How to Use a Cap Table for Raising Capital

Introduction

A cap table, short for “capitalization table,” is a document used to track the equity distribution of a company. It organizes and records the details of each shareholder, the number of shares owned by each shareholder, and the price and value of those shares. A cap table tracks both current and future rounds of financing for a company.

Utilizing a cap table for raising capital has several advantages. Below is an overview of the benefits:

Benefits of Utilizing a Cap Table

• Organize and simplify stock compensation.
• Calculate the amount of equity one is entitled to.
• Keep shareholders up to date on company changes that impact their investments.
• Help ensure an accurate valuation of a company.
• Forecast future capitalization rounds and performance.

Preparing the Cap Table

A cap table is an essential tool for any company raising capital. It outlines the company’s ownership structure, the amount of capital that has been raised, and the type and class of securities owned by shareholders. Creating and maintaining an accurate cap table is essential to any fundraising effort.

Assigning Values to Shares

Before preparing the cap table, you must assign a value to the shares that will be issued. This value is typically based on the current valuation of the company, by taking into account factors such as company cash flow, revenue, growth trajectory, and market size. If a company has multiple share classes, each type of share must have a separate value assigned.

Determining Who Will Receive Shares

Deciding who will receive shares of the company requires an understanding of the deal structure, the investors’ interests, and the company’s goals. Dilution of existing shareholders should be taken into consideration as well. It is important to ensure that any new investors have the same rights and privileges as current shareholders.

Due to the complexity of the cap table process, it is advisable to consult with a lawyer who specializes in securities law to ensure proper documentation and the optimal deal structure for the company.

Determining How Much Equity to Offer

When raising capital, calculating how much equity to offer investors can be a major challenge. Having a solid understanding of your cap table helps buyers to gain an understanding of their potential return, allowing them to make an informed decision when entering a deal.

Assessing Investors' Risk Profiles

It is important to understand the risk profile of potential investors. Are they looking for a long-term return or short-term profitability? Understanding what type of equity share is suitable for different types of investors helps investors choose the appropriate share size and structure.

For investors looking for a long-term return, it is important to consider factors such as dividends, management rights, and vesting schedules. Understanding these factors helps ensure a favorable return in the future.

Calculating Equity Allocations

Using the cap table calculation is essential to determining how much equity to offer investors. This calculation is based on the total amount of money invested, the investment structure, the amount of equity that investors receive, and the target return rate.

Equity allocations can be calculated using a variety of methods, such as the discounted cash flow analysis, the capitalization rate, and the net present value analysis. Each of these methods helps identify the best share size and structure for different types of investors.

Calculating Post-Money and Pre-Money Valuations

When raising capital for a business venture, an investor will often use a “cap table” to show the ownership, securities, and capitalization of the business. This allows for a more comprehensive understanding of the pre- and post-money valuations and the corresponding impact on ownership percentages. Below are considerations to keep in mind when utilizing a cap table for raising equity.

Considerations for Raising Equity

• Familiarizing yourself with the company’s capital structure - The capital structure refers to how the company finances itself: how much is equity and how much is debt. A cap table can provide detail on the breakdown of these values.
• Assigning a liquidation preference for all investors - Liquidation preference establishes a priority for investors should the company decide to liquidate. When fundraising, it is important to establish these rules and understand the impact they will have on the valuation.
• Calculating the effective dilution - Dilution is a decrease in the ownership percentage of the pre-money shareholders. It is a very important concept to be aware of when raising capital.

Understanding the Impact on Post-Money Valuation

Post-money valuation is important in understanding how the investors' investment will be valued in the current round and how the stakes are likely to change. Using the cap table, you can calculate the post-money valuation using the post-money equity formula above. This is important in understanding how much the company will be worth after the investment is made and how it will be valued by shareholders.

It is important to use a cap table to evaluate current and post-money valuations when raising capital. A cap table provides an easy way to view the progression of equity and financial valuations that can be beneficial in understanding the company’s current and future equity position.

