Your Cap Table
Are virtual shares part of the cap table?
Cap table is a document that usually lists all shareholders as well as persons that have the right to become shareholders in the future, such as employee option holders. As virtual shareholders are not actual shareholders and virtual shares do not give the right to become actual shareholders in the future, you may have a valid question – should virtual shares be reflected in the cap table?
Short answer is yes – we generally recommend to include also virtual shares in the cap table. But we will keep it nice and clean.
This is because your shareholders, above all, investors read your cap table to understand how are profits and returns allocated in your company, for example, how are profits distributed and what will shareholders get when the company is acquired. In this context it is important to understand that certain economic benefits given to your virtual shareholders will “dilute” similar economic benefits available for actual shareholders. For example, if your virtual shares give the right to receive payment when the company gets acquired, the buyer of your company will (most likely) deduct the money to be paid out to virtual shareholders from the total acquisition price. This means that less money will be distributed to actual shareholders.
In the same way, if your virtual shares give the right to receive payment when dividend is paid to actual shareholders, part of the profits that would otherwise have been distributed to shareholders would be distributed to virtual shareholders. If your virtual shares do not give any right to any dividend-like payments or company sale / liquidation payments, we advise to consult with your lawyers to find out whether to reflect the virtual shares in the cap table.
Virtual shareholders vs traditional shareholders in your cap table
It is important to remember that virtual shareholders are not actual shareholders and they do not have shareholders’ rights, including voting rights in traditional sense. This means that you do not need to invite them to shareholders’ meetings, send them information and documents that you send to actual shareholders or otherwise engage them in shareholders’ matters.
For example, you do not need to seek their vote or approval if you wish to adopt shareholders’ resolutions, sign shareholders’ agreements, investment agreements or similar documents or amendments to those documents.
In other words, your virtual shares will not hinder the normal decision making and document signing process in your company, including the process for raising new investments. It is also important to remember that virtual shares do not create financial obligations for your shareholders – all financial obligations arising from virtual shares lie with your company, in the same way as debt raised by your company.
How to reflect the virtual shares in the cap table?
Let’s assume that your company’s current cap table is as follows:
You now wish to create a virtual share pool of 5%. In such case, your cap table together with virtual shares pool would look like this:
You should think about virtual share pool in the same way as your employee option pool – at the time such pools are created, they are only reserves “on paper” which do not yet dilute the shareholdings or economic benefits of actual shareholders. Dilution will take place only once virtual shares are issued to and accepted by virtual shareholders – in the same way like options will dilute other shareholders only once they have been actually issued, vested and properly exercised by option holders.
In other words, the creation of a virtual share pool of 5% means that you would in principle be ready to distribute up to 5% of the proceeds of the sale of your company to virtual shareholders. If, by the time your company is actually sold, only 2% has been actually issued and accepted by virtual shareholders, you must distribute 2% of the sale proceeds to your virtual shareholders and the remaining proceeds will be distributed other shareholders, including employee option holders who have properly exercised their options.
Learn more how virtual shares compare to traditional shares or employee stock options 
Virtual Shares vs ESOP