So you’ve just launched your startup and are preparing to take on investment. After running through the post-incorporation checklist, it’s now time to draw up your capitalization table (cap table).
The cap table is a record of ownership. The cap table provides an analysis of the founders’ and investors’ percentage of ownership, equity dilution, and value of equity in each round of investment.
Although there is no right way to format your cap table, it is typically laid out in an Excel spreadsheet. The names (and sometimes addresses) of the shareholders are in the left column with the capital contributions and units in the subsequent columns to the right. The co-founders and groups of investors, from earliest to most recent, are sequenced top to bottom separated by rows clarifying the class of stock and option holders. Managing the cap table can be chaotic, confusing and frustrating especially when bringing on more investors. But if you’re a first time founder, all the more reason to get the structure right the first time from the get-go.
As your company continues to grow and evolve, the cap table will help you keep track of who owns what. When first structuring your cap table, there are certain terms and formulas that are important to understand such as:
Value of your company determined prior to investment (in term sheet discussions)
Pre-Money Valuation/Pre-Money Shares
Pre-Money Valuation + Total Investment Amount
Post Money Valuation/ Price-Per-Share
Investor Percent Ownership
Investor Shares / Post-Money Shares
In theory, the cap table shouldn’t be hard but it can certainly become a pain as you add more investors and employees into the option pool over time. Nick Moran from The Full Ratchet does a really good job of walking you through the steps for structuring a basic cap table. I highly recommend you check out his post as well as calculate his simple cap table for 1st funding round. Furthermore, if you choose to fully automate the process instead of manually updating your spreadsheet you should consider services such as eShares. eShares is a cap table management software that digitizes paper stock certificates along with stock options, warrants, and derivatives.
Whether on a spreadsheet or automated software, try to keep the cap table as simple and straightforward as possible to prevent any mishaps or confusion over stock ownership.