How will your exit reshape your cap table?

Major investor exits can significantly shift ownership structures and affect corporate governance. In certain cases, they may also impact the company’s valuation. There’s always the risk of sending the wrong signal due to how a certain exit was executed. In extreme cases, a poorly executed exit may make prospective investors apprehensive as they may see it as a sign of loss of confidence in the company.

Hence, it is extremely important to understand the impact of your exit on your company’s cap table. To help you do so, in this article, we shall explore how an early investor’s exit can impact a company’s cap table in various ways depending on the type of exit. Read on to know more!

Cap table changes in different exit scenarios

Typically, a shareholder’s exit could be in the form of buyouts by incoming investors, buyouts by existing investors, retirement of shares, or partial exits through buyouts. In each case, there is a distinct impact on ownership percentages, stake values, and overall company valuation. To understand the differences in cap table impact in each case, let us consider the following example.

Suppose you were an early investor in Starc Electronics, a startup aiming to revolutionize the semiconductor chip industry. In 2019, you received 100,000 shares for a seed investment of $250,000. Now, in the Series C round, your stake is valued at $2.5 million.

At present, Starc Electronics’ cap table is as follows.

Stakeholders	Descriptions	Units	Ownership percentage	Value
Founders	Common stock	750,000	66.08%	$18,750,000
Investor #1 (You)	Common stock	100,000	8.81%	$2,500,000
Investor #2	Common stock	120,000	10.57%	$3,000,000
Investor #3	Common stock	140,000	12.33%	$3,500,000
Employee stock option pool
Unvested stock options	Stock options	50,000
Exercised stock options	Common stock	10,000
Potential additions to employee ownership	Vested and unexercised stock options	15,000
Total potential employee ownership	Common stock	25,000	2.20%	$625,000
Total		1,135,000	100%	$28,375,000

Buyout by incoming investors

Suppose an incoming investor has the appetite to invest $21 million, however, Starc Electronics plans to raise only $11 million. In such a case, the incoming investors could offer to buy out existing investors while also providing exits to employees whose shares have been vested. This would mean existing investors being bought out for $9 million, employees receiving $625,000, and Starc Electronics receiving the rest, i.e., $11,375,000, as investment.

Post this funding round, Starc Electronics’ cap table would be as follows.

Stakeholders	Descriptions	Units	Ownership percentage	Value
Founders	Common stock	750,000	47.17%	$18,750,000
Incoming investor	Common stock	840,000	52.83%	$21,000,000
Employee stock option pool
Unvested stock options	Stock options	50000
Exercised stock options	Common stock	0
Potential additions to employee ownership	Vested and unexercised stock options	0
Total potential employee ownership	Common stock	0	0.00%	-
Total		1,590,000	100.00%	$39,750,000

If we compare this cap table to the first cap table, we can see that the stocks owned by existing investors, as well as employees, have been bought out by the incoming investors. However, that alone does not account for all of the incoming investors’ stockholding. These investors also received shares for the $11,375,000 invested at a share price of $25.

You must also note that, due to the influx of funds, the shareholding percentage of the founders has gone down from 66.08% to 47.17%. Thus, buying out stakes enabled the incoming investor to achieve majority shareholding.

Buyout by other existing investors

Once again, we will assume that Starc Electronics wanted to raise $11 million. Suppose that out of all these shares being freshly issued, shares worth $3 million were first offered to you and other existing investors. As you plan to exit in this round, the existing investors offered to buy out your stake.

Suppose the freshly issued shares, as well as your stake, were both bought by the existing investors in the ratio of 1:1.

Let us examine the impact of such an exit on Starc Electronics’ cap table.

