Capitalization Tables 101: A Beginner's Guide to Building a Cap Table for Fundraising
A capitalization table, or cap table for short, is a key financial document that outlines the ownership structure of a company and the equity held by its investors. A cap table is a critical tool for companies looking to raise capital, as it provides a comprehensive view of the company's ownership structure and the potential dilution of equity that could occur as a result of a fundraising round. In this post, we'll provide a beginner's guide to building a cap table for fundraising.
Step 1: Define the Ownership Structure
The first step in building a cap table is to define the ownership structure of the company. This involves identifying all the shareholders and the percentage of equity held by each shareholder. This information can be obtained from the company's articles of incorporation, stock purchase agreements, and other legal documents.
Step 2: Calculate the Post-Money Valuation
The post-money valuation is the value of the company after the fundraising round is complete. To calculate the post-money valuation, you need to determine the pre-money valuation (the value of the company before the fundraising round) and add the total amount of funding that will be raised in the round. The post-money valuation is used to determine the price per share and the dilution of equity that will occur as a result of the fundraising round.
Step 3: Determine the Price Per Share
The price per share is the price that investors will pay for each share of the company's stock. To determine the price per share, you divide the post-money valuation by the number of shares outstanding after the round. This calculation takes into account the total number of shares that will be outstanding after the fundraising round is complete, including any new shares issued as part of the round.
Step 4: Calculate the Dilution of Equity
The dilution of equity is the reduction in percentage ownership that existing shareholders will experience as a result of the fundraising round. To calculate the dilution of equity, you need to know the pre-money valuation, the amount of funding that will be raised in the round, and the number of shares outstanding before the round. This information is used to determine the percentage ownership of each shareholder before and after the round.
Step 5: Update the Cap Table
Once you have calculated the price per share and the dilution of equity, you can update the cap table to reflect the new ownership structure of the company. This involves adding any new investors and their respective shareholdings, as well as updating the shareholdings of existing shareholders to reflect the dilution of equity.
Let's take a fictional climate-tech startup called Green Solutions, Inc. as an example to illustrate the steps involved in building a cap table.
Step 1: Define the Ownership Structure
Green Solutions, Inc. has two founders, Jane and Mark, who each own 50% of the company. They have not yet taken any outside investment, so the ownership structure of the company is as follows:
Jane: 50%
Mark: 50%
Step 2: Calculate the Post-Money Valuation
Green Solutions, Inc. is raising $1 million in a seed round of funding. They have agreed on a pre-money valuation of $5 million. To calculate the post-money valuation, we add the pre-money valuation and the amount of funding raised:
Post-money valuation = Pre-money valuation + Funding raised Post-money valuation = $5 million + $1 million Post-money valuation = $6 million
Step 3: Determine the Price Per Share
To determine the price per share, we divide the post-money valuation by the number of shares outstanding after the round. Green Solutions, Inc. currently has 1 million shares outstanding, split equally between the two founders. As part of the seed round, they are issuing 500,000 new shares to investors:
Price per share = Post-money valuation / Shares outstanding after the round Price per share = $6 million / (1 million + 500,000) Price per share = $6 million / 1.5 million Price per share = $4
Step 4: Calculate the Dilution of Equity
To calculate the dilution of equity, we need to know the pre-money valuation, the amount of funding raised, and the number of shares outstanding before the round. In this case, the pre-money valuation is $5 million, the funding raised is $1 million, and there are 1 million shares outstanding before the round. This means that each founder currently owns 500,000 shares:
Jane: 500,000 shares (50% ownership)
Mark: 500,000 shares (50% ownership)
After the seed round, the number of shares outstanding will be 1.5 million (1 million existing shares + 500,000 new shares). The dilution of equity can be calculated as follows:
Dilution of equity = (Funding raised / Post-money valuation) x 100 Dilution of equity = ($1 million / $6 million) x 100 Dilution of equity = 16.67%
This means that after the seed round, Jane and Mark's ownership percentages will be diluted as follows:
Jane: (500,000 / 1.5 million) x 100 = 33.33%
Mark: (500,000 / 1.5 million) x 100 = 33.33%
New investors: (500,000 / 1.5 million) x 100 = 33.33%
Step 5: Update the Cap Table
Based on the above calculations, the updated cap table for Green Solutions, Inc. after the seed round will be as follows:
Jane: 33.33%
Mark: 33.33%
New investors: 33.33%
In conclusion, building a cap table is an important step for any startup that is looking to raise capital. By following the steps outlined above and using a fictional climate-tech startup as an example, we can see how a cap table can be created to accurately reflect the ownership structure of a company and provide a clear picture of the potential dilution of equity that could occur as a result of a fundraising round.