What role do angel investors play in early-stage startup cap tables?

Angel investors are often the first outsiders you welcome into your company and onto its cap table. When you combine that with the fact that they are typically issued complex securities such as preferred shares and Simple Agreements for Future Equity (SAFE) notes, it becomes evident that they can have a significant impact on your ownership structure.

They are the first source of dilution and the first set of investors whose exits you must facilitate. So, how you structure your first funding agreement is of immense importance. Specifically, in the case of SAFE notes, you should pay close attention to how you frame the conversion price, the valuation cap, and the trigger events for conversions.

This article explores the impact of angel investors on early-stage startup cap tables. Insights from this article can help you devise an advantageous funding agreement and effectively manage equity. Read on to know more!

Role of angel investors in shaping cap tables

Instead of simply discussing the probable impact of angel investors on your cap table, let us simulate this through an example.

Assume that you founded SynapseFlow, an AI startup, along with four other founders. At inception, ownership was distributed equally, and the valuation was calculated as $300,000 using the asset-based approach. At a share price of $0.30, 1 million shares were issued in the following manner.

Stakeholders	Descriptions	Units	Ownership percentage	Value
Founder #1	Common stock	200,000	20%	$60,000
Founder #2	Common stock	200,000	20%	$60,000
Founder #3	Common stock	200,000	20%	$60,000
Founder #4	Common stock	200,000	20%	$60,000
Founder #5	Common stock	200,000	20%	$60,000
Total outstanding shares		1,000,000	100%	$300,000

Entry of angel investors

18 months later, after you solidified your product idea, you were able to attract an investment of $1.6 million from two angel investors. However, since SynapseFlow lacked financial and operational history, the angel investors were hesitant to agree on a valuation. To overcome this obstacle, you offered SAFE notes with a conversion price of $10 per share.

Since you had proposed a pre-money valuation of $15 million, your common stock would carry a share price of $15 per share. As the discount offered was attractive to the angel investors, they accepted your offer.

As a result, your cap table took the following form.

Stakeholders	Descriptions	Units	Ownership percentage	Value
Founder #1	Common stock	200,000	20%	$3,000,000
Founder #2	Common stock	200,000	20%	$3,000,000
Founder #3	Common stock	200,000	20%	$3,000,000
Founder #4	Common stock	200,000	20%	$3,000,000
Founder #5	Common stock	200,000	20%	$3,000,000
Angel investor #1	SAFE note	Conversion price of $10 per share	N.A.	$800,000
Angel investor #2	SAFE note	Conversion price of $10 per share	N.A.	$800,000
Total outstanding shares		1,000,000	100%	$16,600,000

You may observe that the cap table’s complexity has increased. While the cap table reflects 20% ownership for each founder, these figures will change when the angel investors convert their SAFE notes into common stock.

Conversion of SAFE notes

A year later, leading up to your Series A funding round, your angel investors requested an exit. They had already converted their SAFE notes into common stock, and your valuation had grown to $78.75 million. At this stage, you had also created an employee stock option pool of 100,000 options. So, your cap table was as follows.

Stakeholders	Descriptions	Units	Ownership percentage	Value
Founder #1	Common stock	200,000	17.24%	$12,500,000
Founder #2	Common stock	200,000	17.24%	$12,500,000
Founder #3	Common stock	200,000	17.24%	$12,500,000
Founder #4	Common stock	200,000	17.24%	$12,500,000
Founder #5	Common stock	200,000	17.24%	$12,500,000
Angel investor #1	Common stock	80,000	6.90%	$5,000,000
Angel investor #2	Common stock	80,000	6.90%	$5,000,000
Employee stock option pool	Stock options	100,000	N.A.	$6,250,000
Total outstanding shares		1,160,000	100%	$78,750,000

Due to the conversion of SAFE notes, every founder’s ownership percentage dropped from 20% to 17.24%.