Drafting Equity Agreements

Raising capital typically includes drafting equity legal agreements. This process can be quite complex and hefty, and it is critical to ensure that these equity legal agreements are properly documented and managed. The following considerations and techniques should be taken into account when drafting equity agreements.

Considerations for Equity Legal Agreements

Creating and managing equity agreements requires an ample amount of of legal expertise, so it is typically recommended to coordinate with a legal advisor for guidance and oversight. Some considerations for drafting equity legal agreements include:

• Reviewing any applicable state and federal securities laws.
• Ensuring the contracts conform to the terms of the potential investors.
• Determining the terms that should be included in any equity contracts.
• Accounting for the different risks involved with equity agreements.
• Verifying that all contracts are properly executed.

Utilizing Relevant Contract Templates

In addition to legal advice and guidance, potential investors can leverage relevant contract templates to streamline the process of creating equity agreements. Templates can provide a comprehensive look at the type of contracts that should be used depending on the nature and risk of the investment in question. By employing contract templates, investors can simplify the process of drafting and executing equity agreements.

Utilizing Cap Tables During Funding Rounds

A capitalization (or “cap”) table is an organized list of an entity’s equity ownership tracking all of the stakes in the business. It captures all share and option grants, the amounts invested, and all other related information that is necessary to accurately track all of the equity owners. For startups, cap tables can provide important information to help guide fundraising moments. A well-formulated cap table can help secure additional investor capital. Here we will discuss two important aspects of utilizing cap tables during funding rounds: calculating post-funding equity and presenting cap tables to potential investors.

Calculating Post-Funding Equity

Cap tables are incredibly helpful for calculating the post-fund raise equity split by owner. Through mapping the original capitalizations and inputting the new money investments into the spreadsheet, cap tables demonstrate each stakeholders’ post-funding equity very accurately. This helps eliminate any risk of confusion or miscommunication during negotiations with investors. Updating the cap table to reflect changes in price per share, and any new co-investors or issued options can help with the accuracy of the post-funding equity calculations.

Presenting the Cap Table to Potential Investors

Due to their comprehensive nature, cap tables can provide investors with an in-depth understanding of the company’s investors, their equity ownership and other equity information that is helpful in making investment decisions. As a result, it is standard practice for entrepreneurs to present potential investors with a copy of the company’s cap table. To make the most of this opportunity, entrepreneurs should keep the cap table as organized and up-to-date as possible. Any inaccuracies could reflect negatively on the credibility of the business. Additionally, entrepreneurs should be prepared to answer questions and provide additional information that may arise from the review of the cap table.

Overall, having an up-to-date and organized cap table can be incredibly helpful for raising capital. By taking the time to accurately update and present the cap table, entrepreneurs can make the most of the potential investor capital.

Conclusion

A cap table is an invaluable tool during a company's fundraising rounds by providing transparency, insight into the complexity of ownership dynamics, and facilitating investor communication. From determining the valuation of a company to providing dynamic tracking of ownership data, cap tables make the process of raising capital more efficient and effective for both investors and entrepreneurs.

Summary of Cap Tables in the Funding Process

A cap table is a record of the current ownership of a company, including both debt and equity. It lays out all securities issued by the business in both private and public rounds and the ownership of the company’s stock. The most basic elements of a cap table include the name of the shareholder, the type of security, the value of the shares, the percentage of ownership, and the liquidation preference.

An effective cap table highlights a company's ownership structure and enables entrepreneurs to gain insights into their investors’ rights, capital structure, and the future of their business. Investors use cap tables to understand the value of their investments and to help negotiate future rounds of financing.

Final Remarks on Capital Raising Benefits of Cap Tables

Cap tables have become increasingly important in the capital raising process, allowing startup founders and investors to gain an understanding of their ownership information. With an accurate cap table, entrepreneurs are able to better manage their investor relations, financials and other aspects of the investment. Investors are able to better assess their returns, contractual rights, and any potential risks associated with the investments.

Ultimately, cap tables play an essential role in the capital raising process. By providing transparency and insight, cap tables make the process of raising capital more efficient and effective for both investors and entrepreneurs.