Cap Table: Do you understand your full story?
You have either heard a lot about cap tables, or you’ve not heard anything at all. Cap table as it is popularly called, is the shorthand for capitalization table in the Investing world.
We belong to the school of thought that agrees that a cap table is key for every successful founder. This is because at a glance, it tells a story about you, your company and who matters. As you focus on building that product, it is important for you to understand that your cap table is at the heart of the matter in terms of the economics and control of your company.
Popularly referred to as the 'money power’, the cap table is a document/table that outlines what parties have an ownership stake in a venture and the terms of their ownership. It describes your startup’s capital structure. Of course, there are underlying agreement terms such as voting rights, voting percentages, rights to purchase future equity or not, vesting schedules, purchase price, raising additional rounds of financing, determining the pattern in which shareholders are paid at exit amongst other terms – we would definitely need another write up for this!
In the meantime, let’s look at the cap table from two angles.
Firstly, your cap table needs to be able to tell your story and send a signal to future investors. We think it is important to look at those numbers and names with the following lens - Who are your major shareholders? What special powers or rights do they have?
It also highlights patterns - have the initial or lead investors leaned in or leaned out as your company has progressed? Coupled with telling the narrative of management stakes and incentives that motivate, and sometimes the step-by-step order of who gets out, and in what order, when a liquidity event happens.
In our opinion, the cap table tells the full tale!
Also, we look at it from another angle, paying attention to this is very crucial because it can easily get complicated over the years as a result of the mathematical theatrics that go into it. The computations! You know when a lead investor sets terms for an investment into a company, they typically work on a document called a term sheet.
This is when a decision is made about the “pre-money valuation” of the company (the value of a company before it goes public or receives more funding) and how much money will be raised during the funding round. Once the term sheet is defined, all the calculations on the cap table build off one another. Using formulas, the math of partnership with the VC comes into play.
For first time raising startups, we think some of the formulas below may help you to further understand.
• Post-Money Valuation = Pre-Money Valuation + Total Investment Amount, then,
• Price-Per-Share = Pre-Money Valuation / Pre-Money Shares
• Post-Money Shares = Post Money Valuation/ Price-Per-Share
• Investor Percent Ownership = Investor Shares / Post-Money Shares.
Your investor understands the full spectrum of these computations, although good knowledge at your fingertips, we would rather you defer to them. As you scale, your cap table tends to scale, and the need to track ownership interest becomes more pressing.
At Oui Capital, we believe that having the right thinking on your cap table discussions will always be instrumental to your budding startup.
We would like to read up on some of your interesting cap table stories and possibly questions about this topic. Let us know in the comments!