Episode 3 – Cap Table Key Considerations
Welcome to Episode 3 of Five Minute Finance for Founders, thanks for continuing to sing along!
Your time is valuable, so we won’t waste it, that’s a promise.
A venture’s cap table is hugely important to its founders (and others) and here at EmergeOne, we’re often asked to build, amend, refresh them or figure out scenarios based on future rounds or other financing events, how exits may be impacted by preference stacks and any number of other stuff that can happen throughout the life cycle of a typical venture.
- Who needs to see your cap table?
- Why do you need it?
- What should your venture show in its cap table?
- Where do I keep my cap table up to date?
The Who: Obviously founders themselves need to understand the capital structure of the business and the CFO and their finance team will probably own it as they’ll need to ensure it’s up to date and in line with accountants and filings. Potential investors may wish to see the company’s cap table but we always recommend that in the first instance founders send a summary rather than detail of every shareholding. For existing shareholders (especially larger ones and VCs), there are likely to be legitimate reasons why they may need to see the full cap table, but when in doubt try and understand what’s motivating the need for info in the first place. Beyond that, the only folk that will likely need to see the cap table in one format or the other will be the tax-man and whichever jurisdiction you file your company returns at.
The Why: There are 2 main reasons to understand your cap table:
- Economics – who owns what % of your venture.
- Control – who owns what % of the voting rights in your venture.
Everything else is pretty much a variation on these two themes!
For example, you may be raising a new round and an investor asks you by how much they’re going to be diluted and what they may need to invest to maintain their shareholding.
Or down the track, you may be trying to figure out what would happen at an exit event, if you have a simple structure with ordinary shares, it’ll probably be pretty simple. But if you have options, warrants, different share classes including preference shares, then things get a little more complex.
Control is the issue that often gets ignored but is arguably more important than the economics. As a founder you want to ensure that you get to make decisions about the direction of your venture, make sure that you understand who may be really calling the shots amongst different classes of shares.
The What:As with so many things we talk about here, there isn’t a cookie cutter approach that you can take. The complexity of your cap table and your needs will dictate the information you want in there. Our approach is generally to build the detail up from first principles, that is:
- Shareholder Name
- Date of investment
- Amount invested
- Shares issued
- Share class
- Round participated in
- % Ownership
- % Fully diluted ownership
We’d likely have a summary tab that pivots the info from the detail so that you can see your financing progression on a round by round basis.
Finally, we’d create separate detail around any option pools and options granted, warrants or convertible instruments issued by the venture. These instruments don’t have an immediate impact on the share capitalisation, but if converted to equity they would – that’s why the fully diluted position of the venture takes these into account.
Finally, where do I keep this thing up to date? For most ventures a spreadsheet is going to be sufficient; you want to keep things as simple as possible and this is probably the best way to do that. But as you grow and start looking at other considerations, like share certificate management, compliance filings or even distributing employee options, a spreadsheet may be too cumbersome it might be time to consider a share management platform such as Carta, Vestd or Capdesk. Whilst we’ve used some of these before, this is by no means an endorsement of any one in particular as they focus on different functionality in each case. Vestd is good for UK based ventures looking to manage their EMI schemes and be able to lodge share issuances directly with Companies House, Carta is more US focussed and also allows you to scenario plan whilst Capdesk has a more global outlook. We recommend you always investigate what’s available and how it fits in with your needs and, if necessary, taking advice from a trusted adviser if you’re not sure.
And there we go, the fundamentals of cap tables laid bare, we hope that was useful and if you’d like to take a deeper dive, drop us a line.
In Episode 4 we’re going to open up the discussion on fundraising – things to know, things to do and things to avoid, heck, whether you should be fundraising at all.
Finally, because we know there’s no cookie cutter approach to venture building you can let us know what you want us to talk about by emailing us at [email protected] and if you want to ensure you get this straight to your inbox every time, just sign up on the to our mailing list.
Right, back to building!
Aarish and the EmergeOne team
Follow us at:
