University:
Boston University
Course:
CAS EC 323 | Behavioral Economics
Academic year:

2023
Views:

273

Pages:

27
Author:

avariada23z3

Capitalization Tables: who owns what and how much 2 Cap table: who owns what Boston University Slideshow Title Goes Here  If you’re a sole proprietor, a cap table is not required  As soon as equity is divided between two or more parties, bring out the cap table!  The equity backbone of the company  Debt is not recorded on a cap table*  Primarily details the number of shares held by each party and why 3 Many parties contribute to the cap table Boston University Slideshow Title Goes Here  Parties who own shares or options  Employees  Founders shares  Options  Investors  Those who’ve written a check  Vendors or customers who have received options (warrants) in lieu of cash  Option pool – yes, it’s its own line on a cap table  Options available  Options distributed but not purchased 4 The cap table tells a story Boston University Slideshow Title Goes Here  Nature of financiers  Angels  VCs  FFF  Corporate  Employees  Rounds of financing  Seed  A Bound  B Round • Events • Founders • Additions to the team • License (if equity plays a part) • Partnerships (should equity play a part) • Formation of option pool • Option grants 5 More on the story Boston University Slideshow Title Goes Here  Success (or not) of the company as stock price rises, stays the same or falls  Clearly delineates the nature of participation in the company’s equity story  Amount  Timing  Participants  Shows management’s responsibility in managing equity 6 Building blocks of the cap table    Pre-money value  Negotiated – good luck Boston University figure Slideshow Title Goes Here  A figure the entrepreneur and investor agree to that defines the Pre-Money Valuation value of the company before any investment  Entirely subjective + Investment  Comparables may (should) be brought in as part of the Post-Money Valuation negotiation  More often, it’s the investor backing into a valuation given a possible ROI Investment  The amount of money investors will spend to buy shares of the company Post-money value  Pre-money + Investment  The new value of the company the day you accept the check!!  THIS is the where entrepreneurs fail to understand the consequences of the Round’s Pre-Money Valuation 7 Terms of a Round, negotiation and the Cap Table Boston University Slideshow Title Goes Here     Pre money valuation is a stated dollar figure  “we [the investors] say you’re value is $500,000” Investors are juggling:  Pre-money  Post money  Invested capital  Investor percent ownership, post money Percent ownership  Many investors have a minimum percentage threshold they must own  With that as a start, other variables are determined Terms not included in the cap table:  Liquidation preference  Dividend – unless and until those dividends purchase shares  Anti-dilution 8 Cap tables come in all shapes and sizes Boston University Slideshow Title Goes Here  All include the number of shares  Cap table more than anything conveying ownership  Not all include the dollars invested  I disagree with this  There are no two identical cap table formats 9 Good cap table governance Boston University Slideshow Title Goes Here  Keep ALL documentation:  Board resolutions and minutes  Offer letters  Start and stop date for all employees (vesting)  Signatures of option agreements  Consultant agreements (if equity involved)  Update cap table with every alteration in equity and date the table  Suggestion: assign co-ownership of the table to your counsel and possibly your Comptroller 10 * Convertible note and bridge financing Boston University Slideshow Title Goes Here      Resides as debt on the balance sheet until it converts into equity Therefore, not recorded on the cap table!  I like to create a tab with any notes and arithmetic pertaining to a Note  Same with dividends That conversion event could be:  Next round of financing  Acquisition  Maturity of the Note  Other agreed upon event such as an investment of non-dilutive financing Allows investors to defer having to value the company Usually offers a discount to the next equity event  A 15% discount example  If the next round is raised at $1/share, the Note holders will buy in at $0.85/share – reward for taking the up front risk before the Round was raised 11 Using the cap table for scenario analysis Boston University Slideshow Title Goes Here  What will the company look like IF we  Raise a B Round  Raise a B Round and convert a note  Raise a B Round, convert a note and include the interest from the Note  Raise a B Round, convert a note and include the interest from the Note and dividends from the A Round preferred investors  Raise the next Round a higher or lower stock price  Sell the company for X, 2X, 3X  Then the cap table can help with liquidation preferences  Last money in is always paid first (after debt of course) 12  Let’s turn our attention to building a Capitalization Table 13 Two scientists decided to start a company Editorial: DO NOT split the company 50, 50 - problem if one leaves - good leadership 14 They negotiated a deal with a CEO Boston University Slideshow Title Goes Here • • CEO receives 50% of the company Diluting the Founders by 50% 15 To prepare to add a Board of Directors, they added an Option Pool Boston University Slideshow Title Goes Here • • The Pool is 4.8% of the company All parties are equally diluted 16 Here ‘come da Board…here ‘come da Board Boston University Slideshow Title Goes Here • • • Each Board member receives 0.5% of the company Options taken from the Pool Dilution is unchanged 17 Now the university joins the team with a 10% equity ownership Boston University Slideshow Title Goes Here • • • They negotiate a license from the university All parties diluted by 10% This could have happened at any time up until this point • In fact, ANY of these events could happen in ANY order • Often the license happens with the two Sci Fos before the CEO is hired 18 Let’s add the shares now, to prepare for a financing Boston University Slideshow Title Goes Here • Along the way, the Board decided the company will have 10,000,000 shares total, including options • This probably happened earlier but only showed up in the cap table now • This only further illustrates that creating a cap table is as much a function of style and necessity as it is finance 19 Oh HO! A Collaborator! Boston University Slideshow Title Goes Here • • • They negotiated some sort of deal and agreed to give that Collaborator 2,000,000 shares of Common Stock in return They must’ve issued more shares All parties are diluted equally • That concludes our pre-investment story 20 Different approach: These guys started with shares and share value. They must have felt it added credibility Boston University Slideshow Title Goes Here • • • Some people start with shares not percentages Some even make the shares have a price when the Founders want to put money into the company • Share price of $1.00 would’ve meant a $2,000,000 Founders’ investment! Who’s company IS it? YOUR company • ANY of these events could happen in ANY order 21 This is why you play the VC (equity) Game Boston University Slideshow Title Goes Here 22 “Let us not talk falsely now. The hour’s getting late” Boston University Slideshow Title Goes Here 23 The following enumerate anti-dilution scenarios Boston University Slideshow Title Goes Here  Pre-money of $3,000000  A Round of $2,000,000  Post-money of $5,000,000  B Round of $2,000,000 We’ll now watch as this plays out under different anti-dilution terms THIS is the important part – what happens more often – what no one wants to talk about 24 Let’s look at anti-dilution and a down round Boston University Slideshow Title Goes Here Regular Anti-Dilution – all parties diluted together 25 It gets worse Weighted Average Anti-Dilution formula Boston University Slideshow Title Goes Here 26 Worse still? Full Ratchet Anti-Dilution Boston University Slideshow Title Goes Here Jam everything into the pre-money and then adjust for the investors 27 The Cap Table tells your equity story Boston University Slideshow Title Goes Here  Who owns what and why  The events that shaped the ownership  Your successes and failures to:      Achieve milestones Manage your team Manage your equity assets Raise funds Add value – as perceived by investors  Type of investors

Capitalization Tables - Who Owns What And How Much

Related Documents

Recommended Documents

Description

Related Documents

Free up your schedule!

Take 5 seconds to unlock