Allocating capital using a capitalization table, or cap table for short, is among the most important things a business will does because it provides the investors with valuable information regarding who owns the company and the founding team’s thoughts on ownership, financing, and exit strategies.
It’s critical to know exactly how many people own percentages of the company, how much stock has been issued to date, and how much is outstanding. All of this important information must be tallied up so the cap table equity can be seen clearly. A company’s equity is the ownership interest in the company after all liabilities are accounted for and the value that shareholders would receive if the assets were liquidated and all debts were paid off. The following are some of the things that investors look for when considering your company’s capitalization table:
Page Breaks – A cap table that lists so many investors that page breaks are required is a waving red flag for the majority of investors. A large number of investors amounts to a distraction, which a new investor won’t want to take risks on, considering they prefer to own large parts of the company they are investing in themselves. Future ownership stakes that must be negotiated with a large number of small owners is usually a bridge too far for most investors.
Loners – The cap table reveals exactly how much capital investors contributed as well as who owns what percentages. If any work is outsourced in exchange for equity it will be seen on the cap table. Investors prefer a dedicated team that have long-term incentives to remain with the business. The more unevenly distributed ownership is, the greater the risk will be. Your innovation will take around a decade before it matures, so it’s important to retain as much equity as possible for team members and investors who have committed for the long haul.
Favourites – It’s just human nature to occasionally play favourites, but it is not a good idea to do it on the cap table! Sure, it would be lovely to give every investor a special gift, but the cap table is not the place. When the terms are standardized, calculating what everyone receives during an exit is fairly simple, but the numbers grow very complex when every single investor has been given unique terms, a situation that leads to much greater risk. Always aim for terms that push the entire company toward success with all investors equally aligned.
Maintaining a clean cap table with a sensible equity compensation plan is your best path to attracting those investors!
