Cap Table 101
By: Kevin Lu
Tags: Cap Table, From The Team, Startup, Founder Advice, Venture Capital

1. KEY CONCEPTS

Before we dive into what a later stage cap table looks like, here are 5 key concepts to understand:

1.1 Common vs Preferred Shares



Common shares — impart the most basic rights, privileges and preferences to those that hold them, including the rights to disclose company performance or to exercise a degree of control over operations. Typically held by founders, employees and angels.



Preferred shares — impart additional rights on top of those provided by common shares, generally giving priority to security holder for company returns in a liquidation event.

Figure 2. Ownership by stage (Source: Capshare)

1.2 Participating Preferred vs Non-Participating preferred



Participating preferred shares — receives their full investment amount AND pro-rata share of remaining ownership in a liquidation event.



Non-participating preferred shares — receives their full investment amount OR a pro-rata share in the liquidation amount.

Figure 3. Participating Returns vs Non Participating Returns

1.3 Convertible Notes



Convertible Notes (a.k.a. convertible bonds) — are debt agreements with the option to purchase equity at a discount in the following round. These are generally seen in seed/ series A rounds where there is a larger risk of the start-up not succeeding. A typical conversion carries an interest rate ~10% and discount for the next round of ~20%.

1.4 ESOP



Employee Stock Ownership Plan (ESOP) — provides employees with an ownership stake to align their interests with the company. ESOP gives employees a right to purchase shares in a company at a fixed price, and is generally distributed as part of an employee’s remuneration package. As an incentive mechanism, ESOP is a powerful tool to use early on in a company’s life time, especially when they have limited cash flow.

1.5 Dilution

Fully diluted % equity — Often in later stage cap tables, a fully diluted % equity column exists to illustrate the ownership structure should all convertible notes and options on the cap table have been exercised. On raises, founders are usually first to give up their equity for capital, hence diluting their stake in their start-up.

Anti-dilution — a standard provision in investor shareholder agreements that prevent their stake from being diluted after new shares have been issued. Also considered a pre-emptive / protective/ pro-rata measure.

Full ratchet dilution — In a case where an investor with the protection of this clause has paid a higher price per share in a previous round (say $10/share at 20% stake), the clause would allow that investor to maintain their stake in a subsequent round by converting their shares ($5/share, doubling the amount of shares) at the price paid in the previous round. This provision can impair raises at higher valuations as certain investors may hold a disproportionate amount of shares, especially if the clause is used in an early round.

Weighted average dilution — This is an industry standard clause that protects the initial investor by taking into consideration for the difference in number of shares issued to a new investor at the current rounds price, versus the price of the previous rounds, and the degree of dilution incurred by the raise.