Capitalization Table

A capitalization table is the list of everyone who owns a piece of a company, and how big each piece is.

It is not only a list of names. It shows the class of each holding as well — ordinary equity, preference shares, convertible instruments, and the block of shares set aside for employees.

Why does an AIF care so much about it? Because ownership is where its money ends up. A fund can agree a price, sign a term sheet and pay the cheque, and still own nothing until the shares are allotted and its name appears on the table.

The table also decides power, not just value. Rights to block a decision usually belong to a class of shares. Reading the table tells you who those holders are.

And it changes. Every new round, every option an employee exercises and every convertible that converts rewrites it.

Where XIX-D puts it. The workbook has no section on the capitalisation table. It appears at two points, and both are examinable.

1. The last step of the deal (Chapter 9, section 9.1.3.2). In the private equity deal pipeline, after final due diligence and the Final Investment Memorandum, the fund signs the shareholders agreement and the share subscription agreement, hands over the cheque, and the shares are allotted and share certificates issued. The workbook then closes the pipeline with the line that matters here: the name of the investor will also appear on the Capitalization Table of the start-up. Until allotment, an agreement to invest is not ownership.

2. Who sits on it (Chapter 10, section 10.4.9). Protective provisions in a term sheet give rights to a class of preferred stockholders — described by the workbook as generally the minority shareholders or preference shareholders on the Capitalization Table of the company. Those rights cover changes in the number of preferred shares of any class, amendments to the memorandum or articles, creating another class of preferred shares with dividend, liquidation or voting preferences, restructuring and acquisitions, dividend declarations, changing the size of the board, redemptions, dissolution, and establishing a new option plan or authorising new shares for one. The table is therefore the map of who can block a corporate action.

What crowds the table — the option pool (section 10.4.7). Stock options go to employees who meet pre-defined conditions, and lapse without any share allocation if they do not. An option pool of 15% of total capital means all employees can potentially own 15% of the company. Within that pool a Chief Marketing Officer may be given options over 3% and a Chief Technology Officer over 2% — figures the workbook says are not fixed and vary from company to company. Its view of a sensible size: an ideal option pool for a start-up in India should be between 5% and 10% of capital. Every option exercised can dilute an investor's stake, which is why the extent of the pool is negotiated.

What rewrites the table later (section 10.4.8). A hybrid security carries an automatic conversion clause: convertible debt securities or convertible preference shares must compulsorily become equity on a pre-defined trigger. The workbook's own triggers are a start-up generating a minimum of INR 10 crore revenue, raising Pre-Series A capital, or a growth company going public through an IPO. The conversion ratio, agreed between company and investor, fixes how many shares appear; a higher ratio benefits the investor because more shares are allotted. An optional conversion right gives the investor the choice rather than the obligation.

No figure for the table itself. XIX-D prescribes no format, no minimum content and no number for the capitalisation table. Every figure above belongs to the option pool or the conversion trigger, not to the table.

The Rs 1 crore, 10% and Rs 10 crore figures are the workbook's own illustration in section 11.8.2. The share counts and the rest of the table are illustrative.

The workbook's round. ABC Venture Fund wants to invest INR 1 crore in Co. XYZ for a 10% stake at a post-money valuation of INR 10 crore. The pre-money valuation is therefore Rs 10 crore − Rs 1 crore = INR 9 crore.

Put that on a capitalisation table. Before the round, Co. XYZ has 90,00,000 equity shares held by its founders, which at a Rs 9 crore pre-money valuation is Rs 10 a share. ABC Venture Fund subscribes to 10,00,000 compulsorily convertible preference shares at Rs 10.

The fund's 10% is exactly what the post-money arithmetic promised — but only once those 10,00,000 shares are allotted and the register updated. Before that, ABC has a signed agreement and no line on the table.

Now add the option pool. The board creates a pool of 15% of total capital, the figure the workbook uses in section 10.4.7, by authorising 17,64,706 new shares (15% of the enlarged 1,17,64,706 total). Within it the Chief Marketing Officer gets options over 3% and the Chief Technology Officer over 2%.

ABC's stake has fallen from 10.0% to 8.5% without the fund selling a single share. That is why the extent of the pool is a term sheet negotiation and not an afterthought — and why a pool at the workbook's suggested 5% to 10% would have cost the fund far less.

And the convertible that is not yet on the table. Say an earlier investor holds convertible debentures that convert automatically once Co. XYZ crosses INR 10 crore of revenue, at a ratio that would produce 8,00,000 equity shares. Nothing appears on the table today. On the day revenue crosses Rs 10 crore, every percentage above changes again.

Chapter 9, section 9.1.3.2 (Private equity deal structure), ends the deal pipeline with the investor name appearing on the Capitalization Table — so an ordering question can ask what happens last, or what happens after the share subscription agreement is signed. Chapter 10, sections 10.4.7 to 10.4.9, supply the examinable numbers around it: the option pool illustration of 15%, the CMO and CTO options at 3% and 2%, the ideal Indian pool of 5% to 10%, the automatic conversion trigger of INR 10 crore of revenue, and the description of protective provisions as belonging to minority or preference shareholders on the Capitalization Table.

Expect the pool percentages and the conversion trigger as direct recall, and the cap table itself as the answer to where the investor name is recorded once shares are allotted.

• Signing is not owning. The investor name goes on the table when the shares are allotted, after the shareholders agreement and share subscription agreement are signed and the cheque handed over. A term sheet puts nobody on the table.
• 15% is the workbook's illustration, 5% to 10% is its recommendation. Both numbers are in section 10.4.7 and they answer different questions. The 15% is used to explain what a pool means; the 5% to 10% is what it calls ideal for an Indian start-up.
• The CMO and CTO figures are percentages of the company, not of the pool, in the workbook's example — and it says expressly that they are not fixed and vary from company to company.
• A protective provision belongs to a class, not to a person. It is the class of preferred stockholders on the table that gets the veto.
• Automatic conversion is compulsory on the trigger; optional conversion is the investor choice. The two are contrasted in section 10.4.8 and the words are easy to swap.
• A higher conversion ratio favours the investor, because more equity shares are allotted on conversion.
• Dilution is arithmetic, not a loss of shares. In the example above the fund still holds 10,00,000 shares; only the denominator moved.
• XIX-D gives no prescribed format for a capitalisation table. If an option claims a SEBI-specified format or content, it is not from this workbook.