How does a cap table work?
As the cap table is important for many reasons, it helps investors understand what they are buying into.
A cap table is pretty simple to understand in theory. It is a table that takes all the shareholders in the company and puts down the details on who owns what, how much each of these people own, and what the value of the shares they own. As the cap table is important for many reasons, it helps investors understand what they are buying into.
To understand how the cap table works, here are the key elements that the cap table has:
- Price per share
- Post-money valuation
- The amount each shareholder paid for the shares
- The percentage of ownership each shareholder has in both pre-money and post-money valuations
Let us understand all these in detail to know where they came from. Take for instance you are about to raise a round of funding and agree to a pre-money valuations with an investor, which allow you to know how much money can be raised. And when you raise the money, it adds to the pre-money valuation that would create the post-money valuation.
To be clear, the pre-money valuation helps in determining the price per share for how much the investor would pay for the shares. In simple words, the price per share is the pre-money valuation divided by the number of pre-money shares. Now, with this, we can divide the total investment made by the investor with the price per share to get the total number of shares that the investor gets.
Now, the investor ownership percentage is calculated by using the shares of the investor and dividing it by the post-money shares. This would give the total ownership that the investor has in the company. All the key terms that would build the cap table come from one another and start from the term sheet discussions.
These general formulas may help you with managing your cap table:
- Investor Percent Ownership = Investor Shares / Post-Money Shares
- Post-Money Shares = Post Money Valuation/ Price Per Share
- Price Per Share = Pre-Money Valuation / Pre-Money Shares
- Post-Money Valuation = Pre-Money Valuation + Total Investment Amount
If you are still not sure how a cap table works and want to know more, head over to Eqvista. We offer a FREE cap table application that can keep you up to date on all your company shares and help you make smarter decisions while negotiating your funding rounds.