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.
