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• This is a guide to using a template cap table (with returns analysis) that I created
• The cap table enables founders to track ownership from founding up to Series-C
• In addition there is a nifty ‘Returns Waterfall’ tab that enables you to calculate returns to all the shareholders at an exit
• This presentation is going to explain at a high level how to use it • This stuff is complicated so you are going to have to
do reading to really get your head around it
Introduction
• You can download the spreadsheet from my blog here:
http://wp.me/p41jkx-3d
Download
• It is an excel spreadsheet that sets out in a ledger who owns the startup at different periods of time
• It is a list of the shareholders and how much each person owns
• It tells you how much money you will make if you exit, which is what I am sure you want to know!
What is a cap table?
• Think of it this way, when you start out as a founder you own 100% of the company, right? Well you raise a Seed round and now investors have a chunk. How do you know who owns what? The cap table tells you
• Furthermore, by having one properly set out you can truly understand what you own in different scenarios and after all sorts of complex things happen such as effects of liquidation preferences, discounts on convertible debt, the option pool shuffle and more importantly, not confuse ‘basic’ stuff like your ownership being based on post-money valuations and not pre-money
Why do you need a cap table?
• The cap table enables you to understand the ownership of your company and how it evolves across multiple financing rounds, as well as play with all the assumptions to support how you structure your next financing round
• The template accounts for most for what you will typically see with investors. It covers you for: • Initial founder table • Angel investment (Both as convertible debt which converts at Seed
stage and straight priced round) • Seed investment (Assuming 1x strategy preferred liquidation
preference) • Series A, B and C (Again structured as the Seed investment)
• In addition to the cap table, I have integrated a waterfall returns analysis so you can calculate exactly how much people will earn and at different exit valuation scenarios. I have not seen someone do this before, so I think it is pretty cool
What my template cap table does
• As you are no doubt aware, things can get pretty complicated and therefore my model does not account for every scenario
• Assuming you are dealing with reputable investors, you won’t ever really have to change this (Such as account for multiple liquidation preferences and participating preferred shares)
• I do not assume that you will: • Get funded with warrants • Assume there is a vesting schedule on shares (Though there is a
switch to remove unissued shares from the ESOP pool) • Have debt and interest that converts to shares • Have multiple liquidation preferences • Participating preferred shares • Different terms for investors at each stage of funding
What my template cap table does not do
• Your cap table is important. I did this myself and it has not been audited by anyone
• You ultimately will need a lawyer to ratify it • I do not take any responsibility whatsoever with
what you do with it
Important Disclaimer!
• Founders and staff get both/or: • Common stock • Common options
• Common stock is ‘junior’ to preference shares which is what your investors get (Certainly in series-A and after)
• Preference shares are legally a separate ‘class’ • Often they come with special rights, normally either
control or economic in nature • This means you get paid after everyone who has
preference ones
Shares
This is the split of the company when you start
Put in name of founders and staff Put in the shares people start out with
New shares get dealt with later
This tells you how much everyone owns…
This is where you add new options for staff
When you issue shares over time they are deducted from the
unvested options pool in the future tabs
Summary tab of what happens across future financing rounds
• Your angel round will either be: • Priced round - ‘Angel cap table’ tab • Convertible debt - ‘Angel Convertible’ tab
• I have made two sheets to deal with these • The priced round is the same as all the other
sheets except angels are getting common shares • The convertible debt gets converted to Preference
shares at the discount you negotiate to the Seed Round (Aka the ‘Next qualified financing’) • Why? Well it’s all about negotiation. Assume angels in
a priced round don’t get preference, but in a convertible they want to convert at the same class as the Seed investors
Angel round tabs
Here you issue convertible notes which convert at Seed
Put in the numbers you negotiate, simple
This is something you agree on approximately, and let’s you know
how much is owed till you raise again
This changes automatically when you start putting in numbers into the
Seed round tab It will say “215” if the Seed table is
blank
Where the angel converts in the seed stage
This shows you total amount of cash you actually got
Thats the convertible value it converts into
It’s higher than the $50k investment due to interest and being netted up
from the discount
See the conversion of shares in the Seed tab
And here the angel convertible fits into the summary cap table in the
Seed tab
Put in assumptions and see the resultsHere the investor wants a bigger
ESOP plan This is a option pool for staff
If is also a way to decrease the effective valuation
This is the date you close the round
Premoney + investment = postmoney
Put in how much each investor invests and their name
Summary cap table before investment
Summary cap table AFTER investment
The right section is what just happened after the angel investment
This shows you the cap table from previous round
note this is 25000 more than before We increased the ESOP in the round
by 75000 but in the founder sheet we issued 50000 shares to Founder
#1. This nets to a 25000 increase
Here is the issuance
Now everyone is getting diluted as we add more shares
There are 2 investors one takes 80% of the shares from
that round
After we issue new shares everyone gets diluted
• Having raised the angel round, the next one is Seed
• The seed round is priced- you agree on a pre-money valuation and investment amount
• The Seed investors get issued a new class of shares call preference shares • Give them ‘economic’ right of a 1x liquidation
preference. Meaning they get their investment back before common shareholders do if they use the right (Optional, they will convert to common if they can make more money)
• This is a straight preferred not participating preferred (Investors don’t ‘double dip’ which is bad for founders)
Seed round
Put in the terms for the new round, note the Convertible note!
