Cap table for Seed-funded Startups
This article explores the concept and practicalities behind creating seed-funded startup cap tables.
As a startup’s founder, you will be surrounded by the titans of industry: angel investors, venture capitalists, private equity firms, and even banks. These are the entities that provide the capital you need to grow and scale your startup. However, to achieve success, you will need to navigate their various funding models and the expectations accompanying them. In this regard, a cap table is a financial tool that records the equity stakes of each investor in your startup and illustrates the breakdown of the funds raised. As such, seed-stage startups should create cap tables that accurately reflect their equity structure in order to secure the company’s financial future. This article explores the concept and practicalities behind creating seed-funded startup cap tables.
Cap table and seed-funded startups
A cap or capitalization table is a spreadsheet that provides a snapshot of a company’s ownership structure. A cap table is particularly useful for seed-stage startups because it facilitates the allocation of ownership and aligns the startup’s founders, investors, and employees on the same page. Additionally, a cap table assists the startup in documenting its financial obligations and potential risks in terms of dilution.
What is a cap table, and what is it used for?
The cap table is a spreadsheet that details all the different ownership classes of a company and the corresponding value of each. It is structured in a way to provide the reader with an overview of where the startup’s money came from and what each investor paid for their stake in the company. This overview comes in handy for shareholders, company management, and founders of the startup, who can use it to track their ownership and identify the dilution of their equity.
Moreover, a cap table acts as a reference point for future investors and can be used in pitch meetings to illustrate how the company’s ownership structure evolved over time. Therefore, regularly updating and maintaining a cap table is vital for seed-funded startups, as it ensures the company remains on track with its business plan and values.
How does a cap table work for seed-funded startups?
When a funding round is conducted, the ownership of the company changes. This is because different investors will want a certain percentage of equity in exchange for the amount they contribute to the startup. While the majority of the seed-stage startups will go through the seed funding round, such as Series A, Series B, and Series C, thereby requiring constant modifications to their cap table. A cap table serves as a tool to record the changes in ownership, and it is used at all times during the company’s life cycle.
This information allows the founders to detect the level of dilution, plan further funding needs, and assess the overall financial health of the startup. Seed-stage startups should ideally maintain a cap table since it provides a comprehensive record of the startup’s investments and obligations. At this point, the startup should have disclosed and shareholders in a legal and regulatory document, as well as its partners and investors.
Understanding seed funding
Well, the capital raised by a seed stage startup is generally used for making a minimum viable product (MVP), hiring the necessary workforce, adding the essential technical infrastructure, building relationships, and connections, and making the necessary investments to enhance its product and market reach. In this regard, seed funding refers to the initial funding raised by an early-stage startup for getting its business off the ground.
When startups are looking for seed funding, they have to understand that they need to show the viability of their product and are expected to have a well-developed business plan that includes an overview of their revenue projections, funding needs, milestones, and goals. As a result, attracting potential investors requires a solid pitch deck that clearly articulates the future plans and potential of the startup.
Types of seed funding
There are different kinds of seed funding that a startup can raise in the early stage of its inception. Following are the most common types of seed funding:
- Corporate seed funding – Corporate seed funding refers to the funding provided by large companies that are looking to fund promising startups and technologies in exchange for dividends or corporate interests in the future. In the initial stage of the company, corporate investors look to acquire a stake in the startup and expect to benefit from its possible success.
- Crowdfunding – Crowdfunding is the practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the Internet. Seed-stage startups generally use crowdfunding to finance their initial launch or market study, which can be done through various crowdfunding platforms.
- Angel investors – Angel investors, who usually have accredited individuals or institutions as their investors, are one of the most common types of early-stage funding. Seed-stage startups look to angel investors in the seed funding round to provide them with the required finances, and in return, these investors are entitled to equity in the company.
- VC funding – Venture capital firms and investment companies are known as venture capitalists (VC). Since the early stages of their establishment, seed-stage startups have raised money from VCs in exchange for ownership equity. VCs are interested in rapid growth and high-investment returns, which they expect to gain from the advancements in the industry made by startups.
- Accelerators – Accelerators are programs that provide seed-stage startups with the necessary funding and guidance for their company’s growth. Some accelerators offer seed funding, mentoring, and event participation; other accelerator programs provide seed funding, as well as prototyping and product development services. Generally, between 5% and 10% equity of a seed-funded startup is contributed to the accelerator program in exchange for their services.
- Incubators – Incubators provide seed-stage startups with an amount of funding in exchange for helping the startups with their product development, market research, and business planning. As a result, the incubator helps the startup to grow from a scalable idea to a fully-fledged venture.
When should a startup prepare for seed funding?
A startup can conduct a seed funding round as soon as it has a fully developed business plan. Before conducting a seed funding round, the startup should understand the market, product development strategies, and competitive landscape. In order to pitch their idea to potential investors, a startup must have a strong founding team with high levels of competence in their respective fields.
It is also imperative that the startup has a viable product or service, as this will allow them to build their reputation quickly and potentially attract more funding. In essence, a well-framed pitch deck during a seed funding round can represent the startup well and help them gain the interest of potential investors. Therefore, the right time to conduct a seed investment round is when the startup has a viable product and is ready to capitalize on it. But how much funding do startups get in seed funding?
How much funding does a startup get in the seed stage?
Based on the statistics, a typical seed financing round will see startups raising anywhere between $500,000 and $3,00,000: while the average seed financing round is $2,20,000. However, a startup’s exact amount depends on multiple factors such as its growth strategy, product launch costs, and market expansion. If a startup is looking to grow quickly and expand its operations, it must go for a seed funding round that provides adequate capital to achieve its growth goals.
Overall, it is imperative that the startup develops a well-planned and detailed business and revenue model to present to investors. The more capital they raise, the more freedom they have to plan their growth strategy, market expansion, and product development. Be sure to be clear about your funding needs and the amount of money you need to effectively achieve your goals.
Cap table for seed-funded startups
The first major step for a seed-funded startup is to create a cap table, which shows the ownership percentages of every investor in the company, including founders, shareholders, and investors. Seed-stage startups with well-researched and a strong business plan will attract more investors in the seed funding round, thereby benefiting from the initial investments. As a result, the cap table for seed-stage startups is the first thing that the startup should prepare in order to attract potential investors and determine the stake of the stakeholders in the startup.
How does a cap table help startups get funding in the seed stage?
The cap table helps a startup identify each stakeholder’s ownership level and negotiate from a position of strength. Since the cap table defines the ownership of each stakeholder, it gives startups the opportunity to showcase the financial health of their startup and make the investors understand the level of risk involved in supporting them. In a nutshell, an investor can make a decision if it is worth partnering with the startup by scrutinizing the cap table.
Eqvista is one of the leading companies providing cap table management software to startups. As such, they have helped a number of startups to successfully raise seed funding rounds with their cap table management services. The knowledge and experience of experts at Eqvista in managing cap tables for seed funding rounds have helped startups in laying a strong foundation for investor relations and achieving their business goals. The cap table management services of Eqvista can be easily accessed by startups through their website. Thus, manage shareholders’ data for your seed-stage startup with the help of Eqvista’s cap table management software.
Manage your seed-funded startup’s cap table efficiently with Eqvista!
There are various types of funding available for startups in the seed stage. In order to raise funding for your startup, managing a cap table is important to show potential investors your equity. Eqvista can help you manage your cap table easily and effectively. You can manage all of your shares, stock options and shareholders in one place without worries. To learn more about our cap table management platform, reach out to our team today!