An Angel Investor’s Guide to Cap Tables
A cap table, short for “capitalization table,” is a document that shows the ownership structure of a company. It lists all the securities issued by the company, such as common stock, preferred stock, convertible notes, SAFEs and stock options, as well as the owners of those securities, including founders, employees, investors, and other stakeholders.
The cap table also shows the percentage of ownership and the number of shares held by each owner, as well as any restrictions on the securities, such as vesting schedules or conversion terms. It is a critical tool for startups, investors, and early-stage companies as it helps to keep track of ownership changes and potential dilution from future financing rounds or stock issuances.
Oftentimes Cap Tables are managed via an excel sheet but there are platforms that assist with equity management, which is especially useful as companies grow and issue stock to new employees or raise more money. Carta does provide a free template that can be downloaded and used.
An important term and concept for any founder or early stage investor to understand is the concept of Cap table dilution. Cap table dilution refers to the reduction in the ownership percentage of existing shareholders in a company due to the issuance of new shares. Below are two different examples of dilution to consider from the angel investor side.
Say an investor buys 10,000 shares in a startup that has a total of 100,000 outstanding shares. This means that the investor owns 10% of the company. However, the company decides to raise additional funding by issuing 50,000 new shares to a new investor. After this round of funding, the total number of outstanding shares in the company increases to 150,000.
As a result of the new share issuance, the investor’s ownership percentage is diluted from 10% to 6.67%. This means that the investor now owns a smaller percentage of the company than before, even though the total value of the company may have increased due to the additional funding
Another way an angel investor should think about the investment is how the future rounds and raises will affect this. An investor writes a $100k check to a startup at the seed stage and receives 10% equity in exchange. The company’s valuation at the time of the investment is $1 million.
Over the next few years, the company grows and raises additional funding at higher valuations. Let’s say the company raises a Series A round at a valuation of $10 million and a Series B round at a valuation of $50 million. At each funding round, the investor’s ownership percentage is diluted, but the value of their shares also increases.
If the company is eventually acquired or goes public at a valuation of $500 million, the investor’s 10% equity stake would be worth $50 million. Subtracting out the initial $100k investment, the investor would earn a return of $49.9 million on their investment. Thus, illustrating why it is important for founders and early stage investors to understand their Cap table and dilution.
The Riptide Syndicate is a community of early stage investors that has joined together to leverage the network effects of our experience, perspectives, and connections. If you’re interested in joining the Riptide Syndicate or learning more about angel investing, please fill out our application form here. For companies interested in pitching our syndicate, click here to fill out our application.
Other resources that are good to reference and visit regarding cap tables are as follows:
https://smartasset.com/infographic/startup
https://carta.com/blog/what-is-a-cap-table/
https://johngannonblog.com/venture-capital-financial-modeling/
