How to prepare a cap table for investors?

Initially, a startup’s venture capital cap table may comprise the company’s founders and/or its first employees. However, when the company’s workforce expands and new outside investors become involved, the situation can rapidly deteriorate. We discuss the importance of the cap table for investors.

In order to determine the dilutive effect of each fundraising round, employee stock options, and new securities issuances, a cap table must be managed and maintained. Thus, all stakeholders can properly estimate their respective portions of a future exit’s proceeds (i.e., liquidation event such as a sale to a strategic or IPO). For your benefit, we have outlined the significance of a cap table for venture capital and its need for VC.

You may see the company’s ownership structures and how much dilution there is by looking at a company’s cap table (capitalization table). Every round of investment generates a cap table, which is a valuable resource for both founders and investors. Founders and investors may see their company’s structure and their equity stake in plain sight. Keeping a close eye on the cap table’s accuracy is therefore essential.

What is the VC cap table called?

A VC Cap table is the cap table for venture capital. For venture capitalists, cap tables are a way to keep track of the number and kind of shares held by the company’s stockholders, as well as any special arrangements, such as protection clauses or liquidation preferences.

What would an initial cap table look like?

Beginning entrepreneurs commonly use a simple Excel spreadsheet or similar tool. Specialized tools cap table management makes it easier and more comprehensive later on. You begin representing your founder’s equity structure from the outset.

Let’s have a look at this example: You have two founders and there is a 70/30 split of ownership between the two (limited liability holding). For a total of 30,000 €, founder 1 paid 21,000 € and founder 2 paid 9,000 €. To reflect the founders’ ownership stake and the distribution of cash during liquidity events, they receive one share (given as the nominal value) for every Euro paid in (e.g. the liquidation of the company, payment of dividends, etc.)

To expand your business, you will need to seek funding from investors, who will require you to meet certain conditions and supply them with certain information in your cap table to evaluate your company.

Let’s examine the major considerations you should make when constructing your cap table.

Investment Rounds — Angel Investors & VC

Typically, entrepreneurs request external investors (ranging from Business Angels to multinational Venture Capital funding funds) to participate in an investment round as new owners and give fresh capital. Initial funding is frequently given by angel investors (business angels). Before receiving the funds, you and the investors will agree on a pre-money value of the business, and an investment amount for this round will be determined appropriately. These variables (pre-money valuation and investment amount) are recorded in the capitalization table, and a post-money valuation is computed by adding the investors’ funding amount to the pre-money valuation. So, the new addition of the “Angel Investors” would pop into the cap table.

If your firm has made substantial development since the initial round of angel funding, is developing traction with key clients, and you need additional resources — such as additional team members — to keep expanding, you may want to explore the second round of funding from a Venture Capital (VC) fund.

Venture capitalists (VCs) are willing to invest in businesses in exchange for a particular level of risk-adjusted return, as well as a higher likelihood of success. Institutional investors, on the other hand, expect entrepreneurs to give incentives for key workers to stay with the company, work hard, and add value to it. For this, ESOPs and Option Pools are utilized as a type of pay to provide important employees with a share in the distribution of earnings upon the liquidation of a firm. Up to 20% of the company’s entire equity (or exit proceeds, in the case of so-called Virtual or Phantom shares) must be reserved for employees in order to construct an Employee Stock Ownership Plan (ESOP), which is regulated in the United States.

Alright, you would be now wondering how these all are calculated, how do the VC take terms into consideration?

VC equity participation should be 100% at the most basic level in a cap table. When new investors or debt is converted to equity, the share count of the cap table must be updated to represent these changes accurately.

To demonstrate how to calculate the cap table, we’ll look at an example:

Venture capitalists can invest $1 million in your company in exchange for a 10 percent share, as an example.

More than 100,000 shares of the company are now in circulation (50 percent held by the founder and 50 percent held by an angel investor)

New investors receive how many new Series A shares as part of their investment?

Formula, New Ownership Stake = New Shares / (Old Shares + New Shares)

Solving: New Shares = [Ownership Stake / (1 — Ownership Stake)] * Old Shares

Applying the assumptions:

• New Shares = [.10/(1-.10)] * 100,000
• New Shares = 11,111

By performing the computation, we can determine that their shares account for 10% of the new company:

11,111 / (100,000 + 11,111) = 10%

The waterfall flow of funds shows how each investor on a company’s cap table receives their portion of a liquidity event’s proceeds following an acquisition.

An investment of $1 million in a firm is split 50/50 between the founder and an angel investor. Let’s assume the company sells for $5 million, or nearly half of its initial valuation, five years later and share those proceeds accordingly.

The following are some additional details:

The Series A Preferred shares provide a 1x liquidation preference for non-participating investors.

1:1 is projected to be the most common conversion ratio.

To begin, the Series A investor must select whether to maintain their preferred shares (1x their initial $1 million investment) or convert to common stock and obtain their pro-rata portion of the proceeds:

The preference is worth $1 million.

There is a 10 percent conversion factor on a $5 million.

However, the VC will most likely use the 1x multiple of invested capital to ensure that they get their money back, although this would be considered a loss in terms of time. A total of $2 million would be distributed to the company’s founders and angel investors.

Consider this scenario: A $100 million sale of the aforementioned company.

The entrepreneur and the angel investor would each earn $45 million, while the investor would receive $10 million in common stock or 10% of the proceeds.

On Eqvista cap table software, creating a cap table is simple and easy. Signing up on our website and creating a company profile through the onboarding process is all you need to do to get started on the platform.

This will bring up the primary dashboard for your newly created firm, which will display you all of its details once you’re done. Eqvista’s cap table platform is now ready for you to begin issuing shares and taking full advantage.

For each phase of the process, check out these helpful articles! If you’d want to brush up on the legal terms, you may do so here in the knowledge center.

Eqvista has a number of features that make it worth a try, including:

• Managing all equity accounting
• Keeping track of your stock ledger
• Issuance of digital stocks
• Cloud-based management of your company’s cap table, which can be shared with all parties involved.
• Round modeling and waterfall analysis
• Management of stock portfolios as well as the conversion of stock options and warrants
• Supporting a wide range of convertible instruments, including Convertible Notes, KISS, SAFES, and more.
• You can design and implement your Vesting Plan for your shareholders at any time.
• ESO (Employee Stock Ownership Plan). RSUs (Reserved Stock Unit) and RSAs (Reserved Stock Award)
• Creating a unique portal for each of your shareholders

Eqvista is always being improved on cap table management for the benefit of its users. We do our best to remain on top of every technical breakthrough that comes our way and makes the process seamless.