ARTICLE
Shares of Founders and Investors in a Startup: How to Plan Them Across Rounds
The question of equity distribution in business is a perennial source of drama, both on the silver screen and in real life. How does one maintain a controlling stake for founders? What proportion is fair to allocate to investors when seeking funding? How much should be set aside for employee stock options? To address these questions in a businesslike manner and preempt surprises, transparent calculation rules are applied. These, together with a comprehensive list of all company stakeholders, are documented in a company’s capitalization table.
So, let’s delve into the Capitalization Table, or Cap Table. If you’re managing a business with multiple stakeholders, this tool is essential for knowing who owns what at any given time and avoiding company-disrupting conflicts.
Cap Table of a Startup (Capitalization Table)
Why does a company need a Cap Table?
A Cap Table is a document that outlines the ownership structure of a company. It shows who owns what and in what proportions. Keeping track of this information is crucial for several reasons:
Equity distribution in the company
It helps understand who owns what percentage of the company and how this changes when new investors come on board.
Relations with Investors
It’s important to keep investors informed about their stakes and any potential dilution from future funding rounds.
Company valuation
It helps determine the company’s valuation, which affects fundraising, selling the business, merger and acquisition deals.
Stock Options for Employees
It facilitates the management of issuing shares to employees, which is a common practice in startups and growing companies.
Equity distribution in the company
It helps understand who owns what percentage of the company and how this changes when new investors come on board.
Relations with Investors
It’s important to keep investors informed about their stakes and any potential dilution from future funding rounds.
Company valuation
It helps determine the company’s valuation, which affects fundraising, selling the business, merger and acquisition deals.
Stock Options for Employees
It facilitates the management of issuing shares to employees, which is a common practice in startups and growing companies.
How to construct a Capitalization Table?
The Cap Table consists of two parts:
1. Valuation of the business
2. List of shareholders with their ownership stakes in the business
In the first section, we specify the overall value of the company, the number of shares issued, and the price per share. In the second section, we list the shareholders and calculate their respective ownership percentages.
1. Valuation of the business
2. List of shareholders with their ownership stakes in the business
In the first section, we specify the overall value of the company, the number of shares issued, and the price per share. In the second section, we list the shareholders and calculate their respective ownership percentages.
Cap Table of a Company (Capitalization Table)
Above is a screenshot of a basic template for a single investment round. Let’s break it down step by step.
Pre-Money Valuation: Enter the company’s existing value at the time of investment.
New Capital Raised: Calculate the total amount of investment raised from all investors in this round.
Post-Money Valuation: Sum up the initial company valuation with the total amount of investment raised.
Number of Shares: In the row corresponding to the initial company valuation, indicate the number of shares issued at the company’s inception and distributed among founders and team members. In the row corresponding to the amount of capital raised, calculate the number of new shares that need to be issued to investors in exchange for their capital.
Share Price: Calculate the price per share based on the initial company valuation and the number of shares.
Shareholders List: List all shareholders, including founders, investors, and employees with shares.
Share Classes: If relevant, use additional columns to categorize shares into classes: common shares, preferred shares, and options.
Founder Shares: Input the distribution of initially issued shares among founders.
Investments by Each Investor: Specify how much capital each investor has invested in the company.
Number of Investor Shares: Based on the invested capital and the share price, calculate the number of shares held by each investor.
Ownership Percentage: Calculate the ownership percentage of each shareholder based on their share count and the total number of company shares after the investment round.
Pre-Money Valuation: Enter the company’s existing value at the time of investment.
New Capital Raised: Calculate the total amount of investment raised from all investors in this round.
Post-Money Valuation: Sum up the initial company valuation with the total amount of investment raised.
Number of Shares: In the row corresponding to the initial company valuation, indicate the number of shares issued at the company’s inception and distributed among founders and team members. In the row corresponding to the amount of capital raised, calculate the number of new shares that need to be issued to investors in exchange for their capital.
Share Price: Calculate the price per share based on the initial company valuation and the number of shares.
Shareholders List: List all shareholders, including founders, investors, and employees with shares.
Share Classes: If relevant, use additional columns to categorize shares into classes: common shares, preferred shares, and options.
Founder Shares: Input the distribution of initially issued shares among founders.
Investments by Each Investor: Specify how much capital each investor has invested in the company.
Number of Investor Shares: Based on the invested capital and the share price, calculate the number of shares held by each investor.
Ownership Percentage: Calculate the ownership percentage of each shareholder based on their share count and the total number of company shares after the investment round.
How to predict changes in shareholders’ stakes across multiple investment rounds?
Repeat the same steps several times.
Cap Table for a Startup by Rounds (Capitalization Table)
Above is a screenshot from a financial model that takes into account multiple rounds of investment.
From the perspective of the capitalization table, new rounds will affect the company’s valuation, the number and composition of shareholders, and changes in participants’ stakes.
Company Valuation
The logical (and positive) trajectory for any startup is to invest the proceeds from one round into the development and promotion of the company, leading to an increase in its value, and then attract the next round to grow even faster. This cycle continues until the company’s profits begin to cover its investment needs for further development.
Therefore, in each subsequent round, we plan for the company’s valuation to increase relative to the business’s value at the close of the previous round. Subsequent calculations are then based on this new valuation.
Shareholders List and Number of Shares
We add new shareholders to the list, include the amounts of their investments, and calculate the number of shares in the company. If investors from previous rounds do not participate in the new round, we maintain their share count at the previous level. If they contribute additional capital, we allocate them additional shares, but based on the share price in the current round.
Ownership Percentage
We recalculate ownership percentages for all shareholders based on the new number of shares in the company.
From the perspective of the capitalization table, new rounds will affect the company’s valuation, the number and composition of shareholders, and changes in participants’ stakes.
Company Valuation
The logical (and positive) trajectory for any startup is to invest the proceeds from one round into the development and promotion of the company, leading to an increase in its value, and then attract the next round to grow even faster. This cycle continues until the company’s profits begin to cover its investment needs for further development.
Therefore, in each subsequent round, we plan for the company’s valuation to increase relative to the business’s value at the close of the previous round. Subsequent calculations are then based on this new valuation.
Shareholders List and Number of Shares
We add new shareholders to the list, include the amounts of their investments, and calculate the number of shares in the company. If investors from previous rounds do not participate in the new round, we maintain their share count at the previous level. If they contribute additional capital, we allocate them additional shares, but based on the share price in the current round.
Ownership Percentage
We recalculate ownership percentages for all shareholders based on the new number of shares in the company.
The capitalization table is a simple tool that allows for a conscious approach to equity allocation in business, both for investors and founders. You can understand how your founder stake will dilute and determine target values for company valuation and external investment amounts that make the business appealing to you.
Capitalization tables by rounds, dividend calculations, ROI based on participants’ stakes (and much more) are included in my financial model templates in the “L” format for mobile applications and SaaS products.
Capitalization tables by rounds, dividend calculations, ROI based on participants’ stakes (and much more) are included in my financial model templates in the “L” format for mobile applications and SaaS products.
You can purchase a financial model template for a specific business in the store or request the development of a custom financial model for your project.