Sunday, 4 June 2017

CAPITALIZATION TABLE: Know who Owns What Part of Your Company Before and After VC Financing




A Capitalization Table is used to indicate the summary of the business ownership after the VC funding round. It’s important for the business owner to understand the structure of the ownership to know who owns what part of the company before and after the financing. All aspiring and young entrepreneurs hoping to obtain funding from investor now or in the future must have an insight on how this table works. 

In this post, let’s look at an example to fully understand how the Capitalization Table works:

ABC Limited is founded by Eric, and was incorporated with 3,000,000 founder’s shares. Assuming the Pre-Money Valuation of the company is $10 million before the VC invests. After looking at the business plans proposed by Eric, the capitalists decided to invest $5 million into the project. 


In this example, the first thing that must be calculated is the percentage of the company owned by the VC after investing $5 million into ABC Limited. Before we proceed, let’s look at how a Capitalization Table Looks:

CLASS
FOUNDERS
EMPLOYEE POOL
VENTURE CAPITALIST
TOTAL
SHARES




PREFERRED PRICE




VALUATION




% OF OWNERSHIP




 

Then, what is the Post-Money Valuation:

Post-Money Valuation= $15 Million [ $10 million Pre-Money + $5 million invested by the VC]

Consequently,

% Owned by VC = [Amount Invested/ Post Money Valuation] x 100


                                = [5,000,000 / 15,000,000] x 100

                                = 33.33%



Also, assuming there is a 20% Employee Option Pool on a Post Money basis indicated on the agreement term sheet. This means that employees will be able to invest and own up to 20% of the company in the future. 

Putting all the information we have so far, the Cap Table will look like:

CLASS
FOUNDERS
EMPLOYEE POOL
VENTURE CAPITALIST
TOTAL
SHARES
3,000,000
B
C
E
PREFERRED PRICE


D

VALUATION


5,000,000
15,000,000
% OF OWNERSHIP
A
20%
33.33%
100%
 

The percentage owned by Founders after financing is represented by letter A. To calculate this, the percentage owned by the VC and the Employee pool will be added together, and subtracted from 100%.

                A = 100 – [33.33 + 20]

                   = 46.67%



Therefore,

Since the 3,000,000 Founders shares is now translated to 46.67% after financing, the total number of outstanding shares to make up 100% ownership, represented as E on the capitalization table, can be calculated:

                3,000,000 shares -------- 46.67%

                E  -------------------------- 100 %



Hence,

We have: [3,000,000 x 100]/ 46.67

Therefore, E= 6,428,112 shares



To determine the actual number of shares owned by the Employee Pool and VC, we simply multiply their respective ownership percentage by the total number of shares altogether.

Therefore:

B = 0.20 x 6,426,112

     = 1,285,622 shares


And similarly,

The number of shares owned by the VC

   = 0.3333 x 6,428,112

C = 2,142,490 shares



Then, to find out the actual price per shares; since the $5 million invested by the VC bought 2,142,490 shares of preferred stock

  D = [$15,000,000/2,142,490]

   = $7.00 per shares


The Capitalization Table now looks like this:

CLASS
FOUNDERS
EMPLOYEE POOL
VENTURE CAPITALIST
TOTAL
SHARES
3,000,000
1,285,622
2,142,490
6,428,112
PREFERRED PRICE


$7

VALUATION


5,000,000
15,000,000
% OF OWNERSHIP
46.67%
20%
33.33%
100%
 

Looking at the Capitalization Table, the venture capitalist now own 33.33% of Eric’s company after this round of funding. And with 20% reserved for employees as specified on the term sheet, Eric now gets to keep only 46.67% of the company. Although in most cases, the binding agreement between the founder and venture capitalist may last between 7 – 10 years, or after the investors have recouped the value of their invested funds over and over again.