors, venture capitalists, and other financial professionals, as they provide a complete picture of the company’s ownership structure. Knowing the complete economic interests of all members of the company is essential for making decisions regarding financing, mergers, and other changes in the company.

Improved Investor Communication

A fully diluted cap table can be used to improve communication between investors, who may be spread out geographically and due to the complexities of a large capital structure. Developing a comprehensive table can help clarify the ownership structure, and can make it easier to communicate new strategies and potential changes in the organization. Investors can communicate with each other, and with the company itself, using the table as a reference.

Greater Ability to Make Financial Decisions

Having a detailed and accurate picture of the company’s financial interests is crucial for making important decisions. It can help make decisions about financing, mergers, acquisitions, and other changes in the company. The table can also provide an analysis of stock dilution which can help investors and financial experts determine how best to structure future investments or change ownership structure. This information is critical for making sound financial decisions.

• A fully diluted cap table can serve as the basis for improved investor communication.
• Having this detailed picture can aid in giving greater ability to make financial decisions.
• The cap table can also provide an analysis of stock dilution which can help investors and financial experts.

Disadvantages of a Fully Diluted Cap Table

Fully diluting the cap table may present certain challenges to producing and managing an accurate representation of the company’s ownership.

Challenges to Producing an Accurate Cap Table

Managing an accurate list of stockholders, their respective holdings, and their rights associated with the company may be difficult to maintain when the cap table is fully diluted. As new members and holders join, the cap table must be updated and adjusted frequently to properly reflect the composition of the company’s ownership.

It is also important to keep track of the potential impact of any additional issuances of shares. Adding new shareholders to the fully diluted cap table will dilute all existing shareholders. Therefore, it is important to understand potential issuances, assess the potential dilution, and price the new issuance accordingly.

Lack of Standard Terms Sheets

The absence of any standard terms sheets also makes detailed tracking of shares and stock options of different share classes and holders more challenging. Different holders may have different rights, depending on the terms of issuance and class of shares, making it difficult to accurately reflect the ownership structure.

Due to the complexity of the fully diluted cap table, it is important for companies to have access to the expertise of accounting professionals, attorneys, and other consultants in order to ensure their cap table is accurate and up-to-date.

Conclusion

A fully diluted cap table is an important document that provides a comprehensive overview of the ownership structure of a company. It tracks the number and type of securities issued, the price per share, the ownership percentage of each investor, and the vesting of stock options. It is considered the most important document by investors, as it can reveal a lot of information about a company’s financial health.

From its components to its purpose to its benefits and drawbacks, a fully diluted cap table can give potential investors a clearer picture of the company’s ownership structure. Although it takes a bit of time and effort to create, it can be incredibly useful in helping investors make more informed decisions when it comes to investing in a venture.

The most important thing to note about a fully diluted cap table is that it provides a detailed overview of all securities issued and vested, as well as the ownership percentages of each investor. Having a clear understanding of all of this information is essential for both investors and founders alike and can make the process of investing much simpler and more accurate.