The Cap Table: From company formation to exit
1
THE CAP
TABLE
FR OM
COMPANY
F ORMATION
TO EXIT
Introduction
1
Company formation
2
Shares and share capital
Share classes and share rights
3
Articles of association and
memorandum of association
4
Primary transactions: issuing shares
4
The company’s first cap table
6
Seed round
7
Valuation pre-money and post-money
7
Option pool shuffle
8
The founder-friendly approach
10
The investor-friendly approach
10
The company’s second cap table
12
Employee equity remuneration
13
Stock options, warrants and phantom shares
13
Stock options
13
Warrants
15
Phantom shares
16
Equity and cash split
17
Convertible notes
18
Standard convertible notes
18
SAFE note
19
Advanced subscription agreement
20
When to use a convertible note
21
The company’s fourth cap table
22
Series A and beyond
23
Term sheet
23
Converting the note
24
Convertible note shuffle
25
The investor-friendly approach
26
The founder-friendly approach
27
Series A negotiations
29
Worst-case scenario
30
Bad-case scenario
31
Best-case scenario
32
Series B to G
33
The exit
34
M&A
34
IPO
35
A simplified exit scenario
36
Summary
39
The cap table: From company formation to exit
1
At Capdesk, we feel strongly that founders and leaders
in startups and scale-ups need to better understand the
capitalization table, also known as a ‘cap table’. We see
‘broken’ cap tables all the time, which lead to mistakes in
shareholder registers or employee share plans. These kinds
of mistakes have been known to cost businesses huge
sums of money, often just as a business is primed to scale
and needs to make the most of its existing resources.
Nightmarish cap table tales don’t make the news, though,
so it’s hard to convince businesses to take them seriously.
As a result, many founders don’t fully understand the details
of ownership in their own companies until they reach a
crucial stage – at which point it’s far too late to correct
problems, and chaos invariably ensues.
The cap table is the d