The capitalization table (cap table) is referred to the agreement of shares and ownership of a company. It sits at the intersection of shareholder, number of shares, and company valuation.
I realized that I’ve never touched on this in previous Finance of Startupsposts, so I’ll cover that ground here.
A few examples of cap tables…
Lois and Clark want to cofound a venture to provide virtual tours into the unknown – called The Great Digital Explore. Lois will be the CEO while Clark will be the CTO. Given their differing skill sets and being friends, they’ve decided to split ownership in half – 50-50. They’ve also decided to set aside 20% of the company for future employees. They value the company initially at $20,000. Par value is $0.002 as they “create” an initial pool of 10,00,000 shares (pretty standard).
The cap table for The Great Digital Explore would look like this:
Shareholder
Equity Position
Number of Shares
Price per Share
Value
Lois
40%
4,000,000
$0.002
$8,000
Clark
40%
4,000,000
$0.002
$8,000
Employee Pool
20%
2,000,000
$0.002
$4,000
100%
10,000,000
$0.002
$20,000
Three retired Navy SEALs are looking to start a private security company – Aramis, Athos, Porthos. Being the former team captain while in the SEAL program, Aramis is the CEO, and commands a slightly higher ownership of their new company Musketeer Security Services while Athos and Porthos hold equal positions. As they form, they value their company at $10,000 (with par value of $0.001 at 10,000,000 shares). The three see teamwork to be essential in the success of their company, so they set aside 30% of the company for future employees.
The cap table for Musketeer Security Services would look like this:
Shareholder
Equity Position
Number of Shares
Price per Share
Value
Aramis
28%
2,800,000
$0.001
$2,800
Athos
21%
2,100,000
$0.001
$2,100
Porthos
21%
2,100,000
$0.001
$2,100
Employee Pool
30%
3,000,000
$0.001
$3,000
100%
10,000,000
$0.001
$10,000
As Aramis, Athos, and Porthos are starting up, one of their young SEAL members overhears their discussions. Being the Millennial that he is, D’Artagnan is eager to join the team. He’s fascinated by entrepreneurship. Musketeer Security Services is already up and running, however, and have made a good name for themselves such that they are growing. D’Artagnan wants a piece of the pie and with a sizable bank account from summer jobs when he was younger, he wants to not only join as an employee, but he wants to contribute to the bank. D’Artagnan wishes to inject $100,000 (pizza delivery was very good business for four summers). They all agree on a pre-money valuation of $750,000.
Let’s see how this shakes up the cap table:
(Remember, $750,000 for the pre-money value divided by 10,000,000 shares = $0.075 par value.)
Shareholder
Equity Position
Number of Shares
Price per Share
Value
Aramis
24.7%
2,800,000
$0.075
$210,000
Athos
18.5%
2,100,000
$0.075
$157,500
Porthos
18.5%
2,100,000
$0.075
$157,500
D’Artagnan
11.7%
1,333,333
$0.075
$100,000
Employee Pool
26.5%
3,000,000
$0.075
$225,000
100%
10,000,000
$0.001
$850,000
This isn’t too complicated. It will get complicated as investors start pouring in capital with varying stock classes – common, preferred, etc. You can check out the prior posts to see how the cap table is affected by those capital raises – Finance of Startups.
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