Let's try to understand what a capitalization table. It is useful during funding round where it shows how much each investor/founder owns after the investment has been made. Initially, 100% of the company is owned by the founding team before any funding round. The important question is "What will I own if a VC invests X in my company at aY valuation? This is where you need a cap table.
Let's try to understand it with an example:
2 million shares held by founders/employees before VC invests
$20 million pre-money valuation (I will explain pre-money and post-money valuation in later post)
$10 million is invested by VC
In simple terms, pre-money is money that the VC calculates prior to the funding round, and post-money valuation is after the funding has been done. Here, is pre-money is $20million and VC invests $10million, so the post-money valuation will be $30million(20+10million). How much does the VC own? If it is 33.33%($10million/$30million) then it's correct.
Let's also consider the case of an employee option that the VC asks as a percentage of the shares to be kept aside for employees. Let's say it's 20% on the post-money basis.
Let's try to understand each on by one
A = 46.67%(100 - 33.33 - 20) is the amount of shares the founder holds
E = 4,285,408 (2 million/0.4667)
B = 857,081 (4,285,408 *0.20)
C = 1,428,326 (4,285,408 * 0.3333)
D = $7.0 ($10million/1,428,326)
Cross-check if your math is right - If you have $20 million pre-money before funding 2million shares and 857K employee options. You can do (2million + 857K) * 7.0 = 19,999,567 approx 20million
It’s not close enough for most VCs, or for most lawyers, for that matter. And it shouldn’t be close enough for you. That’s why most cap tables have two additional significant digits (or fractional shares)—the rounding to the nearest share doesn’t happen during intermediate steps but does occur only at the very end.
In the later post, I will explain:
Price per Share with Convertible Notes
Pre-Money Method
Percentage-Ownership Method