Exit through the retirement of shares

In your Series A round, you succeeded in raising $37.5 million from a venture capital firm. To secure this funding, you issued 500,000 preferred shares, each of which could be converted into 1.2 common shares. A part of these funds was used to buy back and retire shares held by the angel investors.

These changes would reflect in your cap table in the following manner.

Stakeholders	Descriptions	Units	Ownership percentage	Value
Founder #1	Common stock	200,000	13.33%	$12,500,000
Founder #2	Common stock	200,000	13.33%	$12,500,000
Founder #3	Common stock	200,000	13.33%	$12,500,000
Founder #4	Common stock	200,000	13.33%	$12,500,000
Founder #5	Common stock	200,000	13.33%	$12,500,000
Incoming venture capital firm	Preferred stock (Convertible to 1.2 common shares)	500,000	33.33%	$37,500,000
Employee stock option pool	Stock options	100,000	N.A.	$6,250,000
Total outstanding shares		1,500,000	100.00%	$106,250,000

Exit provided by the incoming investor

Since buying back angel investors’ shares depletes your company’s cash reserves, it is not the ideal scenario for an early-stage startup. An alternative to this would be requesting the incoming investor to buy out the angel investors. This would result in the incoming venture capital firm owning two classes of shares, i.e., 500,000 preferred shares and 160,000 common shares.

Such an exit would transform your cap table in the following manner.

Stakeholders	Descriptions	Units	Ownership percentage	Value
Founder #1	Common stock	200,000	12.05%	$12,500,000
Founder #2	Common stock	200,000	12.05%	$12,500,000
Founder #3	Common stock	200,000	12.05%	$12,500,000
Founder #4	Common stock	200,000	12.05%	$12,500,000
Founder #5	Common stock	200,000	12.05%	$12,500,000
Incoming venture capital firm	Preferred stock (Convertible to 1.2 common shares)	500,000	30.12%	$37,500,000
	Common stock	160,000	9.64%	$10,000,000
Employee stock option pool	Stock options	100,000	N.A.	$6,250,000
Total		1,660,000	100.00%	$116,250,000

In comparison to the share buyback and retirement exit scenario, the ownership percentage of each founder has dropped marginally. However, an important thing to note is that, post conversion of preferred shares, the incoming venture capital firm would own 43.18% of your company. In contrast, if the incoming VC firm did not provide any exits, it would own only 37.50% of your company.

Exit provided by the founders

Suppose you and the other founders were not comfortable with the incoming VC firm’s ownership percentage. So, you and your fellow founders decided to collectively buy out the angel investors by spending $2 million each. As a result, each founder would come to own another 32,000 common shares.

These changes would reflect in SynapseFlow’s cap table in the following manner.

Stakeholders	Descriptions	Units	Ownership percentage	Value
Founder #1	Common stock	232,000	14%	$14,500,000
Founder #2	Common stock	232,000	14%	$14,500,000
Founder #3	Common stock	232,000	14%	$14,500,000
Founder #4	Common stock	232,000	14%	$14,500,000
Founder #5	Common stock	232,000	14%	$14,500,000
Incoming venture capital firm	Preferred stock (Convertible to 1.2 common shares)	500,000	30%	$37,500,000
Employee stock option pool	Stock options	100,000	N.A.	$6,250,000
Total		1,660,000	100%	$116,250,000

In this scenario, post-conversion, the incoming VC firm’s ownership percentage would be 34.09%, and that of the founders would be 65.91%, collectively.

Eqvista – Equity management made easy!

Prudent cap table management ensures that all stakeholders are rewarded fairly for their contributions and helps you maintain control over your startup. This is often the cornerstone in forging positive and long-lasting relationships as a founder dealing with investors. However, the raw data confined in cap tables is often too complex to reliably base strategic decisions on.

This is where Eqvista, a next-generation cap table software, comes in.

We enable our users to visualize various funding and exit scenarios, and perform operations such as adding shareholders, issuing equity interests, and seeking board approval. These intuitive features not only help you save time but also help you leverage data in decision-making. Contact us for a demonstration!