Stakeholders	Descriptions	Units	Ownership percentage	Value
Founders	Common stock	750,000	47.62%	$18,750,000
Investor #2	Common stock	230,000	14.60%	$5,750,000
Investor #3	Common stock	250,000	15.87%	$6,250,000
Incoming investor	Common stock	320,000	20.32%	$8,000,000
Employee stock option pool
Unvested stock options	Stock options	50,000
Exercised stock options	Common stock	10,000
Potential additions to employee ownership	Vested and unexercised stock options	15,000
Total potential employee ownership	Common stock	25,000	1.59%	$625,000
Total		1,575,000	100%	$39,375,000

Let us compare this exit scenario with the previous one, where the incoming investor bought out your stake. The first thing to note is that the existing investors were able to avoid dilution as they were offered freshly issued shares as well as the shares you owned. Secondly, in this case, the founders were able to retain their position as the group with the shareholding majority.

Finally, since neither freshly issued shares nor your shares were offered to employees, the total potential employee ownership declined in percentage terms.

Retirement of shares

Suppose that Starc Electronics responded to your request for an exit by buying out your shares and retiring them. In this case, Starc Electronics’ cash reserves would deplete as much as the value of your stake. As a result, the company’s valuation would also drop by the value of your stake. So, after your exit, Starc Electronics’ valuation should drop from $28,375,000 to $25,875,000.

Let us evaluate other changes to Starc Electronics’ cap table in the event of such an exit.

Stakeholders	Descriptions	Units	Ownership percentage	Value
Founders	Common stock	750,000	72.46%	$18,750,000
Investor #2	Common stock	120,000	11.59%	$3,000,000
Investor #3	Common stock	140,000	13.53%	$3,500,000
Employee stock option pool
Unvested stock options	Stock options	50,000
Exercised stock options	Common stock	10,000
Potential additions to employee ownership	Vested and unexercised stock options	15,000
Total potential employee ownership	Common stock	25,000	2.42%	$625,000
Total		1,035,000	100%	$25,875,000

The first thing to note is that the ownership percentage of each stakeholder has gone up. However, no changes have occurred to the stake value. After all, the share price remained stable, and there was no change in the shareholding of those who remained after your exit.

Notably, the founder group’s ownership percentage has increased to 72.46% from 66.08%. Typically, if a shareholder has secured a majority shareholding and another shareholder leaves, the majority shareholder’s control increases.

Partial exit through buyout

Now, let us consider the scenario where Starc Electronics’ founders offered to buy out 50% of the stakes held by existing investors. So, in the buyout offer, the founders are offering to buy a total of 180,000 shares, including 50,000 of your shares. Let us examine how such exits impact Starc Electronics’ cap table.

Stakeholders	Descriptions	Units	Ownership percentage	Value
Founders	Common stock	930,000	81.94%	$23,250,000
Investor #1 (You)	Common stock	50,000	4.41%	$1,250,000
Investor #2	Common stock	60,000	5.29%	$1,500,000
Investor #3	Common stock	70,000	6.17%	$1,750,000
Employee stock option pool
Unvested stock options	Stock options	50,000
Exercised stock options	Common stock	10,000
Potential additions to employee ownership	Vested and unexercised stock options	15,000
Total potential employee ownership	Common stock	25,000	2.20%	$625,000
Total		1,135,000	100.00%	$28,375,000

As expected, the ownership percentages of existing investors, including yourself, were halved. In contrast, the ownership percentage of the founders increased. Such exits allow investors to secure partial returns and founders to consolidate ownership.

At the same time, remaining investors retain equity, positioning them to benefit from any future share price appreciation. In this way, such exits provide both immediate liquidity and capital gains potential to investors.

Eqvista – Streamlining equity for agile decision-making!

Equity management goes beyond just number crunching and record-keeping. It requires clear and elucidative communication. After all, each stakeholder may have a unique investment goal and governance preference, yet you must ensure that all of them are satisfied with your company’s equity policy.

However, words alone often fall short. When it comes to proving the fairness of your equity policies, visual tools like waterfall analysis and scenario modeling can speak volumes. These visualizations help reassure investors that your proposed equity changes still support their return expectations.

With Eqvista’s cap table management platform, you can generate these insights instantly and turn meandering discussions on complex scenarios into decisive data-driven discussions. Want to see how? Contact us to book a demonstration!