Cap table magic made easy

Introducing our cap table template to help founders manage their equity

By Christian Meermann and Carlo Schmid

Founders start companies every single day. And, yes, this holds true during downturns. Many category-defining companies — like Uber, Airbnb, King, and Zalando to name just a few — started between 2009 and 2011 amidst the Great Recession. For many, the next few months or years might be a great time to begin building. And while companies start at different times to tackle very different problems in different industries, they all have the same starting point: incorporation.

Incorporating creates the initial equity that you as a founder hold and have to manage for the entire lifespan of your company. At first glance, it seems like a small step and sounds simple in theory, but incorporation involves laying critical foundations for everything else down the road. This is crucial to get right from the start and maintain across all later funding rounds until the company IPOs or exits.

TL;DR— incorporation is crucial.

Lawyers draft hundreds of legal documents to ensure that everything is in order. But given that this is not always the easiest way to get a quick glimpse of how the equity is managed and distributed, the capitalization table (“cap table”) came to the rescue. It’s the most crucial spreadsheet file in your entrepreneurial journey.

Cap tables can seem intimidating, but they are pretty simple to build and manage. To demystify how cap tables are structured and evolve, we’re sharing our very own cap table template and we’ll take you through what to expect in your company’s journey over subsequent funding rounds, various ESOP pools, secondaries, and more focusing on the economic terms.

Cherry_CapTable_Template

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Initiation

Let’s set the scene.

After brainstorming and researching for months, you as a founder finally decide to start Unicorn Company. Luckily, you are not alone and have two complementary cofounders. You sign the incorporation documents and off you go.

The first step is pretty simple. The equity is split evenly among the three cofounders.

VSOP

While you are a complementary team, you know you will not reach your vision alone. You need employees. You want the best talent but cannot yet compete with larger, more established companies on salary and benefits. However, you have a powerful argument for new and talented people to join your journey: equity.

You can incentivize new employees by letting them participate in the upside of your company’s future success by creating a virtual stock options plan (“VSOP”) or employee stock options plan (ESOP) in the UK or US.

In your company’s case, you created a VSOP pool of 10% that will be allocated to future employees.

With the creation of the VSOP pool, we now have two views on the company: a non-fully diluted view (“n.f.d”) and a fully diluted view (“f.d.”). The n.f.d. view reflects the official view you can also find in a commercial register. It only considers real equity shares of the company, hence actual legal shareholding. The f.d. view, however, is relevant to you and your shareholders regarding the economic outcome in case of an exit and for determining share prices in future rounds (Pro tip: Always use the fully diluted share count/price).

Pre-seed

After even more research, speaking to customers, formulating your product vision, and starting to build your MVP, you as the founder decide to take on outside capital for the first time. You want to hire engineers and speed up the product development process. After all, you want to go to market as fast as possible.

The first round is typically raised by friends, family, and angel investors and can be anywhere between €250k and €1m. However, we at Cherry often lead these very early rounds in ambitious teams.

To not waste unnecessary time and money with drafting legal documents, you decide to go for a convertible note — in the US, the YC Safe note is the best equivalent. A convertible note is a debt note that will convert to equity in the subsequent financing round. It comes in the vast majority of cases with a cap — the maximum valuation on which new shares are issued to convertible noteholders — and a discount on the price of the next round — the final price will always be lower of the cap price, and the discounted price:

• Round size: €300,000
• Cap: €3,500,000
• Discount: 20%
• Interest rate: 2% (for tax reasons important to include, but can be set rather low)

Seed

The yellow fields highlight the most important fields in the cap table based on the negotiated terms.

You hired your first employees (and gave them VSOP shares), developed your MVP, and attracted your first pilot customers willing to pay for the product. You are building a pipeline of potential customers and realize that you have a real opportunity at hand. To keep the momentum high, you decide to raise your seed round. Now, you go straight for institutional investor and you choose to do an equity round to convert your debt holders to equity owners.

After a thorough negotiation with your dream VC, you agreed on the following economic terms:

• Round size: €1,500,000
• Valuation: €8,500,000 (pre-money) / €10,000,000 (post-money)
• Dilution: 15% (Round Size / Post Money Valuation)
• VSOP pool: 14% f.d. post round, but extended before the equity round (pre-round)

Points to note:

• The share price for the round is based (as mentioned above) on the fully diluted share count existing before the new investment round happens. This also includes the shares created and distributed to your convertible note holders. At first, this might seem confusing, given that the debt is converted to equity during the seed round. But looking at the historical timeline, the convertible note happened before the seed round. Thus, the debt will also convert to equity before the round. The shares created need to be included in the fully diluted share count for calculating the seed round share price (a circular reference, to be precise but the correct way to view and model it out).
• The VSOP is extended pre-round and is thus shared by all existing investors but not the new seed investor. This is a topic for negotiation, and we will view the other scenario (post-round extension) in the Series A round.

Series A

The yellow fields highlight the most important fields in the cap table based on the negotiated terms.

Twelve months later, you achieved all your seed milestones, show first signs of product-market fit, and have strong commercial traction overall. You want to continue scaling and feel ready for your Series A. After a successful fundraising process, you found your dream Series A investor willing to lead your round.

You agreed to the following terms:

• Round size: €7,500,000
• Valuation: €30,000,000 (pre-money) / €37,500,000 (post-money)
• Dilution: 20% (Round Size / Post Money Valuation)
• VSOP pool: 14% f.d. post-round and extended post-round

Points to note:

• Given that the VSOP pool is extended post-round, all investors, also the new Series A investor, experience dilution.
• The seed VC used its pro-rata rights to maintain its ownership of 15% f.d. To get the final investment amount of €1,250,000, you have to multiply the f.d. ownership of the seed VC (15%) and multiply it by the overall round size (€7,500,000). But wait a second! Looking at the cap table, the ownership of the seed VC post-round now stands at 14.79%, not 15.00%, despite its pro-rata investment. The answer is simple: the VSOP pool extension happened post-round and diluted the seed VC as well. So there are two options: The existing investor increases the pro-rata amount a bit to get to 15% f.d. even after the VSOP increase or you take in the VSOP increase pre-round.

Series B

The yellow fields highlight the most important fields in the cap table based on the negotiated terms.

You put the money from the Series A round to good use. The company’s revenue grows nicely, while its unit economics constantly improve. To keep the momentum, you plan to raise a solid Series B to expand geographically and deliver on your ever-increasing product roadmap. Your Series B investor wants to increase its ownership via secondaries and offers your current business angels a fair deal.

The terms of the round including the secondaries are the following:

• Round size: €20,000,000
• Valuation: €80,000,000 (pre-money) / €100,000,000 (post-money)
• Dilution: 20% (Round Size / Post Money Valuation)
• VSOP pool: Keep as is
• Secondary: 250 shares sold by each business angel with a 20% discount on the Series B share price

Points to note:

• The Series B investor wants to invest €12,500,000. The Seed VC and Series A VC 1 use their pro-rata rights — the same calculation as before. The Series A VC 2 takes the remainder of the round and invests above its pro-rata right to expand its ownership.
• The secondary is modeled into the cap table to reflect the new ownership distribution. Note that each business angel sells 250 of its Seed shares. Given that these shares have subordinate rights to Series B preferred shares, a discount is typically applied. The Series B investor buys these 750 shares and adds them to its share count of the 9,344 Series B preferred shares it acquired in the regular equity round. While this can be modeled out in more detail, 750 Seed shares are added to the total share count of the Series B VC directly to keep track of the overall ownership distribution.

At this point, our journey through the world of cap tables ends. There will, of course, be more rounds to come and, in the end, a successful exit. But for our audience — emerging entrepreneurs, early-stage founders, and maybe also employees of high-growth start-ups who are thinking of embarking on their entrepreneurial journey — this template should serve you well and guide you through your company’s first couple of years. At some point, you can also consider working with a cap table management software like Ledgy, Carta, and bunch, a great tool to orchestrate SPVs and more complex cap table structures. While the interface will be different, understanding the underlying mechanics will be crucial to you as a founder.

We are focusing on the economic terms here and cap tables are a tool to reflect these. There are, of course, many more factors to consider when raising a financing round and signing a term sheet. But the importance of managing your cap table well cannot be understated. Mistakes happen way too often. We, at Cherry, support our teams in ensuring that the economic outcomes are as expected. Our team, including our general counsel and dedicated finance team, are there for founders every step of the way.