Your start-up’s capitalization table (who owns what amount of different types of stock) is an important reporting tool for company execs, the board and investors. Having a clean, easy-to-maintain cap table makes reporting to all audiences much easier.
This quick post covers start-up cap table creation, maintenance and reporting using a Google Docs spreadsheet and two slides. This is a prelude to the updated, 2012 board meeting example discussion that will hopefully be done in the next few weeks.
Fictional company NewCo context
If you look at the spreadsheet, there are two sheets / tabs: the cap table summary and the cap table itself. Reading through the summary, it’s clear that this fictional company has raised two rounds of funding (Series A and Series B Preferred) from a total of 3 VC firms and one individual investor. There are two founders and one early employee that had common stock at the point of the preferred investment; this common stock is listed separately from issued options and the available stock option pool.
NOTE: There is only one input cell on the summary sheet: the number of shares in the option pool (C25); every other value is input or derived from the cap table sheet.
Number of outstanding vs. fully diluted shares
The two columns on the summary sheet to the left of the number of shares show different percentages. The number of “outstanding shares” are all the existing common shares PLUS all the preferred shares PLUS the issued options, whether or not the options are exercised. The number of “fully diluted outstanding shares” is the number of outstanding shares PLUS the unissued option pool. The reason to delineate between these two versions of share numbers is because, in certain situations (such as an acquisition of NewCo), the unissued option pool will be canceled and the percentage ownership will be equal to the percentage outstanding. With a large option pool, the difference between the two resulting ownership percentages can be significant.
On the summary sheet:
- A good rule of thumb for who should be listed as an investor or holder of common stock is to list anyone with 5% or more ownership separately. We didn’t do that in the Series A preferred but we did do that in the common holders even thought it was just one individual. Use your judgment to create a clean, readable summary.
- I think the summary chart is a great cut-and-paste into a board deck (see slides link).
- Always include the date on the cap table because it’s a living document that can change dramatically over time.
On the cap table itself:
- All of the columns are not used for each class of stock. Columns D-J are only relevant to option grants (the section at the bottom of the sheet).
- The preferred stock has a few “house keeping” columns of information such as the date the stock was issued (probably the ‘close’ date of the investment) as well as the stock certificate number.
- The Rule 144 start date refers to the start of the holding period for the SEC’s Rule 144.
- The strike price for the preferred stock is the price the investors paid per share; the domicile is the state in which the investors do business or live.
- The strike price for the common stock options is the Fair Market Value as determined by the board of directors. A reasonable rule of thumb is that the option strike price is 20%-25% of the most recent preferred price. However, this rule of thumb has been complicated by IRS Section 409a.
- Section 409A suggests that the fair market value of the stock as of a particular date is the “value determined by the reasonable application of a reasonable valuation method” based on all the facts and circumstances available. This means using a number of different valuation methods to determine the value of an option and the easiest way to manage this confusing guidance is to hire a firm to perform a 409a valuation (which should cost a few thousand dollars, on average and take 2-4 weeks to complete).
I believe the rest is pretty self explanatory; if you have questions, please ask.