Cap Tables – Puzzles for Investors

A Cap Table, which is an abbreviation for capitalization table, is a record that outlines the ownership of a company. The details of a cap table include not only the names of the shareholders but also the type of equity security they own, the prices they paid and any other options or future equity that will impact the fully-diluted ownership of the company.

As investors, it is critical to understand what the real ownership of a potential portfolio company is prior to making an investment. Early stage companies, with limited cash flow, will oftentimes use options as a substitute for cash to compensate employees. The terms of these option grants, including vesting provisions, will impact your “fully-diluted” ownership of the company.

As investors, we frequently have to recast the cap table of an early stage company to include those options allocated to employees/consultants or percentages given to “friends and family” in exchange for an investment made to get the business off the ground. When you offer Uncle Harry 10% of your company for $100,000, not only have you provided him with equity, you have also implicitly valued that enterprise at $1,000,000. I tend to look to look at cap tables as puzzles, since you begin with the information you know and then try to figure out what you might be missing.

Don’t hesitate to ask the CEO for the documentation behind the ownership of the company. Even with the new math, the totals need to add up to 100%!

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