So this is what the world really wants to know — are you the next great startup superstar? There have been countless tales of these tech wizards with brilliant entrepreneurial skills toiling away in their parents’ garage until finally they are able to create a product that is worthy and that can captivate the masses.
If you are one of those founders, you are probably familiar with the entire process and how these things typically go. You set up the perfect business plan, you create a minimum viable product for you to at least demonstrate the basic functionality of your product, then you get a pitch deck together and go to your nearest venture capitalist to pitch your vision and your company so that you can get funding.
One of the most important documents these venture capitalists will be looking for is your capitalization table, also known as your cap table. This table basically tracks how much money your business has raised so far and where this money was raised from. In other words, it demonstrates who owns your company and how much your company is worth — at least on paper that is.
So where do you start when it comes to cap tables? Let’s talk about finding the right options here.
Has the Right Options
So since you are ideally leaving your capitalization tables to be done by professionals, you have to consider the right options. Ideally, the company that provides your cap tables should have different models aimed at different types of companies at different stages.
If you are in the earlier stages of your startup journey, you might want to consider a pre-money cap table that features all of your funding and ownership allocations before your most recent round of funding. If on the other hand, you are at the series B stage or even further, then a post-money cap table would be more ideal.
The next thing you should look for in a cap table provider is that they need to have very realistic models for their calculations. It is easy to track, for example, how much a previous investor has given and how many shares of common or preferred stock was offered to that investor — but there are other metrics that prove to be a lot more complex.
When a startup hires an employee, that employee will most likely get vested stock options since startups cannot compete with big tech level salaries. Your cap table needs to consider the time value of these stock options when doing their calculations among other things they need to keep track of.
Keeps Track of Dilutions
So you are probably familiar with the convoluted saga of the Facebook founders and how one of the founders, Eduardo Saverin, was left in the dust when the company took on additional funding. Basically, he did not have a way to keep track of how much the shares of common stock owned by the founders would dilute should the company take on more investors and therefore issue more shares of stock.
The ideal cap table that you want is something that makes sure dilutions are monitored with every stock split. After all — a company can potentially be worth billions in the future.
So hopefully, with the help of this guide, you will be wiser when it comes to getting the right capitalization table for you and your startup. You do not want to misrepresent your company to your future investors.
Remember, if your company is valued too high you can never keep up with it with your earnings. If your company is valued too low, you run the risk of being taken over by a bigger company. Do your due diligence and scale your startup carefully!