Cap Tables and Ownership Stocks: The Basic Terms to Know

DISCLAIMER

This information is intended for business owners in Canada and serves as general guidance only. Always consult with a qualified advisor before making any legal decision. 

In this article, we’ll cover the following topics:

• What’s a cap table?

• The four types of ownership in a cap table

  • Common stock

  • Stock options

  • Preferred stock

  • Convertible notes

What’s a cap table?

A cap table (shorthand for capitalization table) is a table (typically an excel or Google spreadsheet) that reflects the ownership of your company. It’s an essential document in a business owner’s arsenal for keeping your investors happy and forecasting the impact of potential funding rounds.

Cap tables track four kinds of company ownership: common stock, preferred stock, stock options, and convertible notes.

Common Stock

Common stock is typically held by founders, key first employees, and in some cases, advisors. Sometimes, holders of common stock are given voting rights in a company. 

Stock Options

Stock options give people – usually employees – the right to purchase company shares at a later point in time. Stock options are great because they align employee incentives with owner incentives, they encourage employees to treat the company as if it were their own, and they help build employee loyalty. Read “Employee Stock Options: Everything Canadian Business Owners Need to Know” for more on stock options.

Preferred Stock

Preferred stock is just like common stock, except preferred stock comes with certain preferential rights. For example, if there’s a liquidity event or if the company is dissolved, holders of preferred stock are typically the first shareholders in line to get paid. For this reason, many investors insist that they receive preferred stock.

Convertible Notes

Convertible notes are debt instruments that can be converted into company equity later on. Convertible notes have all the features of regular loans – interest rates, maturity dates, and so on, but they are also convertible in the sense that, upon the occurrence of a pre-determined conversion event, the notes convert into shares (usually at an attractive discount). Read “How to Fund Your Startup Using a Convertible Note” for more on convertible notes.

Want to learn more about cap tables? We’re here to guide you. Contact us today using the below form.