No ESOP
This is the value Angel convertible investors get
This is the actual cash that was got
Angel investors now own 15%
Seed investors got 25%
This is the ownership of your startup post Seed investment now
Seed investors now have a ‘fully diluted’ 24.9%
Preference not common shares have been issues
Fully diluted adds both common and preference
We can see a summary of ownership by category
• Things have gone well and you are now closing your Series-A
• Pre-money has been agreed at $5m, with $1.3m investment
• If you divide the pre-money valuation over the total number of shares post Seed you get the share price that Series A investors are buying at
• The number of shares in total post series-a shares have been issued times by the share price tell you the post money valuation
Series A
Nothing you havent seen before
Lots new shares in ESOP
Series A investors take 21%
Seed investors diluted to 19%
Here is the share price i mentioned
Unissued ESOP is now 725k shares (5%) and we have two Series A investors on the board
Series A investors take 20.6%
Unissued ESOP bigger 5% ESOP
• Its a year later • Pre-money is up to $12m, with $5m investment • The investors want to make the ESOP bigger so
you can issue more shares to staff • The Series-B investors are senior to the Series-A
ones
Series B
The unissued ESOP nets out
Unissued ESOP now 525k shares
We issued 1.2m options to Employee #4 and the rest of the
staff
Unissued ESOP now 525k shares
• You raise your Series-C round which is a growth investment to scale your business before your exit
• This is the last round of financing you are going to do (In this model anyway)
• Post this you will be looking at exit opportunities and using the next tab, “Returns Waterfall” to calculate the returns on investment
Series-C
• After multiple rounds of finance, hard work and some luck, it is time to make money at exit!
• The “Returns Waterfall” will tell you how much money each investor will make for different valuations
• The latest investor typically gets their money back first, so the sheet is a reverse waterfall • You start with the Exit value • Each investor decides if they use their liquidation
preference or not and the money flows down to the common shareholders
Introduction
• Investors asked you to increase the ESOP so you could issue shares to new staff as you need to attract new talent • Investors ask this BEFORE they put in money, so
previous investors are the only ones getting diluted • It also reduced the effective valuation they paid as they
don’t expect all the shares to be issued to new staff • In most cases the entire ESOP will NOT be issued
meaning that the returns are equally divided across all shareholders • Previous investors paid to make the ESOP pool
• The model allows you to remove or leave it in • Expect to remove it
Including the unissued ESOP?
There are only a few variables for you to have to play with
This is summary of your final cap table
This allows you to adjust for unissued options and drives all the
calculations below
This is the ESOP switch FALSE: remove unissued ESOP
TRUE: include whole ESOP
The exit date drives dividend payments (If investors negotiated
them)Dividend % is input here
Series-C get a dividend of 10%
This tells you if the shares are included or not
The more you sell for the more common get
Common get nothing as liquidation preferences claim all the return
Series-C liquidation preference is taken up to here
The exit value range (Right is more cash!)
Here we can see how much of the money goes to what investor
Series-C get all of it
Common shareholders (Founders and staff) get paid!
Past a certain point, returns are constant to all shareholders in
proportion to ownership
This is the range of exit values
The range
This is your base exit value
This is the increments (+/-) to the central exit value
This tells you if Series-C take their preference payment or if they convert to common shares and take a %
They aren’t converting to common shares till an exit of $64m so they
take their preference
Convert to common tells you if they convert
Returns for different exit values
Series-C get a dividend payment of 10% so the total preference is more
than $9m
We put the 10% dividend in the assumptions remember?
Series B are next in the waterfall
Preference payment Here they convert to common
No dividend being paid
At the end of the waterfall you see preference paid and remaining proceeds for common shareholders
Preferences paid
Amount for common shares to get return
After adjusting for preference share payments you can see how much common shareholders get paid
Common get nothing
% of what is left getting paid to the shareholders
The number of shares ‘what is left’ is divided to common shares
Preferences are not taken, investors convert to common
$ payment to common shareholders
We see here the actual amount each shareholder gets
This shows common plus preference payments as a % of total proceeds
This is the dollar value payment to investors
Ths is the per share return to investors
This shows the multiple of their investment they make
Seed investors get a 5.6x return on investment
1x return is the liquidation preference at work